as 10% when France was increasing hers by 75%, Germany by 43%, and the United States by 106%.

Of course, the reason you cannot get up a gold scare in England is because her bankers' pocketbooks are filled with international bills payable in gold and her bankers can raise the rate of discount at any time and command gold payment from all corners of the earth.

If the $2,500,000,000 invested in England in international bills was to be transmuted into the medium of bank deposits before its investment in commercial bills and a 25% gold reserve required against it there would be "music in the air."

With our extravagant treasury and banking system and fixed and useless reserves we have had a measure of salvation in this country through the private bankers. It has been estimated that at times a thousand millions of deposits were with the private bankers of New York City, or about as much as was held a few years ago on deposit with New York national banks. State banks likewise held another billion of deposits. Now had the deposits of the state banks and the private bankers been thrust directly into the national banks of New York City and a 25% fixed reserve set up against them there would have been a considerable strain in the financial situation, for the billion in the state banks had less than 15% reserve, and the billion with the private bankers could for the most part be loaned out and nobody question the ability of the private bankers to pay on demand. They could keep 25% of this billion as their reserve and deposit the same in the national banks where the bank's 25% reserve becomes only about 6% of the total of the deposit with the private bankers.

Thus do large deposits of money filter through private banking hands and find a 6% basis of money reserve all-sufficient.

IX

PRIMARY CREDIT EXPANSION.

The greatest fallacy concerning the new bank act is that the primary inflation is to come through the issue of the new notes or even through the regional reserve banks.

Startling as it may appear, the inflation is with the member banks, or in the national banking system.

When a regional reserve bank under control of the Federal Reserve Board is required to keep a 35% reserve against deposits and an additional 40% in gold against its note issues, inflation may be broad but is neither primary nor necessarily sudden. When a dollar is deposited by a member bank (and the new banks do business with no other depositors), that dollar must have 35 cents clipped off and put aside as reserve against the deposit liability. If later this member bank presents its endorsed mercantile paper to the regional reserve bank for re-discount, the amount of the re-discount passes to the credit of the member bank and again 35% in lawful money must be set aside in the reserve account against this deposit liability.

Soon the member bank's currency runs low and the date approaches for the member bank to furnish a large manufacturer-depositor with his weekly or monthly payroll. The member bank thereupon goes to the reserve bank and takes out bills against the manufacturer's endorsed paper which it had recently re-discounted or any other re-discounted commercial paper. Against such bills the Federal reserve bank must hold 40 cents in gold for each dollar in paper put out and the Federal Reserve Agent must hold in custody the commercial note that is behind it.

Therefore, in effect the reserve bank has an endorsed mercantile promise to pay a dollar, has 40 cents in gold, 35 cents in lawful money and a 25 cents surplus to balance a deposit liability of a dollar and a federal note liability of a dollar. It may readily be seen that the 25-cent surplus for the next expansion may not at first carry very far.

The expansion in the aggregate may be treated later and there are ways in which it can be made very large. These figures are only to show the small primary expansion with the reserve notes, dis

counts and deposits, as compared with member bank possibilities under reduced reserves.

Now, if national banks can carry six billions of loans upon 900 millions of real money the reserves are 15%, as previously noted, and individual credit expansion is as six to one.

Reduce the reserve requirements as in the Federal Reserve Act by 7% on the $1,500,000,000 in Central Reserve City banks, and by 10% on the $1,900,000,000 in Reserve City banks, and by 3% on the $3,700,000,000 in the Country Banks, and we have reduced the reserve requirements on $7,200,000,000 "net" bank deposits by 63%, or $405,000,000.

This reduction of $405,000,000 in reserve requirements cannot be applied in reduction of the $900,000,000 present cash in the national bank system, because a part of the reduction is in the credit reserves and a part in the cash reserves and, furthermore, the reduction in reserves is figured not only on the $6,000,000,000 individual deposits, but the entire net deposits of $7,200,000,000 which include $1,200,000,000 net deposits of banks with other banks. This matter of "net" deposits is a little technical for the lay reader and may be dismissed from present consideration for present purposes. It is expected to undergo a considerable change in the next five years and if the Federal Reserve Act works smoothly, be largely eliminated, bank reserves which are now carried in central reserve and reserve city banks being largely transferred to the new reserve banks.

The purpose here is to treat the 7500 national banks as a unit and deal with their deposit and cash accounts as though they were consolidated into one bank with credits between the banks eliminated, in order to ascertain the reduction in cash reserves permitted under the new act, and their relations to the individual deposits. Cash and individual deposits are the center and the rim of the entire national banking system. This calculation also is based upon the assumption that there is no material change at first in credit relations between national banks and that the country banks maintain deposits with the city banks at first about as at present.

Immediately the announcement is made of the establishment of regional reserve banks there is a reduction of 7% in the reserve requirements of the central reserve city banks holding $1,500,000,000 in deposits. This makes a drop of $105,000,000 in the reserve requirements of banks in New York, Chicago and St. Louis. With no offsets it would be about the equivalent of the sudden arrival of $100,000,000 gold from Europe, which Wall Street would instantly figure as good for $500,000,000 of additional credit spread over the country. There is also a reduction of 10% reserve requirement in the $1,900,

000,000 deposits in the reserve city banks. The banks in the 47 reserve cities, Boston, Philadelphia, etc., keep one-half their 25% in cash, and the other half is redeposited in the central reserve cities. Therefore, the reduction here from 25% to 15%, of which 6% must be in their vaults, means only a 61% reduction in the cash reserve requirements, or just a drop of $120,000,000, making possible, Wall Street sharks would figure, another credit expansion, and to the extent of $600,000,000.

The country bank reserves are reduced from 15% to 12% but here there is a reduction of only 1% in the cash requirements at first and another 1% reduction in the cash requirements at the end of three years. Country banks are now required to keep 6% in cash and may keep 9% with city banks but under the new act their cash requirements are reduced at first from 6% to 5% and at the end of 36 months to 4%.

The 1% drop here means at first a reduction in reserve requirements of $37,000,000, or by 1% on $3,700,000,000.

The total reduction in the cash requirements of all banks immediately on the inauguration of the reserve system is, therefore, above $260,000,000, and this may be taken right off the $900,000,000 real money in the banks. In other words, we could export $260,000,000 of gold and still maintain our $6,000,000,000 of individual loans and deposits. This is what Europe, if not the whole world, is watching with open mouth and tongue moistened for an industrial expansion thereupon. The problem is, will Europe or Wall Street get it? If it remains here it changes the ratio of cash requirements under our national banking system as from one to six to one to nine, making possibly nearly a 50% expansion in our bank credit system. In effect this means an invited expansion of credit with the member banks of between two and three billions.

This is sufficient to last this growing country for some years. The interesting problem is, how quickly will Wall Street, industrial America, or gold-hungry Europe, get this two or three billion of credit expansion.

Much depends upon the wisdom of the federal reserve board. They have power to transmute this possible two billion of expansion into real contraction. An illustration may be had with the country banks who have one-half of the country's deposits, and who are now obliged to keep only 6% in cash and may keep 9% with city banks as reserve credits. Their city bank deposits are to be eliminated in their reserves and if their elimination is ordered by the federal board to be transmuted into cash and held in cash in the regional reserve banks and in their own vaults, there can be very great contraction

by this transmutation of what are now banking credits into cash. Today against the country banks' $3,700,000,000 net deposits only 6% cash is required. When the act goes into effect 5% is required to be held in their vaults, 2% is paid in to the regional reserve banks, and 5% may be held in either their own vaults, or the regional reserve banks, or with any reserve city banks; but each six months 1% is withdrawn from the reserve credits until the reserve credits are entirely eliminated and put in cash, or with the regional reserve banks. So that 6% now held in cash by the country banks on one-half the bank deposits of the country may be by act of the federal reserve board and the conversion of bank credits into cash made to become 12% cash divided between the country banks and the federal reserve banks if the federal board elects to hold all in cash.

This would mean that the reserve banks and the country banks held in their vaults $444,000,000 cash, or 12% in cash, where now there is 6% in cash and 9% in reserve credits with other banks.

With the reserve city banks, while their reserves are nominally reduced from 25% to 15% and the 25% made only half cash and the other half credit with other banks, it is within the power of the federal board to decree that the entire 15% shall be cash, by holding the cash in its own vaults and eliminating all credits from reserves either held by itself or central reserve cities. In other words, while one-half of the 25% reserve was cash, it is possible for the federal board to make the entire new 15% all cash.

It must be added right here that these reduced reserve requirements take no account of the $400,000,000 reserve transferred to the Federal Reserve Banks during the next three years, or the $107,000,000 paid in for its capital account. Both these requirements may in the next few years be met from the member banks' investments which on Oct. 21 last were $1,038,971,129.

We will not attempt to teach our grandmother bank presidents how to suck eggs. They will, before three years are out, see the wisdom of parting with their investments on rising markets and they will see the wisdom of putting the funds thus realized into expanding loans; for loans make deposits and both are profitable in periods of rising prices.

It is figured that a dollar imported from abroad and placed in the banking system now causes an expansion spread over the system of five or six for one, as is shown by the above figuring.

What will now be the expansive power of a dollar placed in the national banking system when the reserve requirements are reduced from the proportion of one to six to one to nine? Will it mean a