of taxes, but if he could have various maturities of well drawn and well endorsed and accepted paper, with familiar names on the acceptance, he would have greater variety as respects names and maturities for his investment and might buy such paper in preference to town notes. The result would be discounts at a steadier rate, with a broader market, and town notes might have to compete therewith.

The sixth power of inflation-before we lose a good measure of gold in the international markets-may be found in the field of government regulations for the transfer of moneys. How this will work out no man can tell. It begins with the postoffice and the new postal money order law providing for the issuance of money orders payable at any one of the 40,000 odd money order offices and ramifies through the whole gamut of clearing house and check collections, rules for which have yet to be established.

How this will work out, and whether as a measure of conservation or inflation, it is not worth while at the present time to attempt to consider; for such changes must be gradual and their effect very many months ahead of us. It need only be alluded to here. Today many millions in checks are doing duty as money in place of bank bills.

Fundamentally there is no difference between a bank bill and a check. A bank bill is a check upon the bank drawn by the cashier and the president under the direction of the government and may circulate in pocketbooks for a year before it is finally cashed at the bank or by the 5% redemption fund in Washington. A check may circulate in the mails and through the pockets of the receivers for some weeks. But even passing between banks it may circulate and perform a measure of duty in substitution of bank bills by from three to four days.

Of course the great volume of checks is local and clears in 24 to 48 hours through the local clearing house, but outside checks will do duty as money for three to five days on the average.

For instance, John Brown in Texas may send his check on a New Orleans bank to New York for $10,000. His correspondent in New York credits the check as cash on his account and may deposit it in the Hanover. There it is credited to the customer's account and the bank has the internal problem of its disposition and collection. Anywhere between New York and New Orleans it may be charged up against the bank on which it is drawn or offsets applied against it. It may do duty at many points in substitution of real cash and yet may be found a little bit questionable when it reaches its redeemer in New Orleans. John Brown may have to be notified that his check dated ten days previously has been cashed

but owing to the fact that other drafts upon his account arrived first he is a trifle over-drawn. Yet the check did money duty all the way around.

There was danger in the first draft of the new currency bill that it would give opportunity for just about 600 millions of checkkiting.

It is estimated that anywhere from 300 millions to 600 millions of checks in transit are daily performing more or less the function of bank bills.

Every bank has its rules and regulations and customs, and these are various with its customers and correspondents in respect to crediting and debiting of checks and retardation and acceleration of check collections.

When the Federal Reserve Board comes to deal with the problem of clearances, exchanges and check collections, it will be in the mazes of a vast vibrating monetary nerve system of which the public and the political authorities know today substantially nothing.

There are so many possibilities here that it is not profitable to discuss them in detail at the present time.

The seventh and final possibility of inflation will arise from any maladministration in connection with the expansion of the new federal reserve notes.

Properly administered these notes should be used as reserve. If they are used to promote expansion instead of, as properly, a regulator in respect to the expansion which the creation of a sound reserve system is inherently bound to produce, they will spell disaster of the direst type.

It may be years before a federal reserve note is issued and it should be many years before they are issued in any large volume.

But the possibilities of their issue on the present gold basis must be outlined and will be dealt with in the next and final article.

XXVIII

INFLATION BY NOTE EXPANSION.

Previous articles have dealt with various possibilities of expansion and inflation arising from confidence, lower cash reserves, time deposits, treasury deposits in banks, check circulation, and new forms of discount. The possible expansion in credit from the reduction in bank reserve requirements has been figured at between two and three billions.

As to the expansion, or the inflation, that may some time arise from the deposit of government gold or other moneys with the reserve banks, this is not at all dangerous, because against government moneys must be kept 35% in lawful money reserve in the federal banks. The danger here will arise, if ever, when the government makes application to become a borrower, which can be accomplished only after amendment of the bank act. The government now has no commerce upon which it could make commercial paper for re-dis

count.

The government today has far greater powers to expand credit by depositing its money directly in the national banks than it will have under this Act, so far as it elects to deposit in the Federal banks.

The deposit of the government gold will give a basis for the new federal notes whenever the commerce of the country shall demand them, which may not be for some years.

The purpose of this article is to show the possibility of expansion or inflation in this seventh form, or by the new federal notes.

If the entire capital of the reserve banks is paid by, or transmuted into, gold there is no deposit liability against such gold, and notes may be issued, as called for, to the extent of 250 millions with such 100 million capital furnishing the 40% gold reserve.

So far as gold is paid in on reserve or deposit account-and these are onea 35% legal money reserve must be maintained against the deposit liability.

As the member banks must maintain Federal reserve and work

ing balances and these are likewise one-and must make part of their payments during the next three years by re-discounts in order. to prevent contraction, the application for the new federal reserve notes will come through member banks desiring currency and offering the security of their commercial re-discounts therefor.

The maximum of currency to issue is measured by the maximum of gold that can be gathered in the reserve banks.

It is the theory of the best economists in the world that the new reserve banks will be in position to sift out all the gold from the circulating currency, and that, this being to their interest, they will in time accomplish it.

It is likewise possible, if not highly probable, that with the low cash reserves required of the member banks they will hold their secondary, as well as their larger, reserve in commercial paper ready for re-discount with the Federal Reserve banks in any emergency. They will therefore have no reason for the accumulation of gold and will be called upon, if necessary, by the Federal Board to pass over their gold to the reserve bank as preliminary to the re-discount for the new currency, as gold must be its 40% base.

With the gold in the United States Treasury on deposit with the reserve banks, except the 150 millions required behind the legal tenders, it is easily conceivable that the federal reserve banks may become within a reasonable number of years the holders of substantially all the gold in the country, or say $1,600,000,000 gold out of the total $1,900,000,000 estimated to be in the United States. Against the hundred million of gold representing capital account they may issue, as stated above, 250 millions of notes, but against the balance, $1,500,000,000, which must come in by deposit, there must be a reserve of 35%, or 525 millions, which set aside from their total gold leaves $1,075,000,000 against which 2 times this amount may be issued in new federal reserve currency with the maintenance of the 40% gold reserve.

Now let it be observed right here that the 525 millions set aside against deposit liability need not be gold but may be in "lawful money;" so that the balance sheet given below may be worked out with only $1,075,000,000 in gold, or with less than 60% of the gold in the country in the federal reserve banks.

This $1,075,000,000 gold, free from deposit liability, permits issue, on a 40% gold reserve base, of $2,687,500,000 of federal reserve currency on the security of commercial bills.

Unless there is the inflation of rising prices this would about cover all the bills that could on the present volume of business be gathered together and counted "strictly commercial."

In balance sheet form this estimate of maximum possibilities works out about as follows:

$4,287,500,000

New currency... 2,687,500,000
$4,287,500,000

Deposit reserve 35% and in gold. Gold reserve against notes 40%.
Total currency now afloat outside the banks $1,800,000,000.

In the above theoretical figures it will be noticed that with the gold concentrated in the federal reserve banks we could export 400 millions and still sustain about $2,500,000,000 of new currency by re-discounting most of the available existing commercial bills.

Of the above $1,600,000,000 gold and "lawful money" $600,000,000 can come in time from the national bank reserves. And $200,000,000 may come from the national government. To get in the other half (and one-half of this need not be gold but only "lawful money") to be held against deposit liability, requires the issue, in substitution, of either more national bank notes or federal reserve notes.

Therefore, if the national bank notes are not increased in volume and we export our gold production, as is expected, the maximum of the new money on our present gold base, in the pockets of the people, can be only $1,887,500,000, as $800,000,000 must issue for the $800,000,000 gold or "lawful money" to be acquired from the pockets of the people.

A study of the above figures will show that the net possibility, with maintenance of reserves in the federal reserve banks, is an issue in the future of not more than two billions of additional currency.

After the issue of enough federal reserve currency, in substitution, for the gold and lawful money drawn into the federal reserve banks, this two billion should be kept as reserve money.

The possible new currency issue, on the present gold monetary system, is far beyond any present capacity of the American people to absorb except by rising prices.

Under our new tariff, rising prices for labor and materials to absorb such a volume of new currency should be an impossibility for many years, or until foreign wages and prices are first advanced. And our gold exports will tend to advance them.

The declaration in the early articles of this series was that the Federal Reserve Act was comparable only to our Declaration of Independence and the national Constitution. The Articles first binding the states together were deficient in the power to tax, and the