Monetary Mischief
by
[Columbia University Press, $2.00]
THIS book deals with the various kinds of monetary mischief perpetrated in the United States from the commencement of the war to date. It shows the part that monetary sins played in developing the boom and the crash, and indicates that monetary sinning is not over, but has merely been shifted from Wall Street to Washington.
Mr. Robinson writes from the point of view both of a student of money and of a man with many years’ practical experience in financial affairs. What he has to say is well worth reading, and carries especial weight by reason of the remarkable accuracy with which he had the situation sized up prior to 1929. When he writes about the boom it is not merely with the wisdom of hindsight. What lie says now he said then, as attested by several chapters of his book which are reproductions of articles originally published in the Annalist in 1924 and 1929.
The author shows how the monetary mischief began during the war when people were urged to buy bonds by borrowing the money from the banks, which borrowed in turn from the Federal Reserve Banks, creating a vast amount of bank credit which became part of the circulating medium of the country. He attributes the inflation in large part to this practice of extending central bank credit on the basis of government securities. The effect of this, in his opinion, was to divorce the volume of bank credit from the strictly commercial require meats of the country, and to facilitate the diversion of Federal Reserve funds to speculative and capital uses.
It will be agreed that the use of government bond collateral as a basis for Federal Reserve credit was an important factor in the huge credit expansion of the time. It would be a mistake, however, to overlook the influence of the great flood of gold imports that poured in upon this country during and after the war. In the period from 1914 to 1929 the monetary gold stocks of the United States much more than doubled, and in the post-war period from 1919 to 1929 alone they increased by more than 40 per cent. No explanation of the war and post-war inflation is complete without recognition of these facts.
Had it not been for this enormous increase in our monetary base, no such credit expansion as took place would have been possible. As it Was, inflation was almost inevitable. There is no doubt that the task of credit control was made vastly more difficult by the tendency of gold to flow to this country in quantities greater than could be absorbed by the legitimate requirements of commercial business.
In these days when the tendency is so often to Stress the importance of the mere quantity of bank credit that can be got into use, it is refreshing to find an author with convictions as to the importance of the quality of bank credit. Mr. Robinson hammers hard on this point, and shows how disaster followed from failure to safeguard the character of bank loans. Too much and too cheap money resulted inevitably in bank assets becoming less and less representative of the regidar flow of production and consumption and more and more representative of capital values dependent for their liquidation upon the sale of property. What Mr. Robinson has to say on this subject is decidedly timely in view of the present-day efforts to resuscitate business by high-pressure methods of credit expansion.
The two chapters on Federal Reserve policy in 1928 and 1929 ought to be read by every business man in the country in connection with the banking bill now pending in Congress. This bill would extend the government’s control over banking on the theory that the government is better qualified to manage the banking system than the regional Reserve Banks and the bankers.
Mr. Robinson’s account of Federal Reserve Board policy during this critical period constitutes a deadly rejoinder to the arguments for increased governmental control. Here indeed is a sorry tale of timidity and procrastination on the part of a government board in a time of emergency when both the Federal Reserve Rank of New York and the Federal Advisory Council, the latter composed of active bankers from each Federal Reserve district, were demanding positive action. In view of the current agitation for further concentration of power over banking in Washington, the following statement of the author is significant: —
‘The chief impetus to restriction of credit came from active bankers, that is to say, from the Federal Advisory Council. The Federal Reserve Rank of New York, with active bankers on its board, was right for ten weeks. The Federal Reserve Board was never right. It was complacent with speculation until the Council rebelled; it finally issued a mild warning; it declined to use the traditional and orthodox method of restriction by raising the rate of discount even during the period from April 19 to May 21, when both the Federal Reserve Bank of New York and the Federal Advisory Council urged that action; and it reversed its own restrictive policy at a critical moment on a showing of improvement as to speculative loans of less than 7 per cent.’
Mr. Robinson discusses the method of taxation, which he believes contributed to the craze for common stocks and encouraged industrial over-capitalization, He contends that the breakdown of the banking system was due primarily to insufficiency of capital, and he criticizes deposit insurance as an attempt to bolster up a system whose fundamental weakness is trying to do business on too small a margin. He vigorously attacks most of the New Deal monetary measures, including the Warren devaluation theory, the gold clause abrogation, the Thomas Amendment, and the Silver Purchase Act.
There is so much sound economic sense in the book that it is a pity that the author has become confused over the issue of government borrowing versus the printing press as a means of financing the deficit. Mr. Robinson contends that government bonds sold to the banks create bank deposits which are as much inflation as green-backs, with the disadvantage to the government that bonds require interest to maturity whereas green-backs do not.
It is true that both courses are inflationary. The distinction between the two is that government bonds represent a debt that some day must be repaid, whereas printing-press money represents an addition to the money supply that is almost certain to be permanent (no government is likely to succeed in any scheme of systematic currency retirement in the face of the popular clamor sure to oppose such a course). Moreover, the issuance of more legal-tender currency would simply result in more currency being deposited in the banks, and subsequently in the Reserve Banks, thus expanding still more the already huge total of member-bank excess reserves and paving the way for further credit innation. When the government borrows from the banks, on the other hand, the result is to increase deposit liabilities against which reserves have to be kept, thus reducing excess reserves and narrowing the base for further credit expansion.
GEORGE B. ROBERTS