6o UNITED STATES - CREDIT 



nished. If on the other hand the circulation be loo large in the interme- 

 diate period and cannot be automatically absorbed by the issuing establish- 

 ments, there is a use less accumulation of money in the towns and specu- 

 lation or the export abroad of gold is encouraged... The organization of 

 the national banks did not allow them to restrict their circulation in periods 

 of stagnation or enlarge it in periods of activity. The absence of this abi- 

 lity to contract and expand gave them the inelasticity for which the system 

 of credit circulation in the United States was so often blamed ". 



The National Monetary Commission found that since the circulation 

 under this system depended on the amount of the Federal bonds pledged, 

 the following state of affairs is produced : in years of development and 

 intense agricultural and commercial activity, in which paper circulation 

 should increase, public receipts are likewise augmented, and in a country 

 like the United States in which operations are on an enormous scale receipts 

 rapidly come to exceed expenditure. With the available excess the gov- 

 ernment reduces the debt, that is reduces the amount of the bonds, and 

 this entails a diminution of the circulation which is opposed to what ought 

 to be. In this way between 1883 and i8gi the circulation was lowered 

 by 53 per cent., with especial rapidity in the autumn of 1886 and 1888, the 

 demand for bank notes being emphasized in that season. The danger of 

 this procedure is more apparent if it be remembered that in the same pe- 

 riod the demand for money for trade rose by 54 per cent. After 1893 the 

 contrary case appeared. The restriction of business ought to have been 

 reproduced in a contraction of the circulation. 



The State's redemption of bonds ceased, owing to the budget's deficit, 

 and a new issue of State bonds was even necessary, so that the circulation 

 was enlarged. Finally the crisis of 1907 proved once more that the mecha- 

 nism of the National Banks was not adequate to the country's need. 



As early as 1906 there had been agitation for the reform of the bank- 

 ing system, essentially with a view to giving the circulation the elasti- 

 city it lacked. The Association of American Bankers and the New York 

 Chamber of Commerce elaborated schemes. Making allowance for diffe- 

 rences of detail these schemes proposed to g'rant to the national banks 

 the power to issue bills secured by federal debt bonds, and other bills diffe- 

 rently secured, and to abolish all restriction on the withdrawal of issued 

 bills. In 1907 Congress merely raised from $3,000,000 to $9,000,000 the 

 amount of the bank notes which could be withdrawn from circulation 

 every month. The crisis of this year showed clearly the urgent need for a 

 change in the financial system. While the question was being examined 

 provisionary measures were taken, pending a complete solution. In 1908 

 the Vreeland-Aldrich Act provided that when money was tight the Na- 

 tional Banks could issue emergency notes up to the value of $500,000,000. 

 These notes would have only a temporary circulation and could be secured 

 b}^ American government or municipal bonds or commercial paper. 



Simultaneously Congress decreed that there should be a National Mo- 

 netary Commission, charged to examine the financial and banking situa- 

 tion in all its aspects in the United States and in the principal European 



