June 5, 1903.] 



SCIENCE. 



899 



banks of each locality would keep their 

 neighborhood clear of foreign currency. 

 They would not accumulate in the centers 

 because they would not be good in the re- 

 serves of the city banks. They are not 

 available as a basis of credit. They can be 

 used only as a circulating medium. This 

 distinction between the bank note and our 

 other forms of paper money is the feature 

 to which attention is directed. It follows 

 from this and from the experience of simi- 

 lar systems that the local banks all over the 

 country would have in ordinary times a 

 reserve of circulation to put out whenever 

 business was active enough to absorb it. 

 The volume of circulation would naturally 

 expand in the fall of the year and contract 

 :as business slackened. 



Inflation through the Expansion of Bank 

 Deposits: Professor Joseph French 

 Johnson, New York University. 

 Professor Johnson pointed out that bank 

 'deposits are of two classes. (1) Those 

 which result from a deposit of cash or of 

 •checks and drafts with a bank. These he 

 :styled cash deposits. (2) Deposits which 

 .are the result of a credit operation, the 

 borrower taking, not money, but a deposit 

 account. These he called credit deposits. 

 The cash deposits can not be increased at 

 ■will by the banker. They represent the 

 :savings of a community, wealth that has 

 "been produced and is not wanted by the 

 producer. The credit deposits may be in- 

 creased at the discretion of the banker. 

 They represent savings in the process of 

 being made, wealth being produced. Both 

 ■classes of deposits give rise to a large mass 

 of checks and drafts which constitute a 

 medium of exchange known as deposit cur- 

 rency. Inasmuch as bankers have some 

 •discretion in the expansion of their credit 

 ■deposits, the supply of deposit currency in 



a country is always dependent upon the 

 policy pursued by the banks. Through aij 

 unwise expansion of their credit deposits 

 banks are able to bring about a very dan- 

 gerous increase or inflation of the deposit 

 currency. In good times, when a specu- 

 lative spirit easily gets possession of busi- 

 ness men, bankers are always liable to en- 

 courage speculation, and the consequent 

 rise of prices, by the expansion of their 

 credit deposits, and a larger portion of the 

 country 's monetary stock, is drawn into the 

 banking reserves as a basis for the extended 

 credits. The increase of the banking re- 

 serve, it should be noted, is very slight in 

 comparison with the concurrent increase of 

 the deposit currency. Inflation of the 

 medium of exchange in this .way is more 

 dangerous and can be carried to greater 

 length than any inflation possible through 

 a free issue of bank notes. In the case of 

 bank notes an automatic check operates to 

 prevent an over-issue. A deflnite amount 

 of hand-to-hand money is wanted by the 

 community, and if any excess is put into 

 circulation, it speedily finds its way back 

 to the issuing bank. No such instant auto- 

 matic check is applied in the case of 

 inflation through an increase of deposit 

 currency. A brake is always applied, 

 but not promptly. An undue infla- 

 tion of deposit currency inflates prices 

 quite as effectively as an increase in the 

 stock of money itself, and so finally dis- 

 turbs our foreign trade relations, bringing 

 about a balance of indebtedness that ren- 

 ders the export of gold necessary. This 

 export of gold forces bankers to contract 

 their operations and often brings injury 

 upon men whose business enterprises are 

 in every respect deserving of assistance. 

 Frank H. Hitchcock, 



Secretary. 

 {To he concluded.) 



