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its possession to make loans rather than to retire notes, assuming that the interest charge made by the Federal Reserve Board is not placed excessively high. Consequently banks will not be eager to retire their own notes. But, in the depression that follows a panic, no reserve bank will have opportunity for keeping all its funds busy; and since in this case the interest charge, however small, will be a dead loss, the bank will have adequate motive for effecting, as promptly as possible, an adequate contraction of its note liabilities. This motive would be still further strengthened if the glut proved sufficient to cause a decided drain of gold, since, in that case, the reserve banks will find difficulty in maintaining the required 40 per cent reserve. On the whole, then, we seem warranted in affirming that, as respects emergency elasticity, the new notes will give no serious disappointment.

I. CONTROL OF THE INDUSTRIAL CYCLE

129.

Panic Rules for Banks 36

BY WALTER BAGEHOT

In time of panic, advances, if they are to be made at all, should be made so as, if possible, to obtain the object for which they are made. The end is to stay the panic; and the advances should, if possible, stay the panic. And for that purpose there are two rules:

First. That these loans should be made only at a very high rate of interest. This will operate as a heavy fine on unreasonable timidity, and will prevent the greater number of applications by persons who do not require it. The rate should be raised early in the panic, so that the fine may be paid early; that no one may borrow out of idle precaution without paying well for it; that the banking reserve may be protected as far as possible.

Secondly. That at this rate these advances should be made on all good banking securities, and as largely as the public asks for them. The reason is plain. The object is to stay alarm, and nothing, therefore, should be done to cause alarm. But the way to cause alarm is to refuse someone who has good security to offer. The news of this will spread in an instant through all the money markets at a moment of terror; no one can say exactly who carries it, but in half an hour it will be carried on all sides, and will intensify the terror everywhere. No advances indeed need be made by which the banks will ultimately lose. The amount of bad business in commercial countries is an infinitesimally small fraction of the whole business. That

"Adapted from Lombard Street, 10th ed., 199–200 (1873).

in a panic the banks should refuse bad bills or bad securities will not make the panic worse; the "unsound" people are a feeble minority, and they are afraid even to look frightened for fear the unsoundness will be detected. The great majority, the majority to be protected, are the "sound" people, the people who have good security to offer. If it is known that the banks are advancing on what in ordinary times is reckoned good security, the alarm of the solvent merchants and bankers will be stayed. But if securities really good and usually convertible are refused by the banks, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

130. The Part of Individual Responsibility37

BY THEODORE E. BURTON

The only sure remedy for these periods of depression is that suggested by Lord Beaconsfield, "the alchemy of patience." The depression is a condition that must be recognized and met; any attempt to ignore it or to indulge in confidence when there is no ground for it will only involve further disaster. A cure cannot be hastened except by the best of care and the co-operation of the patient. At the same time there is every ground for confidence in the ultimate recovery.

Too much confidence must not be placed in the action of government. Just as good laws and effective administration are rather essentials of prosperity than creative of it, so also they are more potent in preventing depressions than in remedying them. So far as human agency is concerned, intelligent individual action must do the

most.

Upon the individual as investor hangs a heavy responsibility. He should follow rules enjoining prudence and careful calculation, particularly that of Professor Jevons: "In making investments it is foolish to do what other people are doing, because there are always sure to be too many people doing the same thing." Were this heeded, investments would distribute themselves more evenly, causing industry to pursue a steadier course.

In the same connection is a rule worthy of considerationnamely, to be careful about investing in undertakings from which an exceptional return has been realized. Profits in all enterprises tend toward equality. After making due allowance for the skill and trustworthiness required, risk incurred, and regularity of employment,

37 Adapted from Financial Crises, 267-269. Copyright by D. Appleton & Co. (1902)

investments afford approximately the same profit. If there is an exceptional return from any line of investment, it is almost certain that the business will be overdone.

Divers suggestions might be made upon the necessity for higher standards of honesty and better education. But these are obvious enough, and their attainment must be worked out in lines other than economic.

Many, discrediting the ability of individuals to work out their own salvation, have proposed the construction of public works in times of depression. The danger of this is that people will fall into the fallacy of working for the sake of working, and will not appreciate the fact that work is valuable only in case it produces something of utility. A definite market value is a trustworthy guide to utility which is absent in such cases. There is the further danger that as numerous laborers are withdrawn from their usual lines of employment to engage in public work, they will, when times have improved, be unable or unwilling to return to their former employments, and thus the productive power of the country will be crippled. It is true, however, that municipalities and states are greatly benefited by certain improvements which are of permanent value, and to which capital may appropriately be applied, such as good roads, better sewers, paved streets, etc. At a time when materials are low and labor is unemployed, these improvements may profitably be made, provided they are carefully considered with a view to their permanent value, and not merely with the object of giving employ

ment.

In short, education and experience must lead to a more intelligent direction of productive energy. Patient, well-directed effort must meet the problems presented by changes from year to year. It is best not to depend upon the government of any country for relief, but upon the individual action of its citizens. There is much foundation for the saying of Jeremy Bentham: "Industry and commerce ask of the state that which Diogenes asked of Alexander, 'Keep out of my sunshine.'”

131. Bettering Business Barometers"

BY WESLEY C. MITCHELL

The American man of affairs who seeks to keep informed about the trend of business conditions relies upon the financial columns of his daily paper, one or two of the financial weeklies, and a special

38

"Adapted from Business Cycles, 591-595. Copyright by the author (1913). Published by The University of California Press.

trade journal. The data which he can compile from these sources cover a considerable range.

Commodity prices at wholesale are represented by actual quotations and by index numbers like Bradstreet's. The prices of loans on call and on time for thirty days to six months are reported for New York, together with the market and bank rates in London, Paris, and Berlin. The prices of securities are published in detail, and to show the general trend of the market there are convenient records, such as the Wall Street Journal's average of twenty railway and twelve industrial stocks.

Fluctuations in the volume of business must be estimated from various sources: bank clearings, railways' gross earnings, number of idle cars, imports and exports, coal, copper, pig-iron and steel output, shipments of grain, live stock, etc. Government crop reports help to forecast the probable state of trade in various agricultural sections. Quite helpful are the reviews of business conditions in different papers.

Information about the currency is supplied by the official estimates of the monetary stock, by reports of gold imports and exports, by the recorded movements of money into and out of the New York banks, and by the figures concerning the production and industrial consumption of gold, and the distribution of money between the banks and the public. Regarding the banks there are telegraphic statements from the central institutions of Europe, as well as a variety of domestic reports from clearing-house and national and state banks.

Some idea of the volume of investment and speculation going on may be obtained from the transactions of the New York Stock Exchange, the number of building permits granted, the mileage of railway under construction, etc.

Last and most important, the prospects of profits are best shown for the railways, whose gross and net earnings are regularly published. The earnings of the United States Steel Corporation probably stand second in general esteem. Then comes a mass of information supplied by the reports of large corporations engaged in mining, manufacturing, banking, etc. The other side is shown by the statistics of bankruptcy compiled weekly by two great mercantile agencies..

Though far from complete, this list of materials is far too long for the average business man. To compile and analyze the available data requires more time, effort, statistical skill, and analytical ability than most men have for the task. Hence the typical individual skips the bewildering evidence and reads only the summary conclusions

drawn by the financial editor. That the studying of business barometers and the forecasting of business weather has become a profitable business affords convincing proof of the need and difficulty of using effectively the available materials. It is from such specialists that we may expect the improving and disseminating of the information required as a basis for perfecting social control over the workings of the money economy.

Professional forecasters do not find the data at hand too elaborate. What they most need to improve their forecasts is more extensive and more reliable materials to work upon. But it is also quite possible to better the use they make of the data already available.

Among the most needed additions to the list of business barometers are the following:

A general index number of the physical volume of trade could be made from data showing the production of certain staples, the shipment or receipts of others, the records of foreign commerce, etc. Much material for this purpose is already incidentally provided in official documents. Separate averages should be struck for the great departments of industry, since the difference between the relative activity in different lines would often be not less significant than the computed changes in the total.

The proposed plan for obtaining reports concerning the volume. of contracts let for construction work and the percentage of work performed on old contracts merits careful consideration. Few sets of figures would give more insight into business conditions when prosperity was verging toward a crisis or when depression was endangering prosperity.

An index number of the relative prices of bonds and corresponding figures showing changes in interest rates upon long-time loans would not be difficult to prepare. Even if standing alone these two series would possess great value as reflecting the attitude of investors; but they would be still more useful if accompanied by data concerning the amounts of bonds and short-term notes put upon the market by business enterprises and by governments.

Certain states have made a beginning in providing statistics of unemployment. But we have no comprehensive data of this kind. Their value, not only as an index of welfare among wage-earners, but also as reflecting changes of activity within important industries and changes in the demand for consumers' goods, is such as to make the present lack a matter of general concern.

Most to be desired are statistics which would show the relative fluctuations of costs and prices. Unhappily the difficulties in the way

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