America's Great Depression (22 page)

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(largely bank premises and expenses of operation). This capital is drawn from commercial banks, and, therefore, if unexpended, is a withdrawal of reserves. This is almost always a negligible item; it is clearly under the control of the Federal Reserve authorities.

Summing up, the following are the factors of change of member bank reserves:15

Factors of Increase

Monetary Gold Stock...................................................uncontrolled Federal Reserve Assets Purchased....................................controlled Bills Bought

U.S. Government Securities

New Bills Discounted.......................................................controlled Other Federal Reserve Credit..........................................controlled Treasury Currency Outstanding.......................................controlled
Factors of Decrease

Outside Money in Circulation......................................uncontrolled Treasury Cash Holdings...................................................controlled Treasury Deposits at the Federal Reserve........................controlled Unexpended Capital Funds of the Federal Reserve........controlled Non-member Bank Deposits at the Federal

Reserve......................................................................uncontrolled Bills Repaid...................................................................uncontrolled An overall survey of the entire 1921–1929 period does not give an accurate picture of the broad forces behind the movements in total reserves. For a while total reserves continued to increase.

15The well-known category of “Federal Reserve Credit” consists of Federal Reserve Assets Purchased and Bills Discounted.

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There were continual fluctuations within the various categories, with some increasing and other decreasing in any one period and different factors predominating at different times. Tables 7 and 8

depict the forces causing changes in total reserves during the 1920s. Table 7 breaks down 1921–1929 into 12 subperiods, shows the changes in each causal factor, and the consequent changes in member bank reserves, for each subperiod. Table 8 transforms the data of Table 7 into per-month figures, thus enabling comparison of the relative
rates
of change for the various periods.

Member bank reserves totaled $1604 million on June 30, 1921, and reached $2356 million eight years later. Over the 12 subperiods, uncontrolled reserves
declined
by $1.04 billion, while controlled reserves
increased
by $1.79 billion. By themselves, then, uncontrolled factors were deflationary; the inflation was clearly precipitated deliberately by the Federal Reserve. The plea that the 1920s was simply a “gold inflation” that the Federal Reserve did not counter actively is finally exploded. Gold was never the major problem, and in not one subperiod did it provide the crucial factor in increasing reserves.

In the 12 subperiods, uncontrolled factors declined seven times and increased five times. Controlled factors, on the other hand, rose in eight periods and declined in four. Of the controlled factors, Bills Bought played a vital role in changing reserves in nine periods, Government Securities in seven, Bills Discounted in five, and Treasury Currency in three (the first three). If we add up, regardless of arithmetic sign, the total impact of each controlled factor on reserves over the twelve periods, we find Government Securities in the lead (with $2.24 billion), Bills Bought slightly behind ($2.16 billion), and New Discounts behind that ($1.54 billion).

At the start of the eight-year period, Bills Discounted totaled $1.75 billion, Bills Bought were $40 million, U.S. Government Securities held were $259 million, Treasury Currency Outstanding totaled $1.75 billion, Monetary Gold Stock was $3 billion, and Money in Circulation was $4.62 billion.

Tables 7 and 8 are organized as follows. Bills Discounted, Bills Bought, Government Securities held by the Federal Reserve, and
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109

XII

Dec. 1928–

June 1929

XI

July 1928–

Dec. 1928

X

Dec. 1927–

July 1928

IX

July 1927–

Dec. 1927

VIII

Oct. 1926–

July 1927

VII

Nov. 1925–

Oct. 1926

VI

Nov. 1924–

Nov. 1925

V

June 1924–

Nov. 1924

IV

Oct. 1923–

June 1924

III

Dec. 1922–

Oct. 1923

II

July 1922–

Dec. 1922

IJune 1921-

July 1922

Factors

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XII

Dec. 1928–

June 1929

XI

July 1928–

Dec. 1928

X

Dec. 1927–

July 1928

IX

July 1927–

Dec. 1927

VIII

Oct. 1926–

July 1927

VII

Nov. 1925–

Oct. 1926

VI

Nov. 1924–

Nov. 1925

V

June 1924–

Nov. 1924

IV

Oct. 1923–

June 1924

III

Dec. 1922–

Oct. 1923

II

July 1922–

Dec. 1922

IJune 1921–

July 1922

Factors

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111

Other Credit constitute Federal Reserve Credit. Changes in Federal Reserve Credit (except for net
reductions
in Bills Discounted), plus changes in Treasury Currency, Treasury Cash, Treasury Deposits at the Federal Reserve, and Unexpended Capital Funds of the Reserve constitute the
controlled
changes in member bank reserves. Changes in Monetary Gold Stock, Money in Circulation, and Other Deposits at the Federal Reserve constitute the
uncontrolled
changes, and the resultant effect constitutes the changes in bank reserves. The arithmetic signs of the actual changes of
factors
of decrease
are reversed to accord with their effects on reserves; thus, a reduction of $165 million in Money in Circulation from 1921–1929 is listed in the table as a change of
plus
165 on reserves.

Any division into historical periods is to a degree arbitrary. Yet the divisions of Tables 7 and 8 were chosen because the author believes they accord best with the most significant subperiods of the 1920s, subperiods which differ too much to be adequately reflected in any overall assessment. The following are the unique characteristics of each of these subperiods.

I. June 1921–July 1922
(dates are all end-of-the-month). Bills Discounted, which had been falling since 1920, continued a precipitate decline, from $1751 million in June 1921 to a bottom of $397 million in August 1922. Total Reserve Credit also fell to reach a bottom in July 1922, as did Money in Circulation, which reached its bottom in July 1922. July was therefore chosen as the terminal month.

II. July 1922–December 1922.
Total Reserve Credit climbed upward sharply, hitting a peak in December, as did total reserves. Bills Discounted reached a peak in November.

III. December 1922–October 1923
. Bills Discounted continued to climb, reaching a peak in October. In the meanwhile, U.S. Government Securities fell sharply to reach a trough of 92 million in October, a trough for the whole period.

IV. October 1923–June 1924.
Bills Bought fell abruptly, to reach a trough in July. Total Reserve Credit reached a trough in June.

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V. June 1924–November 1924.
Bills Discounted, which had been falling since October 1923, continued to fall, reaching bottom in November 1924. U.S. Government Securities climbed to a peak in the same month. The Monetary Gold Stock also reached a peak in November 1924. Bills Bought climbed to a peak in December 1924, as did total Reserve Credit and total reserves.

VI. November 1924–November 1925.
Bills Discounted climbed again to a peak in November. U.S. Securities fell to a trough in October, and total Reserve Credit reached a peak in December.

VII. November 1925–October 1926.
U.S. Government Securities reached a trough in October, and Bills Discounted a peak in the same month. Clearly, both items milled around during this period.

VIII. October 1926–July 1927.
Bills Bought fell to a trough in July, and Bills Discounted reached a trough in August.

Total Reserve Credit reached its trough in May.

IX. July 1927–December 1927
. U.S. Government Securities climbed to a peak in December, as did Bills Discounted, total Reserve Credit, and total reserves.

X. December 1927–July 1928.
Bills Bought fell to a low in July, as did U.S. Government Securities, total Reserve Credit, and total reserves. Bills Discounted climbed to a peak in August.

XI. July 1928–December 1928.
Bills Bought reached a peak in December, as did total reserves, while Bills Discounted and Reserve Credit reached a peak in November.

XII. December 1928–June 1929.
Concludes the period under study.

Using these subperiods and their changes, we may now analyze precisely the course of the monetary inflation in the 1920s.

In Period I (June 1921–July 1922) a superficial glance would lead one to believe that the main inflationary factor was the heavy gold inflow, and that the Federal Reserve simply did not offset this
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113

influx sufficiently. A deeper analysis, however, shows that the banks paid off their loans at such a rapid rate that uncontrolled factors
fell
by $303 million. If the government had remained completely passive, therefore, member bank reserves would have declined by $303 million. Instead, the government actively pumped in $462

million of new reserves, yielding a net increase of $157 million.

(Subtraction differences come from rounding.) The major channels of this increase were purchase of U.S. Government Securities ($278 million), Treasury currency ($115 million), and Bills Bought ($100 million).

Period II (July 1922–December 1922) saw a rapid acceleration of the inflation of reserves. Increasing at an average rate of $12

million per month in Period I, reserves now increased at a rate of $35 million per month. Once again, uncontrolled factors
declined
by $295 million, but they were more than offset by increases in controlled reserves pumped into the economy. These consisted of Bills Discounted ($212 million), Bills Bought ($132 million), and Treasury Currency ($93 million).

Periods III and IV (December 1922–June 1924) saw the inflation come roughly to a halt. Reserves actually fell slightly (by $4

million per month) in Period III (December 1922–October 1923), and rose only slightly (by $6 million per month) in Period IV.

Simultaneously, bank deposits remained about level, member bank demand deposits staying at about $13.5 billion. Total deposits and total money supply, however, rose more in this period, with banks shifting to time deposits to permit increases. (Demand deposits rose by $450 million from June 1923 to June 1924, but time deposits rose by $1.5 billion). Total money supply rose by $3 billion. The economy responded to the slowdown of inflation by entering upon a mild minor recession, from May 1923 to July 1924.

The slight fall in reserves during Period III was brought about by selling U.S. Government Securities (-$344 million) and reducing the amount of bills held (-$67 million). This, indeed, was a positive decline, more than offsetting uncontrolled factors, which had increased by $132 million. The decline in reserves would have been even more effective, if the Federal Reserve had not increased
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its discounts ($266 million) and Treasury currency had not increased ($47 million).

Period IV (October 1923–June 1924), however, began to repeat the pattern of Period I and resume the march of inflation. Uncontrolled factors this time fell by $149 million, but they were more than offset by a controlled increase of $198 million, led by the heavy purchase of government securities ($339 million)—the heaviest average monthly buying spree yet seen in the 1920s ($42.4

million).

Period V was the most rapid reserve inflation to date, over-reaching the previous peak of late 1922. Reserves increased by $39.8 million per month. Once again, the inflation was deliberate, uncontrolled factors declining by $262 million, but offset by a deliberate increase of $461 million. The critical factors of inflation were Bills Bought ($277 million) and U.S. Securities ($153 million).

The pace of inflation was greatly slowed in the next three periods, but continued nevertheless. From December 31, 1924 to June 30, 1927, reserves increased by $750 million; demand deposits adjusted, of all banks, rose by $1.1 billion. But
time
deposits rose by $4.3 billion during the same period, underscoring the banks’

ability to induce customers to shift from demand to time deposits, while savings-and-loan shares and life-insurance reserves rose by another $4.3 billion. In 1926, there was a decided slowing down of the rate of inflation of the money supply, and this led to another mild economic recession during 1926 and 1927.

In Period VI (November 1924–November 1925), a tendency of uncontrolled reserves to decline was again more than offset by an increase in
controlled
reserves; these were Bills Discounted ($446

million) and Bills Bought ($45 million).