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We left the American financial position, three months ago, with its future dependent seemingly on four influences as yet undeveloped — the out-turn of the crops, the problem of gold exports, the question of trade revival, and, partly, no doubt, as primary effect of the three other causes, the attitude of the investing public. In regard to all of these lately unsettled factors the situation still remains in an unusual degree perplexing. Two of them have worked out in such manner that their bearing on the development of finance has been reasonably plain. Gold exports, which reached an unparalleled magnitude at the beginning of the season, stopped abruptly with the ending of the $40,000,000 Panama payment in June; and absence of further outflow of the circulating medium, combined with some further imports, with large domestic production, and with continued flow of currency from interior markets to the Eastern cities, resulted in a rise of the surplus reserve of the New York banks to a figure not reached in the six preceding years, and paralleled only on four occasions in our previous banking history. We shall find some interesting food for reflection in this movement, as it affects both foreign exchange and the influence of large bank credits on the markets. It may also be contended, with some show of reason, that the attitude of the investing public has grown more favorable. At all events, a very large trading in investment bonds at rising prices and a steady advance on the Stock Exchange — often in the face of immediate unfavorable developments were phenomena that could hardly have existed without actual return in some considerable force by the investing public.

But with respect to the other two influences referred to, the crop developments and the movement of general trade, the case is much less clear. It was evident, three months ago, that the financial fortunes of the year would be largely shaped by the outcome of the harvests. Now the cotton crop, whose importance this year was exceptional, has passed with good results through this part of the season. The corn crop promises the largest yield in the country's history. But the wheat crop -always hitherto reckoned the mainstay of the country's productive


has not fared well; the significance of the unlucky season, in its bearing both on our export trade and on our home resources, being such as to require especial study. As for the question of general trade activity, the two facts which challenge attention are the decrease of ten to fourteen per cent in the country's bank exchanges for the quarter, as compared with a year ago, and the wavering of prices in the steel and iron trade, notwithstanding a heavy curtailment of production. These are perplexing phenomena which require careful examination before their bearing on the future can be satisfactorily determined.

The extraordinary figure reached by city bank reserves this season is not in itself astonishing. I set forth in the last number of THE FORUM the reasons why, at a time of slackening trade, money in the form of actual cash flows from the pockets of the people, from the tills of the shopkeeper, and from the vaults of country banks, to the city institutions. Currency being merely a convenient instrument of exchange, people who are making fewer purchases need less; shopkeepers whose sales are reduced, and who consequently have less occasion to make change for customers, can do with a lesser stock of small money in their tills; country banks, one of whose offices is to keep such people provided with currency, have a correspondingly lighter demand on their own reserves of currency. The city banks, whose power to lend is proportioned to their holdings of cash reserves, make a standing offer of interest at two per cent for the use of such cash reserves of country institutions; and the transfer of surplus currency from the country to the city markets becomes at such times almost automatic. As a matter of fact, the magnitude of this movement of currency, from the interior to the city markets, has been larger this season than at any previous time in the country's history.

Some rather interesting questions arise in connection with this phase of the summer's money movement. For instance, the two per cent paid by city banks for this cash from smaller institutions is paid on the supposition that the city bank can re-lend the cash thus procured, and on more advantageous terms. But this is precisely what it could not do in the present season. New York banks which were paying two per cent for the surplus cash of their country correspondents could not get more than one per cent for the same amount lent out in New York, repayable on demand, nor more than two per cent for a loan on three months' time. Loans for a longer period brought slightly higher rates; but before that longer period would expire, the chances

were that the country banks would want their currency back for harvesttime purposes. They have, in fact, been calling it back in very large quantities since September 1.

It is, therefore, not unreasonable to assume that at least a considerable part of this "country money" was obtained by the city banks at an actual loss. It must, in fact, be remembered that the same conditions which made large supplies of cash superfluous to the country institutions rendered them almost equally superfluous in the city. There, too, as in the smaller towns, trade was slacker than a year ago, and need for pocket-money, till-money, and pay-roll money, lighter. That this very moment should be marked, in the case of the city market, by a wholly abnormal increase in the cash reserves of banks, and by a flow of cash in unprecedented volume from the interior, on its face appears anomalous.

The surest way to determine exactly its financial significance is to examine parallel instances in the past. I have said that the surplus reserve of $58,000,000 in the New York banks this season has been surpassed only four times in the history of those institutions. Those occasions were June, 1898, when it reached $62,200,000; January, 1897, with $59,000,000; February, 1894, with $111,600,000; and August, 1885, with $64,700,000. If the circumstances governing the movement at these previous dates be examined, it will be found that only on one occasion did the size of the unused surplus have any cause but contracting trade. The one exception, 1898, was an outcome of the abnormal conditions always caused by war. When the fight with Spain began, in April, 1898, the first thought of our banking institutions was to fortify their position against the uncertainties of warfare-in particular, against the sudden and violent strain on credits which will usually follow military reverses or the announcement of large borrowings by the Government. To prepare for such unpleasant possibilities, the New York banks drew heavily on their European credits, which luckily were large, and the result was $60,000,000 gold imports in three months. Since financial plans were for similar reasons held in temporary abeyance, and since the size of a surplus reserve depends on the ratio of a bank's cash holdings to its outstanding liabilities, the sixty-two million excess reserve of 1898 was a natural result.

But the circumstances of 1897, of 1894, and of 1885 give a closer parallel to the present year. At each of those three periods trade reaction was in progress, and unused currency was pouring from the country into the city markets. The surplus with which 1897 began followed a year

of unsettlement in trade, finance, and politics, when commodity prices as a whole fell to the lowest average in the record of modern times, and when the uncertainty about the money standard paralyzed business enterprise. The year 1894 came on the heels of the panic year, whose financial whirlwind left American industry prostrate. Panic and trade depression similarly led the way to the idle, heaped-up bank surplus of 1885. So far the precedent for 1904 was close, and it might have been expected that we could read the immediate future from the course of events in these three modern instances.


But closer examination discloses points of difference. The presence of an abnormally large surplus reserve of cash, with the country banks sending in quantity to the cities money which neither market could employ, points naturally to gold export. A superfluous circulating medium in the inland markets is relieved by shipments to the cities. in the cities, too, supplies are greater than current needs. If foreign money markets, at such a time, are able to employ an increased bank reserve, the logical outcome is the release of the city surplus, through remittances to such foreign markets, in the form of gold. This has, in fact, been the usual result. It was so even in 1894, when, though currency holdings in the banks were very large, supplies of gold were so light that shippers had to resort to the Treasury's gold reserve through presenting legal tenders for redemption.

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This season there was not even the obstacle of a deficient stock of gold in bank reserves. Of the immense increase in actual cash holdings of our banks, during the twelvemonth past, by far the greater part was gold. It is true that, including the $40,000,000 sent to France in settlement of the Panama payment, no less than $70,000,000 gold had been shipped from New York for the year to date a sum unprecedented for the period. But, with all this outflow, holdings of specie in the New York banks, practically all of which was gold, stood during August at $279,000,000, as against $174,000,000 at the same date last year. That is to say, despite the Panama Canal remittance, not only were New York's cash reserves far in excess of present or prospective needs, but its stock of gold available for export was more than one hundred millions in excess of last year's supply. Yet, except for four or five millions, chiefly sent to Cuba, no gold went out during this period of plethora after the Panama payment was completed.

This singular result needs explanation. The most obvious suggestion would be that the foreign markets also might perhaps have been in no present need of increased cash supplies. In a measure this was

true. Practically all our large gold exports, earlier this year, were consigned to Paris, where not only did they raise the gold reserve of the Bank of France to the largest figure of its history, but where the money rate sank, on receipt of these large supplies of cash, to the one per cent which loans commanded in New York. Clearly there now existed no inducement for the transfer of capital, in the form of gold, from New York to Paris. But the case of London differed. On July 1, the discount rate on Lombard Street had fallen to one and seven eighths per cent, and it was rather commonly supposed that release of funds in the half-yearly interest payments would depress the rate still lower.

The actual result was precisely opposite. Within three weeks the rate had risen to three per cent an abnormally high figure for London at that period of the year. When the market had disclosed its real condition, there were, as usual, explanations in abundance. London had received none of the gold sent out by us so liberally in the spring. Its own reserves of cash were comparatively low. The stock of gold at the Bank of England, in the middle of the year, stood $12,000,000 below the figure scored at that date in 1903, and nearly $20,000,000 below 1902. This lack of bank resources had exerted, too, a visible influence on the English financial markets. Banking houses found their hands full of stocks and bonds which they could not sell, and the cost of carrying which, in a straitened money market, was a heavy burden.

The term "undigested securities," so familiar in our own markets of a year ago, was borrowed to describe the troubles besetting financial London. Some large loans, by states or municipalities in high credit, were offered at what the bankers deemed a reasonable price, and failed to get a market. No doubt this last phenomenon resembled the situation which was familiar in New York six months ago. But the fact remained that, in the middle of this year, London apparently needed larger bank reserves, while New York had more than it could use; that money which could command but one or two per cent on Wall Street was assured of three on the English market. Yet we did not export gold. London, which in the past has usually had but to raise its bid a fraction in order to attract to itself, from other foreign markets, all the gold it needed, had made its bid and did not get the gold.

This incident merits close attention; one of the largest financial problems of the day being involved in it. Has London lost its financial prestige? And, if so, is the loss a temporary or permanent matter? This is not a simple question of the money markets, but it leads to some of the most pressing questions of modern trade and industry. The whole

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