Financial Crises May Arise From the Panics may come from the allowance of too little credit and from the allowance of too much. Usually, however, owing to the general optimism of mankind, a panic comes from the granting of too much credit. Often a general extension of credit is followed by a sudden swing of the pendulum in the other direction, bringing as great a retraction of credit as there has been an extension, and thus intensifying the acuteness of the situation. To prevent panics and to mitigate them when they have arisen we must have a credit flow which will rise and fall with the true business demands of the nation. These demands should be followed when they advance on a firm basis, and restrained when they go beyond their depth. An asset currency based on commercial paper, which represents a certain level of commodity prices, must keep pace with those commodities when their price represents true value in the credit supply of the world. Such an asset currency must not, however, follow commercial paper through a level of prices for commodities which, when weighed against the credit supply of the world, are sure to prove overheavy. There must be a ready method for such an asset currency to contract if it finds it is overstepping itself in its pursuit of true commodity prices. We Should Introduce Innovations in Our Banking Very Guardedly. Any change in our banking methods should always be approached with the greatest forethought and care, and any change to be made should be made slowly. The writers of these pages have tried to show that our first need is, as we have done, to create a central discount market for commercial paper. We have tried to prove that some central reserve association of bankers should always be given some powers over the reserves of national banks. If one section of the country has much money it should be possible to place it readily at the disposal of the part where a stringency exists. The limitations as to the investments of this association should, of course, be so very stringent that only the strongest borrowers shall have access to its aid. Money made use of by the association should count as part of the reserves of the banks owning it. A Union of Reserves and an Asset The question of note issue based on commercial assets is an absolutely different proposition from that of a union of reserves. As we improve our banking and increase the confidence of people in it we shall not need very often an asset currency. Probably a combination of the reserves with a continued confidence in our banking system and in our mercantile finance, with especial reference to commercial paper, does away with much of the need of an asset currency. In fact, by a more general study by bankers of fundamental business conditions and by increasing the general respect for our commercial paper so that there will be a market for it abroad when our own reserves are exhausted, the issuance of an asset currency can generally be CHAPTER VIII HOW INTEREST RATES MAY BE FORECASTED. U P to within the last few years economists have been divided into two "schools," when discussing the course of future interest rates. One school has considered simply the element of time, believing that there is a periodic rhythm in the course of rates and that a period of low interest rates comes approximately every so many years. They believe that this period is within a a certain number of years— again followed by a period of high interest rates, and so on. Believers in this theory, however, disagree as to the length of the periods. Although all agree that there are major periods of approximately twenty years, the length of the average business generation, yet they differ as to the duration of the minor periods. These minor periods, however, are the ones in which the country banker is interested and which usually last only from one to five years. The fact that students differ so widely as to the duration of the said periods of time is one reason why we believe they are wrong in their assumptions. In fact, we strongly believe that there is no economic basis for the statement that interest rates must rise and fall according to any period of time. The Intensity of Business Periods. The other school of thought bases its prognostications on the theory that fluctuations in interest rates are due only to the intensity of the business period that is to say, that interest rates will continue to increase until they reach a certain height, when they will then decline. They believe that the decline will continue until rates reach a certain low point, when they will again begin to increase. Their reasons are very plausible. They claim that the high point is reached when rates exceed the value and usefulness of the money, and the low point is reached when the rate is too small to pay for the trouble involved in the lending. On analyzing these reasons, however, they will be found to be very superficial, as the value is an indeterminable quantity, and supposed to be dependent upon supply and demand. Business Intensity Alone Will Not It might be said that the men who believe that everything is regulated by supply and demand also belong to this school; for the terms "supply" and "demand" are very indefinite and mean nothing of themselves. In fact, if one of these "supply and demand men" is asked to name the causes of the supply or the causes of the demand, he immediately places himself directly in one of these two "schools" of thought. Therefore, it |