despite the handicap of the shrinking foreign market for its staple product, reported an increase of 25 per cent. These figures pointed unmistakably to great increase in American trade activity. But the result of such increase always is, first a much larger circulation of actual cash in the hands of prosperous tradesmen and busy laborers, but next such creation of new loans by banks at all interior centres, to conduct the active trade, as would call for enlarged supplies of cash in the vaults of the institutions, in order to keep their own reserves up to the proportion required by law. This is the real explanation of the decrease of cash in the vaults of New York banks, from $536,367,000 last January to $414,614,000 in June, and for the fall in the so-called "surplus reserve" to $55,850,000 on June 10, 1916, as against the $224,122,000 maximum of last autumn.

But these are precisely the circumstances which, at ordinary times, lead to a rise in money. In the middle of the present year, bank reserves in all sections of the country were still substantially above the usual level of the season. The question was, whether the process of depleting them, through continued activity in American trade, would not be so far emphasized in the active autumn months as to produce the familiar results. I have shown what causes were operating in that direction. There are at least two important opposing influences.

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(Continued from page 61)

was resumed, and in six weeks after the middle of May fully $100,000,000 was imported. The effect was soon visible in bank reserves; presumably they would rise toward their previous high level with increasing rapidity, if the gold import should continue.

How long it could continue was the question of perplexity. The British Government was known to have accumulated a fund of gold in Canada, not reported in the Bank of England's reserve, and it was from this fund that the consignments for New York were drawn. How large it was the markets were not informed; but there would seem to be some limit to the possible size of any such accumulation. In our market's power to draw from Europe either gold or securities, however, there was no relaxation. statement of the country's foreign trade for May showed merchandise exports $61,000,000 greater than in any other month of the present war, and larger by $194,000,000 than in any month of our commercial history before the war.

The

The other offsetting influence is the machinery of the Federal Reserve Banks. Continued shrinkage in bank reserves and a considerable rise in money rates, if not accompanied by a still larger advance in the lending rates of those institutions, would lead individual banks to turn over loans of their own to the Reserve Banks for "rediscount"; thereby relieving themselves of the existing burden and strengthening their reserves. That the Federal Reserve Banks, whose cash holdings in the middle of this year were four times as large as the total sum of their rediscounts, would have abundant capacity to perform this office on a very substantial scale, is quite unquestionable. The only question would be that concerning the disposition of the Federal Reserve Board to control the money market.

If it were thought that existing money rates were unduly low, the

Reserve Banks would naturally raise their own rate for rediscount, and the general money market would follow. This is a traditional office of the central banking institution. Such action is, however, usually taken either because the bank position as a whole is weak, or because low money rates have encouraged reckless speculation, or because it is desired to import gold. The last-named motive could not exist in the face of the gold arrivals from Canada. The existence of the other motives would be determined largely by the course of events next autumn.

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