one does not admit of partial application or of compromise. Any attempt to make exceptions to the prohibition among partners mutually dependent can only result in entirely releasing them all from any obligation respecting it. Yet every banker will freely admit that the purchase of deposits payable on demand operates, in some degree, as an absolution of the obligation to be always in condition to meet the contract. Both the giver and receiver of interest on such deposits, by the nature of the business, substantially, though not expressly, agree to such use of the money as may prevent its immediate return.

What is the nature of bank deposits? Every responsible person in regulating his own affairs must withhold from permanent investment and keep in hand enough ready money for his current wants. This is his reserve. When such sums, for greater safety, are placed in charge of another person, they do not lose their essential character; and when they become further aggregated and pass into the possession of a bank or banker, they are still subject to the same immediate wants of every original owner for the very purpose for which he set them aside. And when these rivulets of capital become streams, and streams gather into rivers and flow toward the ocean until they reach this city, where they come into financial relations with other men in other continents, the parties who here take them in charge assume new and accumulated responsibilities. They are subject not only to the necessities of the people at home but also to the world-wide influences of commerce.

Is it not evident that when these reserves are attracted by banks and bankers who pay interest for them they immediately lose their peculiar character and become, so far, at once changed from reserves into investments, and that their original purpose is greatly reversed? The people's ready cash, by the very condition of receiving interest for it, necessarily passes through the banker into fixed forms never intended. Reserve and investment! Idleness and work! They are adverse and irreconcilable conditions. It is true that in the hands of sound commercial banks some of these deposit funds may be legitimately used for the best interests of society, in the negotiation of business notes representing articles of human want and subsistence, passing from production into consumption. This is using the fund by promoting the very object for which each person originally provided it. But such, we all know, is not the tendency nor the operation of the practice now in question. Money payable on demand with interest is chiefly loaned here upon fixed property intended for permanent

investment and upon bonds, stocks, and other obligations made for the construction of public enterprises and works of established purpose, whose large expenditures are not again resolvable into money. They are in their nature fixed, and they demand, not their ready cash reserve, but the permanent savings of the people to construct them. So that temporary loans of reserved capital upon such securities are certain to be called in when they are hardest to pay, because the ready-money reserves so injudiciously absorbed by them are called back by their owners in apprehension or for the supply of their own needs.

Deposits so unnaturally attracted are necessarily capricious and transitory. They fly away at the first whisper of danger, to the detriment of the many who have touched them. Those banks which so purchase them are objects of special dread to their colleagues in business, while at the same time they are continually held up as patterns of enterprise and as models for imitation. Differing so widely from their associates in principle and in practice, the two cannot work harmoniously together, nor equally and honorably share the burdens of a national financial system whose stability requires the New York banks voluntarily to stand firmly and compactly together as one united body.

Experience among ourselves has again and again proved that the interest-paying banks are the first to become embarrassed by any kind of financial disturbance, even if they themselves are not the means of producing it, and that they are then almost alone in being compelled to seek protection from the loan committee by a pledge of their securitiés.

Will a few members of this association, on the one hand, longer continue a practice that subjects them to this humiliation? And is it just, on the other, for a large majority to tacitly submit to having their business thus drawn away and the community periodically disturbed by associates whom, in the hour of peril, they are compelled for their own protection to support?

59. REDISCOUNTING BY NATIONAL BANKS1

BY LAWRENCE O. MURRAY

While the banks are assumed to have sufficient capital, surplus, profits, and deposits to take care of the business of the community in Adapted from a letter quoted in an unpublished thesis by Joseph J. Klein, entitled The Development of Mercantile Instruments of Credit in the United States (1911).

which they are located, they often rediscount notes, as is shown by their published statements, and their right to do so has been recognized by the courts. This may be necessary because of an unusual withdrawal of deposits, an unusual demand for loans by their customers, and possibly, in rare instances, to make good their reserve. Rediscounting when practical shows a rather strong seasonal swing with the larger amounts during the fall and early winter during the strain of the crop-moving period.

60. VARIOUS MEANS OF INTERSECTIONAL BORROWING1

The rediscounting by country banks in New York is not of large volume and at the present time comes principally from the southern correspondents. There is a great difference of opinion in reference to this matter, and in some quarters rediscounting is looked upon as a sign of weakness, but as far as I am concerned I do not feel that way. Of course any bank in New York which attempts to rediscount its paper and publish the same in its statement is more or less criticized. One large institution in this city showed bills discounted, or rediscounted, for some $2,000,000 in their September call to the Comptroller, which created considerable comment. But for out-of-town banks, whose customers need considerable sums of money at certain seasons, especially in the crop-moving period, and whose capital is not large enough, or would be too large during the rest of the year, I see no reason why such institutions should hesitate to rediscount with their reserve city correspondents. Where there are rival institutions in the smaller places throughout the country they do not hesitate to point out to the customers of the other institutions the fact that they rediscount, as if it was something out of the way. From this fact has grown up a practice with a large number of banks to secure money in other ways which will not show on their statement if called for by the Comptroller. For instance, if they have a large amount of bonds which are well known to their correspondents, they will pass a resolution of their board authorizing the officers to sell these bonds and their correspondent would buy them with an agreement on behalf of the bank to repurchase the bonds at the same price plus a fixed rate of interest. Another method of rediscounting is for the directors of the bank to give their own note jointly and severally to their reserve city correspondent for a considerable sum of money

1 Adapted from a letter of a prominent New York banker, quoted in an unpublished thesis by Joseph J. Klein, op. cit.

without guarantee or endorsement of their bank in any way. The money thus borrowed by the directors is placed at their credit on the books of their own institution, but they do not draw against it, and it gives them just as much more money to use and increases their deposits at a time when naturally the deposits are withdrawn by their regular customers. Another method employed for this borrowing is for the bank to sell some of its notes without recourse to its correspondent, with instructions to charge these notes to their account ten days before maturity and forward the same to them for collection.

These are all irregular methods of borrowing and do not show in the call to the Comptroller; consequently that is the reason why when you come to examine the statements of national banks you do not find under the head of "Rediscounts" any considerable amount.

The Comptroller is endeavoring to take steps to stop these methods and make the banks show all their borrowings as rediscounts. There is one perfectly legitimate method, however, which the Comptroller cannot stop and which I am pleased to say is growing out of the practice of large purchases of commercial paper which the banks throughout the country are making in the open market. You know this is my "fad," and hence I feel very well pleased at the way this part of the business of the country is being handled. Where banks over the country buy commercial paper upon the open market from reputable note-brokers, and buy paper which is known to their correspondents in reserve cities as being first-class in every way, there is no reason, when they need funds to take care of their customers or meet receding deposit lines, why they should not take this commercial paper which is bought on the open market and sell it to their correspondents without any endorsement and without recourse. This makes a very flexible secondary reserve for every institution which carries commercial paper of this character, and the Comptroller can find no fault with this; and the banks that are doing it not only have the advantage over other institutions of being able to take care of their customers as the paper matures, but are also in a position to quickly and promptly turn into cash through their reserve agents a large amount of their bills discounted.

(2) PERIODIC TENSION AND EASE IN THE SYSTEM

(a) Seasonal

61. SEASONAL VARIATIONS IN NEW YORK MONEY MARKET

BY EDWIN WALTER KEMMERER

With regard to seasonal movements in the relative demand for moneyed capital the New York money market exhibits five important seasonal swings. Throughout January and during the early part of February there is normally a pronounced "easing up" of the money market. By the fore part of January the crop-moving demand for money in the West and South is over and the return flow of cash is at its height. There is a natural reaction-in part psychologicalwhich results from the relaxing of the heavy strain on the money market incident to January 1 settlements and to the passing of the holiday season. At this time freight traffic, both on the railroads and on the inland waterways, is relatively small.

The second seasonal movement is the spring revival, beginning about the middle of February and extending to the latter part of March or the fore part of April (in some years a week or so later). This recovery is stimulated by the cheap money prevailing during the preceding period, railroad traffic is released from the incubus of cold weather and snow, the inland waterways are opened up; on April 1 comes the demand for large interest and dividend settlements, and in this period comes the spring demand of agriculturists for the planting of crops.

The third important seasonal movement is the weakening money market of the late spring, followed by the summer depression. This period extends from the middle or latter part of April to the fore part of August. It is interrupted by a temporary reaction about July 1, the time of semiannual settlements. This third seasonal period shows the natural reaction from the high rates of the preceding period, the anticipation and later the realization of the hot months of summer comprising the vacation period, the lessened demand for funds in the Middle West after the planting of the crops, and the resulting return of cash to New York for deposit, investment, and speculation. The declining and cheap money market at this time,

Adapted from Seasonal Variations in the Relative Demand for Money and Capital in the United States, pp. 24-25, 223-24. (National Monetary Commission,