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tion has been when to expect the limit of A select list made up of Atchison, Topeka the downward movement of the prices of & Santa Fé general mortgage 4's, Baltimore standard investment bonds. The fact is, & Ohio gold 4's, Chicago, Burlington & it is not given, even to the great masters Quincy (Denver division) 4's, Chicago, of investment experience, such as the Milwaukee & St. Paul general mortgage savings banks and insurance companies, to 4's, Louisville & Nashville unified 4's, decide with mathematical certainty. Northern Pacific prior lien 4's, Norfolk &

It is a false notion for any investor, Western consolidated 4's, and Union Pacific and particularly the "average" individual first and land grant 4's, practically all investor, to expect that, save by good luck, bonds of the quality prescribed for public he can obtain unadulterated the cream and private trustee investment in New of investment opportunity. Blind persis- York state, shows, by way of illustration, tence in that notion will be found, in nine an extreme fluctuation in yearly average cases out of ten, to result in the investor's prices of approximately eighty dollars durgetting little better than skimmed milk. ing the last decade. Taking the current And it is at just such times as the present, prices of individual issues in such a list, when prices are marked down all along they are found to have declined to within the line, that it is always well to point a short distance of the levels reached during out this delusion, and suggest that, after the panic of six years ago. And it is all, it doesn't make so much difference to considered significant by the students of the real investor what may happen in the the cycles of price movements that the market place during the next six weeks, six latest downward swing has been in progress months, or even the next year.

uninterruptedly since 1909, or for a longer The essential fact is that there are now period than any similar movement in on all sides a great many discrepancies modern financial history. between market prices and intrinsic values. The investor who is inclined to hesitate These discrepancies are found among all at times like the present will do well to types of high grade securities, but nowhere remember that what usually happens are they more apparent than in the large after a period of depression is that the group of railroad bonds comprising the best bonds are among the first to reflect issues that have long been known as the in their market prices the turn of the tide "standards of American investments. of investment.

LITTLE STORIES OF ELASTIC

CURRENCY

BY

JAMES R. MERRIAM

D

OUBTLESS you have heard because it illustrates very aptly one of the the story of the hospital super- vital defects of our present banking intendent and his emergency system, which the bill submitted recently beds.”

to Congress by the Senate and House The speaker was Mr. James Committees on Banking and Currens) B. Forgan, president of the First National aims to remedy. Bank of Chicago, addressing a convention The particular superintendent of Mr of the American Bankers' Association at Forgan's story was required by law to New Orleans two years ago, when currency reserve a certain number of rooms in his reform was being widely debated, just as hospital for emergency use. One day it is today. The story is recalled now building under construction in the next

block collapsed, maiming a number of the Brown is a builder engaged in business workmen. The people of the neighbor- in a growing Kansas town. He has hood hurriedly carried the poor fellows to important contracts on hand, and finds the hospital. The superintendent received himself running short of materials To them so long as he had ordinary beds to supply his needs will take $50,000, and it put them in, but kept the emergency rooms so happens that he can get the most locked. He then told the people he could satisfactory terms from a certain firm with not take care of any more patients, and on which he has never done business before, being reminded by a nurse that the emer- and which is, therefore, reluctant to gency rooms were not in use, he said, extend him credit until the instalments “Why, we cannot use those. The law on his contracts fall due in sufficient requires us to keep them always ready for amounts to enable him to pay for the an emergency."

materials. He finds, moreover, that to This is a season of the year when the settle for the materials at once would so moral of Mr. Forgan's story is likely to reduce his working capital that he would be brought home forcibly to farmers, soon be unable to meet the requirements merchants, manufacturers, and business of the weekly payroll of his workmen. men of all classes when they think of He goes to Jones, who is president of the our banking system as it was constructed bank in which he keeps his account, and a half century ago to meet exigencies long knows there is no question about his since passed away.

solvency. It is arranged that the bank Under that system it has been not only shall lend Brown the $50,000 on the possible but a common occurrence for a security of his promise to pay over the man with good security and a solvent amount two months hence with interest business to be crippled in his operations at, say, 6 per cent. because he could not get his bank to Now Brown's note is taken over by the serve him in the ordinary commercial way. bank as one of its assets, and the bank's

The principal function of a commercial books are made to show that the sum, bank with which the average person is for which the note calls, stands to Brown's most familiar is that of receiving the de- credit as if he had actually deposited the posit of money, not so much for safekeeping money. He now goes ahead with his as to facilitate changes in its ownership purchase of materials, and still has an without actually moving the money it adequate balance at the bank, a part of self. But the layman often overlooks the which he may take out in actual money, important fact that by far the largest part leaving a substantial part, however, to of a bank's deposits originate in quite a draw checks against as he may need money different way.

from time to time to pay his bills. Given a certain amount of deposits in the Here we have an illustration of one of form of actual money, the banker finds the simplest forms of the transactions bethat, although he engages to repay this tween banks and their customers, which money on demand, not all the depositors give rise to nine tenths of the so-called will want their funds at the same time. deposits” of the banks and trust companExperience has taught him that he can ies. And it is with such deposits, obfulfil his obligation for repayment if he viously representing nothing more than keeps in his vaults only a certain propor- what everybody knows as "credit," that tion of the money entrusted to his care. 95 per cent. of the business of the country Therefore, he lends out the balance, just is carried on. as he lends his own capital, and it is It is necessary to point out here that through this operation that a substantial when a banker creates deposits of this part of his profit is derived. It is this kind, by taking the notes of his borrowing lending operation, also called "discount- customers, he is obliged to pay out the ing.” that causes bank deposits to swell to deposits on demand just as if they were such enormous totals. This is the way deposits of actual money. Therefore, he in which it works:

must keep in his vaults an amount of money equal to a certain proportion of contemplate it. We bankers have to such deposits. The money so kept is scramble hard for reserve money at this called the bank's “reserves. The neces

time of the year. In this respect, it's sity for maintaining them is, in the final

every

fellow for himself and the devil take analysis, the only thing that places a limit the hindmost. You're not the only one on a bank's ability to create deposit in town to suffer. Smith, the department liabilities in the manner just described. store man, was in yesterday for $50,000,

For banks in the national system, the and White, the hardware merchant, wanted amounts of these reserves are carefully $25,000 the day before. Had to refuse 'em prescribed by law. Every bank in cer- both. But there'll be plenty to go round tain cities of 500,000 or more inhabitants, shortly. Come in and see me then.” called “reserve cities,” has to keep a re- Thus do we see the moral of the story serve equal to 25 per cent. of its deposits. about the hospital superintendent anu Banks outside the reserve cities have to his locked emergency rooms. To complete keep reserves equal to 15 per cent. of their the picture of Brown's experience, we have deposits. Though the law allows the only to imagine him under the necessity banks some latitude in using these reserve of stopping work on his contracts for the moneys, they must always be available to want of necessary materials to carry them the banks on a moment's notice. The through, throwing his masons, carpenters, penalty for any bank's persistence in allow- plasterers, and all the rest of his workmen ing them to remain below the legal limit out of work, at least temporarily, and is the withdrawal of the bank's right to possibly being himself confronted with continue in business.

bankruptcy. When, therefore, Brown of Kansas went Such an anomaly as this the reformers to Jones, the president of the national of the currency are trying to obviate in bank, to arrange to get his loan of $50,000, the future. They are trying to make a Jones's bank must have had at its command, currency that can expand to take care of either in its vaults or elsewhere, an Brown and his neighboring business men, amount of "lawful money" sufficient to even in the crop-moving season, if their cover not only 15 per cent. of the deposits business is sound and warrants credit. then standing on its books to the credit of Under the proposed law the national customers, but also to enable it to put banks will have put capital in a regional aside enough additional to maintain the reserve bank which will not deal with the legal limit for Brown's $50,000.

public. One of the important functions of But suppose Brown's need for credit these new banks will be to act as common at the bank had arisen about the middle centres where the reserves of all the banks in of August. His bank is in the heart of the their region will be brought together and wheat belt. It is easy to imagine the rendered more useful. The national banks bank president apologizing for his ina- in every region will have the right to ask bility to grant the required loan because their reserve bank to rediscount commercial of the great demand being made upon the paper such as Brown's note (if it is within resources of his bank by the farmers of the proposed limits of time). To go back to the community for actual currency to Brown's case. Under the proposed lau facilitate the moving of their crops to the bank president would not have been market. One can almost hear him saying: forced to refuse the loan. The bank would

“You know, Brown, how much I'd like simply have endorsed the note and forto accommodate you, but it's impossible warded it to its regional bank. The this time. Yes, it's quite true, we have regional bank would have held it as a part several hundred thousand dollars of per- of the Jones bank's reserve. fectly good currency in our vaults, but Again, in the new law, it is proposed to remember we're face to face with our establish a system of what is called "accepannual money crisis, due to demands for tance,” now practically unknown among crop moving, and we're so close to our our business practices - indeed, a practice legal reserve limit now that I dread to that is made a criminal offense under the

national banking law as it now stands. But there is another important part, An "acceptance” may be explained in this which these self-adjusting debts — these way, by supposing that Smith, the depart- notes and bills accepted for rediscount ment store man, needed his credit at the may play in our commercial life. And bank to pay for an invoice of toys “made this is where we come to the idea underin Germany.” Instead of taking book lying the “elastic currency” about which credit and arranging for the transfer of so much has been said these last few that credit to the foreign seller, he would years. Under the plan of banking and have told the seller to draw a draft on him currency reform proposed in the measure for the stipulated sum. He would then now receiving the attention of Congress, have arranged with his local bank to accept these bills may become the basis for an the draft, or, in other words, to become the entirely new kind of currency. That is, primary debtor in the transaction. For the banks that make up the new system, this service he would have paid a com- instead of being compelled as now to mission similar to the discount that would allow such bills to repose quietly in their have been charged on his note. The portfolios as unliquid assets, impounding Kansas bank, in turn, would have been their reserves, will have the further choice able, under the new system, to discount of turning in to the regional banks all the acceptance at the regional bank and bills that are of proper maturity and, get credit for the proceeds on the books. after setting aside a certain amount of

It is clear how, by means of these systems gold as additional security, receiving for of rediscount and acceptance, bona fide them a supply of new currency. The trade debts, possessing the power of self- total supply of these new circulating notes settlement, can be used, as one authority will, in the very nature of the case, be expresses it, “through the agency of the large or small, according as the trade and banks in the settlement of similar debts, commerce of the nation giving rise to without locking up cash reserve."

the bills is at high or low tide.

A PICTURE OF MEXICO

THE PROBLEM OF THE ELEVEN MILLIONS FARTHEST DOWN

T

HREE years ago Mexico cele- The standard of living of the mass of brated the centenary of its in- its people is the one fundamental basis dependence from Spain, the of judgment of a nation. By this criterion eightieth year of Porfirio Diaz's Mexico is a failure. The great majority

life, and the thirtieth year of its citizens are illiterate, extremely poor, of his reign. There was a wonderful cele- lamentably immoral, practically without bration of these events, but even while the political power, and not even safe in their celebration was in progres people were ask- personal rights.

personal rights. In the hundred years of ing “After Diaz, What?” The answer was the Mexican Republic, the Mexican people almost invariably the expressive Latin- have learned little or nothing about selfAmerican shrug of the shoulders. If government or right living. your informant was very communicative A clear and vivid picture of the state of he answered, “Who can tell? Another these people comes to the World's Work dictator? Revolutions?"

in a letter from a long-time resident of Many rightly feared the revolutions. that country: Some hoped for another dictator. Practically no one looked forward to an era of I have lived in this country continuously real democracy.

for many years. During this time my relations with the people have been both note of these things and has promised harmonious and intimate, and it should not reform. Nothing is ever gained in the be too much to say that this opportunity long run by trying to deceive one's self. has brought to me a knowledge of their Beelzebub has not acquired a reputation character, their sorrows, and their attitude for casting out Beelzebub. Both General toward constituted authority which could Huerta and Felix Diaz have long been have been gained in no other way. I have identified with the dominant class through been with them in their humble palm huts their sympathies and material interests. when their children have first opened their Both are said to be wealthy, as are most of eyes upon the indifference of their Father- those who clung to Porfirio Diaz during his land toward them; I have been with them multiplied terms of maladministration, and and given them material assistance in their nothing has yet been done to justify a belief struggles to get the plainest food and the that either one of them will ever initiate scantiest clothing; I have again been with an effort to revolutionize human nature. them at the supreme moment and helped Caciquismo (boss rule) is as much the rule them to close the eyes of their loved ones in 1913 as it was in 1910. Article 16 of upon the continuing indifference of their the Federal Constitution reads (in part): Fatherland; and I have joined their straggling processions to the “Campo

No one can be molested in his person, house

hold, domicile, papers, and possessions, save Santo," and there helped them to lay their

by virtue of a written order emanating from a dead away into hospitable graves, the first

competent authority and setting forth the legal and only peaceful rest they have ever

ground for the proceeding. known. I have heard from their own lips the story of their ancient wrongs; I have Notwithstanding this plain, emphatic seen with my own eyes their brutal punish- guaranty of freedom from tyrannical molesment for trivial offenses; I have witnessed tation, I have seen, during the last month. the despoilment of their small, hard-earned four men of this small settlement arrested savings of years; in common with them I and thrust into jail, without any sort of have myself been a victim of the “gentle- warrant of authority, high or low, without man” with a handkerchief over his face, and complaint of any nature, and without also of his cousin who operates from the being given any hearing in defense. After offices without need of the handkerchief being in jail three days two of the men - who counts upon and receives protection were released by paying fifty dollars each. from higher sources.

and the other two were also let out by It may, therefore, be readily understood paying, one of them forty dollars and the that my viewpoint is the viewpoint of the other ninety, but the forty-dollar man common people — eleven million human had to buy two cases of beer. beings of a total of fifteen million — who If the Mexican Beelzebub is ever going for generations have been forced by their to cast himself out, the common people grasping superiors to remain in abject pov- of this country would very much like to erty surrounded by social conditions that know when the show is due to begin. would be a blot upon the civilization of History does not point to an example of a any country. Neither the fact of their reformation achieved through the instrupoverty nor that of their dense illiteracy mentality of those who have created, has appealed to the governing class. If maintained, and profited by the unfortucriminals everywhere are recruited from nate conditions that make the reform these conditions and if Mexico in criminal necessary. statistics heads the list, as criminologists In the face of the military situation as have stated, there still is nothing in the it exists to-day, in the face of the pes story of these unhappy people that has yet mistic tone of the more enlightened publis awakened the interest of the Mexican sentiment based upon the military situsGovernment in their behalf.

tion, and especially in the face of the But some one rises to remark that the economic conditions of the common people, Huerta provisional Government has taken and of their intense bitterness toward the

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