In what will they remit? By the very assumption, dollars have become dearer in the United States. They can better afford to send back some of the gold that they have drawn from us since the war than to buy exchange in an increasingly unfavorable exchange market. Then we must remember that, under our laws, every dollar of gold that enters the reserves of the banks has the power, if used, of becoming from ten to eleven dollars in circulation. The assumed fall would be immediately checked, in fact it could not occur, except as a consequence of so large an increase in production that goods were nearly a drug in the markets.

OUR MONETARY LAWS AND THE POSSIBILITY OF DEFLATION

THEREUNDER

In a series of brilliant articles Professor Davenport has recently placed the responsibility for the prevailing inflation of our money on the Federal Reserve Board and implies that that Board could, if it desired to do so, reduce it. Without entering into the controversy, we may inquire whether the Board has the power, and if it has, will it use it drastically. It is admitted that the immediate result would be a panic, which the professor regards as the lesser of the two evils. In the first place, it must be remembered that the Federal Reserve Board is there to administer the law. The law sets the amount of legal reserves required. There is very little probability that the reserves will be reduced by a change in the law. Rediscounting of commercial paper for member banks is a duty of the Board and, while it can exercise discretion in the performance of that duty, it has only limited powers. Moreover, by common consent, that policy now being followed is likely to be permanent.

THE DEFLATION CONFERENCE

On May 18, 1920, a conference was held in Washington between the Federal Reserve Board and the

Committee on Deflation of the American Bankers Association for the purpose of devising plans "to save the nation from the consequences of an economic crisis." Alarm was expressed because "at the present time banks have loaned their customers a total which is beyond all precedent and in endeavoring to meet customers' requirements have called upon the Federal Reserve Banks for loans and rediscounts in greater amount than ever before." But no measures of drastic deflation were recommended. Only a sort of moral suasion was resorted to. The recommendation was that bankers should confine their advances to "essentials," whatever that may mean. It should be sufficient for the bankers to be governed by the old, old rule and inquire only whether each proposed loan is safe, short, mobile, and profitable. Since the conference, the Board has continued the policy of raising the rate of rediscount, which tends to stop further inflation but does not appear to have caused any great deflation.

The policies by which the Board is likely to be guided were set forth in an address by its President, Mr. Harding. He made it very clear that, while the Board desired to check further inflation, it was not inclined to take measures which would cause rapid deflation. There are two very potent reasons for this position. The first is that such action might create a crisis; second, because a curtailment of credit would tend to hamper the restoration of production, which is more important than the price level.

It must be remembered that the original purpose of the creation of the Federal Reserve system was to mitigate the evils of a crisis. It is possible that the present liquidation which some people call a crisis, although a very mild one, has been confined to its present proportion by the policy followed by the Federal Reserve Board.

DEFLATION CAUSES SUFFERING

The industrial depression of 1884 was a long time ago and the people forget that deflation in its way causes as much suffering as inflation. Just as rising prices impose a hardship on creditors, so do falling prices impose a hardship on debtors. Rising prices are hard on the buyers, falling prices are hard on the sellers. Rising prices stimulate business, falling prices discourage enterprise. By discouraging business, falling prices reduce the demand for labor, increase unemployment, and depress wages. Of what use is it to a man if he gets ten dollars a day when he works, if he cannot get work? While it is easier to pay the mortgage when prices are rising, it is harder to do so when they are falling. He who has borrowed cheap dollars may have to repay in dear ones. It is difficult indeed to say which causes the more suffering, inflation or deflation. The suffering falls on different persons. We have nearly, but not fully, adjusted ourselves to the new price level. To finish that adjustment would be on the whole the more desirable. But unfortunately the matter is not wholly one under control.

SOME DEFLATION FAVORED

Deflation in some degree is, however, favored. Not exactly on the principle that turn about is fair play. But for the reason that it is generally expected, and possibly, until it comes, unrest will prevail. Moreover, it is desired because, for peace times, the security back of our monetary system seems small. The gold reserves of the Federal Reserve system fell recently to 38.5 per cent, which is only some 10 per cent to 12 per cent of general banking facilities. The world's gold production has fallen off to an alarming extent and there is the possibility of a demand for gold abroad. The foundations of our finances need a strengthening.

DEFLATION HAS HARDLY BEGUN

Despite the general impression gathered from the recent price reductions, deflation is not going on to any great extent. The money circulation of the United States in August, 1920, averaged $6,119,000,000, the highest amount ever reached, and the total stock of money was $7,927,000,000, an amount exceeded but once and that last January, when it was $7,961,000,000. Deposits and clearings maintained an equally high level.

THE FACTS REGARDING FUTURE PRODUCTION

If the top of the fraction is going to remain large, what of the bottom part? Will production increase fast enough to offset the effect of lots of money?

The factors to be considered here are: (1) the crops; (2) the productivity of labor; (3) the new or increased use of machinery; (4) the restoration of our transportation facilities; (5) the nature and extent of our accumulated unfilled wants and the new course of demand.

THE CROPS

The forecasting of the crops has heretofore been confined to short periods. It has been based on observation by an army of untrained observers, each reporting his own ignorant judgment, hopes, and fears. Professor Moore, of Columbia, has recently perfected a method by which, as he puts it, crop forecasts can be made two months earlier, and in seventeen out of twenty times more accurately than by the present methods. This method will be available for the coming years and will tend to restrict wasteful speculation and to steady prices. He has also shown, what has never been established before, that there is a distinct cycle in crops. Without stopping to go into the details, it is sufficient to say that there is reason to expect that the average crops during the next four years will be above the normal. The details are in

Professor Moore's article in the Political Science Quarterly for June, 1920.

LABOR WILL BECOME MORE PRODUCTIVE

History repeats itself monotonously in periods of inflation. On all hands we heard, in 1920, that labor, despite the high wages, was inefficient and slack. We were told that wages were so high that a man got enough to live on by working three days in the week, and so he loafed the other four; that those who worked did so half-heartedly and that the product per man per hour was exceedingly low. The pages of contemporary records in every period of inflation contain exactly the same complaints. A statistical inquiry made by David A. Wells in 1869 brought out the fact that only one employer in nine in that year believed that the amount of work performed in a given time compared favorably with that performed in 1860 when prices and wages were low.

Granting that the complaint was justified, it is not to be assumed that it represented more than a passing phase. There are few men who, when they have the power to better themselves, will not do so and every man has an unlimited capacity for multiplying his wants as fast as he has the power to satisfy them. The first period of slackening demand causes a certain amount of unemployment which makes every man cherish his job, and the best way to hold it against the man who is unemployed is to give a fair day's work for a day's pay.

There has been a great deal of shifting of employment from one industry to another and the labor turnover has been large. It still will be. This is an inevitable consequence of the uneven diffusion of inflation through the community. Wages have not gone up uniformly; they are much higher in some industries than in others. Many still lag behind and have still to realize upon the advance. The employment agencies are and will be flooded with men seeking better jobs.