fluctuates, so will the bank reserves also fluctuate, except so far as these fluctuations of the reserves are compensated by the importation of gold, or by the issue of bank notes, as I shall show a little later.

There are more than 6,500 National banks in the United States, and twice as many State banks and trust companies. These National banks owe deposit liabilities amounting to about five thousand million dollars, and the State banks and trust companies owe deposit liabilities amounting to about seven thousand million dollars more. The combined banks and trust companies of the United States owe to their so-called depositors about twelve thousand million dollars, or four times the entire currency of the United States. These were the figures a year ago. They kept on increasing until the panic came on; since then they have fallen off to some extent.

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It may be asked: "How can the banks and trust companies have deposits amounting to four times the entire currency of the United States?" Nine-tenths of the so-called deposits of the banks and trust companies do not represent the deposit of any money, and never did represent the deposit of any money. The use of the expression "bank deposits " is misleading to many who are not familiar with the actual course of the banking business. Nine-tenths of these so-called deposits were created by the banks and trust companies through mere book entries for the purpose of making a profit by loaning their credit for a consideration. When a man applies to a bank to borrow $100,000 he rarely wants to carry away the money in a bag. What he wants is credit with the bank so that he can draw his checks from time to time to pay his bills. He gives his note to the bank, payable in say three months, with interest at six per cent., and the bank credits his deposit account with $100,000 as if he had actually deposited that sum, altough he never in fact deposited a dollar of money. The borrower generally receives no money, it being understood that he will draw upon his deposit credit only gradually, and that he will at all times leave a substantial balance undrawn. Not a dollar in currency has been received by the bank. The transaction is simply a "swapping" of credits. Again, a man deposits with his bank a batch of checks drawn by other people on other banks, and receives a credit as if he had actually deposited so much money. These checks are then settled through the clearing houses

by turning in to the bank which presents them checks drawn upon it by its own depositors. In this case also no money, or very little money, passes, and the transaction is merely a "swapping" of credits.

I have referred somewhat in detail to the creation of these so-called deposit liabilities without the actual deposit of money, because this is the crux of the entire currency question. The banks and trust companies can go on almost indefinitely creating these so-called deposit liabilities, payable without interest, in consideration of the notes of borrowers payable with interest, except so far as they are limited by the necessity of keeping on hand a certain amount of money to pay their deposit liabilities when called upon for cash. The banks cannot always pay their deposit liabilities by the process of set-off or swapping credits through the Clearing House. They must be prepared to settle in cash balances against them at the Clearing House, and they must be prepared also to pay cash to depositors who call for cash. Common prudence, therefore, requires every bank to keep a certain amount of actual money as a reserve, and the law requires every bank to hold at all times a certain minimum reserve. Taking the average throughout the United States, the National banks commonly expand their deposit liabilities by the processes I have mentioned to six or seven times the amount of lawful money which they hold, and all the banks and trust companies together expand their aggregate deposit liabilities to an amount often equaling twelve times the whole amount of the currency which they hold for the payment of these liabilities. If you throw out the bank notes, Government notes, and silver held by the banks and trust companies, and count only the gold and gold certificates held by them, this gold being the only ultimate reserve for the payment of liabilities in money, you will find that the aggregate deposit liabilities of all the banks and trust companiesliabilities which they must be prepared at all times to pay on demand-amount to more than twenty times the whole amount of gold and gold certificates which they hold.

When you hear of tight money or of a money stringency, what does that really mean? It means that the banks and trust companies have expanded their deposit liabilities to the limit of safety, or to the limit permitted by law in relation to their reserves, and that they cannot lend their credit any further by the creation of

these deposit liabilities, or that they feel compelled to call in loans in order to increase their reserves, or to reduce their deposit liabilities. It does not mean that people cannot have all the currency they want for circulation, unless the banks actually suspend cash payments, as they recently did. Even when the banks suspend cash payments, as in the recent panic, when there was apparently a currency famine, the real cause of the trouble and the source of danger is the over-expansion of bank credits. There would always be more than enough currency available for circulation if the banks did not feel obliged to hold on to their reserves on account of their enormously expanded deposit liabilities. The inability of depositors to obtain all the cash they wanted from the banks was not the serious part of the recent panic. This inability to obtain currency was an inconvenience, but generally not a very serious one, because people could generally pay their debts by check. The serious part of the panic arose from the fact that the banks were compelled to call in loans which borrowers could not pay without enormous sacrifices, and that the banks were compelled to refuse to make loans and grant credits for legitimate and necessary business purposes, because they had already expanded their deposit liabilities in relation to reserves beyond the limit of safety.

If then, our financial troubles are due to the excessive expansion of bank liabilities payable on demand, without adequate reserves for the payment of these liabilities, the question naturally presents itself: "How can you prevent this trouble from arising again, and how can you relieve this trouble by any currency plan?" You cannot artificially create money good as bank reserves, because gold is the only true bank reserve. Notes, which are merely promises to pay money, are clearly not a reserve for the payment of other promises to pay money. The only way of increasing the amount of currency in the country, properly available as bank reserves, is by digging gold out of the ground, or by importing it from abroad. However, you can artificially increase the amount of currency available for circulation by issuing bank notes, because bank notes are accepted and pass as a circulating medium in lieu of gold or other lawful money, so long as the holders of these notes are certain of being able to obtain lawful money for them, on demand. When bank notes are thus put in circulation, they take the place of an equal amount of lawful

money, and this lawful money then becomes available as a reserve of the banks for the payment of their liabilities. If, by keeping all lawful money which they receive, and by paying out only bank notes, the banks can issue and keep in circulation, say, two hundred million dollars of their notes, these notes would take the place of a like amount of lawful money in circulation, and the two hundred million dollars of lawful money thus displaced by notes would go to increase the reserves held by the banks. Such an increase of the bank reserves by two hundred million dollars would bring about an increase of the power of the banks to create deposit liabilities and to make loans by about six times two hundred million dollars, if you take the average of the national banks, or about twelve times two hundred million dollars, if you take the average of all the banks and trust companies in the United States. You can readily perceive, therefore, that the issue of bank notes is a tremendous power for the expansion of bank credits-such expansion being effected not by increasing the ratio of bank liabilities to bank reserves, but by substituting promissory notes of the banks for lawful money as a circulating medium, and by driving lawful money out of circulation into the reserves. Every dollar of bank notes in circulation means a dollar of lawful money saved for the bank reserves, or added to them, and more than six times that amount added to the power of the banks to grant credits, without reducing the ratio of reserves to liabilities.

There is no country in the world in which bank credits, in relation to the reserves held by the banks, are expanded as far as in the United States. The reserves in gold held by the Bank of England against its deposit liabilities rarely are less than 40 per cent. of these liabilities and usually they are much larger. To-day the reserves of the Bank of England amount to 50 per cent. of the deposit liabilities of the bank. It is difficult to ascertain the exact reserves of all the banks in England, but it is estimated that their aggregate reserves in gold amount to more than six per cent. of their aggregate deposit liabilities, which is a larger percentage of gold than is held by all the banks and trust companies in the United States. The reserves held by the Bank of France commonly amount to between 70 and 80 per cent. of all the notes and deposit liabilities of the bank, more than two-thirds of these reserves being gold, and the remainder silver. The Imperial Bank of Germany commonly holds reserves equal to about 40 per cent.

of all its outstanding notes and its deposit liabilities, and it is compelled by law at all times and under all circumstances to hold in its reserves an amount of coin equal to at least 333 per cent. of all its outstanding notes.

The combined banks and trust companies of the United States commonly hold about 4 per cent. of their combined deposit liabilities in gold, and about 8 per cent. in currency of all kinds, including silver, greenbacks and bank notes. Even these small reserves are created in large part artificially, by driving lawful money out of circulation and into the bank reserves by means of an enormous volume of National bank notes always kept in circulation. The report of the Comptroller of the Currency shows that the volume of uncovered paper currency in the United States -I mean bank notes against which money is not held as a reserve —is to-day about three times as large as the uncovered paper currency of any other country in the world, and that the uncovered paper currency per capita in the United States is twice as large as in any other country in the world. The precise figures on January 1, 1906, were as follows: Germany, $213,900,000; France, $118,200,000; United Kingdom, $116,600,000; United States, $582,100,000; the per capita uncovered paper currency being: Germany, $3.53; France, $3.02; United Kingdom, $2.67; United States, $6.83. The above figures for the United States do not include our six hundred million dollars of silver, which for practical purposes is uncovered currency that must be kept at a parity with gold.

Let us not shut our eyes to the fact that the true cause of our financial troubles is the over-expansion-the inflation-of bank credits beyond the limit of safety, and that this over-expansion or inflation has been caused by the issue of an excessive amount of promissory notes of the banks for use as currency in place of real money. Nothing will correct this situation or prevent a recurrence of our financial difficulties except a reduction of the volume of bank notes outstanding in normal times. In our finances, we are in the position of a person who habitually lives on stimulants. The more whisky such a person drinks the more does he want, and the more does he need to keep himself up; but you cannot cure such a case by administering more stimulants. You may temporarily brace up the patient and postpone complete collapse by a further dose of whisky, but this would only make the con