Managing the People's Money

by Joseph E. Goodbar
[Yale University Press, $4.50]
A TREATISE which delves deeply into the fundamentals of our monetary and hanking structures, and attempts to show just how inflation and weak banking systems may be controlled, is of peculiarly timely interest. The underlying purpose of Managing the People’s Monet) is (a) to ascertain the essential principles that must be observed by a banking system in order to assure stable economic progress; (b) to compare those principles with the facts of hanking in this country, determining wherein there is a conflict between economic law and principle and existing banking law and practice; (c) to inquire into what practical means are available for bringing banking law and practice into harmony with economic law and principle.
The author bases his study on what is called the ‘circuit flow of money.’ He observes: ‘We have noted that an expansion in the volume of money entering the “circuit flow of money” raises prices and produces large “profits” for entrepreneurs, while a diminution of the flow forces prices down and causes corresponding “losses.”. . . Economic equilibrium depends on maintaining equality between the volume of current savings and the volume of current investment. And, as a corollary . . . the only source of investment money that can produce really violent economic disturbances through an excess of investment over savings is money from outside; new money, either received from abroad or newly created.
To provide economic equilibrium, effective central bank management of money is necessary, and this requires preventing bank credit from flowing into speculative uses and into new capital-goods investments. The author is of tbe opinion that quantitative control of bank credit, although highly beneficial in preventing the more excessive stages of capital-goods inflation, is not adequate of itself to preserve the necessary balance between investment and savings.‘
He adds that the monetary conditions for economic stability are two, primarily: ’an equality between the amount of money saved and the amount of money expended on capital goods, and an equality between the cost of producing consumers’ goods (including as cost the normal earnings of manufacturers, distributors. etc.), on the one hand, and that portion of national income which is spent in the purchase of those goods, on the other. These conditions are violated whenever bank credit is permitted to expand the amount of investment above the amount uf current savings. Theoretical analysis, therefore, loads to the conclusion that bank credit ought not to be permitted to flow into the financing of speculation or of investment in new capital goods.‘
But can bank credit be prevented from Mowing into the financing of speculation or of investment in new capital goods? In Great Britain, bank loans, slates the author, are devoted to commercial uses almost exclusively, and it is this tradition of British banking which the author regards as being responsible for the present excellence of British banking practice. Ordinarily British bank refuse bank loans that are wanted for speculation or for the purpose of capital assets, or for the construction of new capital goods. Can this be done in the United States?
The Banking Acts of 1933 and 1935 charge the Federal Reserve Board with the duty of determining whether any member banks are permitting their funds to be ‘unduly Used for speculative purposes; but no criterion is established as to what is meant by ‘unduly’ using bank credit for this purpose. This the author regards as a major defect of these new banking acts. In his estimation bank credit used for new capital goods and speculation brings about inflation, but this does not mean that no bank credit may be used for such purposes. In the author’s opinion, if bank credit is thus used ’merely as a temporary substitute for savings that have already accrued, but have not yet been made available for actual use in the production of new capital goods, then bank credit is entirely permissible,’ He has furthermore worked out an interesting formula as to the amount of bank credit which may be permitted to flow into the capital-goods market without bringing about inflation.
The author concludes that stability in the volume flow of bank credit as a whole has appeared be insufficient of itself to preserve stability in economic progress. Important discrepancies may also arise from disequilibrium as between current savings and current investments in capital goods even when the circuit flow of money as a whole is constant. The American banking structure could be strengthened by prevention of inflation-promoting investments — that is, the use of bank funds for the financing of speculation and the financing of capital investments—by providing the Federal Reserve Board with a criterion which would recognize this phenomenon and permit its control. It would also be important to reduce the number of small banks and permit a greater degree of branch banking; and finally, time and demand deposits should be completely segregated, in view of the fact that demand deposits represent money while savings deposits represent investments. ’Mingling the two in one indistinguishable mass defeata all possibility of effective control over the circuit flow of money by means of volume control over deposits,’ maintains the author.
Managing the People’s Money is an interesting, well-thought-out treatise. It should provide all students of banking with much food for thought.