SLUMP AHEAD

IN
BONDS
By
L. L. B. Angas
Outlook for Bonds [and Stocks) under Managed Money
SOMERSET PUBLISHING CO.
<f61 Eicbtb Avenae
New York
Price$!
BIGGER PROFITS ARE STILL NEEDED TO CURE
UNEMPLOYMENT !SEE PAGE 1101
MONEY MANAGEMENT IS HERE. ALL FURTHER
FORECASTING lOTH FOR BONDS AND STOCKS
MUST II PREDICATED ON AN UNDERSTANDING OF
THI COMING MOVES OF THE MONEY MAN.AGERS
A 1% CHANGI! IN LONG-TERM INTEREST RATES
MI!ANS APPROXIMATELY A 10-lo DECUNI IN THE
MARKET VALUE OF THE AVUAGI MIXED BOND
PORTFOUO !SEE PAGI! 341
k a ,/)1<!
.

SLUMP AHEin
IN BONDS
By
L. L. B. ANGAS
Outlook for Boads (and Stock)
Uader Moaey
SOMERSET PUBUSWNG COMPANY
461 ... tit. Aa.
NEW YORK
1937
Ongtnal from
CORNELL UNIVERSITY
COPnJCHT, 1931 , L. L. 8. A.HGAI
All rc.f'Y<Cd. No ,. " ..t ellir. baF
_ ,. be I '"' for -.1111o111
!l""flli ion ill wrilinl l ntm tiM AWI ... r,
('a>CI!'III ll7 1 "..;,.,., -"' .. , ..- lllld
,a,a;ano ia uitw 10 !lot ttl-.f'OI I
- a uinc or IICW'""""''
Ri1ftt nf Tn ... l lllon ltrufd.
Other Publllatl Forco t By
L. L. B. ANCAS
$o\ I
Ua .. ,,..
O.lot u-. 19l1)
n.c Coomina c.a..,_ ia Rubbu J... 1926 -
Thoe Coomiq Ri.e in CoW sa..,.. Feb. 19)1
n..e. e-m, CEqli.h) s- S.pc. "" +100%
The Cominr RUe ia \VaU s.,..., A.pr, 19)J
'fll Comint Colla.,.. ia Cold N<W. + 10%
The Cominr Amu ican Boom july 19)4 +
The {American) BooM Betria Apr. 19)S + 68%
Printed In U. S. A. b)'
MonMIDI 4: WALUNO, IHC.
461 Eight h Ave . New York
Co I
On na from
CORNEll UNIVERSITY
I'REFAC:E
Despite the continued official pronouncement-3 concerning the desir-
ability of continuing a cheap money po1icy, I believe we are fast approaching
the end of the ''boom in bonds."
All of the oo-ealled "natural" forces of Demand trend that direction:
all of the "artificial" Monetary Management control factors of Supply trend
that dire<:tion.
Since a 1 ?Q change in long term money rates means approximately a
10% decline in the market prices of bonds few investors, individual or
institutional, can afford to ignore tho gathering clouds. Hence, this
pamphlet.
L. L. B. A.
ACKNOWLEDGMENT
lily tlumh are due in. the preparation of this work
to my friend and associate W. Linton Nel.on of
Philadelphia, wha enjoys in a marked degree the
happy combinalion of an analytic student and
succeuful investor
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Origmal from
CORNELL UNIVERSITY
LAWRENCE LEE BAZLEY ANGAS was born of a British banking family on the 22nd
of February, 1893. His great grandfather, George Fife Angas, founded the National
Provincial Bank, one of the five largest banks in the British Empire.
The author waa educated in England and France, and received the degree of M.A. at
Magdalen College, Oxford. He entered the British Regular Army in 1914: served through
out the war in France and Italy; at the age of 22 he commanded an infantry battalion at
the front and attained the permanent rank of Major. He received the Military Cross and
the Croix de Guerre for valor in the field.
After peace was declared he resigned from the Army and was asked to stand for the
House of Commons. He decided instead to devote his time to a serious s tudy of the eauaes
of the business cycle, and the concomitant sharp ftuctuations in profits and employment.
From 1919 to 1925 Major Angas devoted moet of his time to studying and writing.
In 1925 ho decided the most efficacious way to prove the soundness of the theories he
had developed was to apply them to practical business and accordingly he started issuinr
public forecaats of Commodity and Stock Exchaoge movementa, simultaneously entering
the investment banking and stock broking businesa at London.
Early in 1935 he retired from active business at London to devote b ~ entire time w
the completion of a series of books on investment, foreign exchanges and unemployment.
That year he published The Problems of the Forei(l" Exchangu and the following year
["vestment for Appreciation, both considered outstanding works in their sphere.
Having written a series of pamphlets starting in 19SS on the economic outlook for
America and beiug possessed of a British quota permit to America, he came w this country
w observe at first hand the recovery which he had previously written about from England.
He has now settled permanently in New Yorlc where he conducts an Investment Con
sultaney Service, specializing in the management of clients' investment portfolios.
Fortune Magazine (September, 1938) d...:ribed Major Angas as ''the man, who, by
being eonsistenUy right for a period of ten years, has become something of a legend."
The London Sunday Dispatch alated that he "has reswred the lost art of pamphlet writing
as a means of expressing opinion among men of conseQuence to the high position which it
occupied at the end of the 18th Century."
Original from
CORNELL UNIVERSITY
TAILE OF CONTENTS
PREFACE.
OUTLINE OF ARGUMENT.
PART I.
GENERAL ARGUMENT.
A. Inllalioo Ahead .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 5
B. Controlllllg lhe Boom.. .. .. . .. .. .. .. .. . . . .. . .. .. .. .. .. . 6
C. Result.aot Slump in Bonds . . . . .. .. . .. . .. . . .. . . . . . . . . . . . . . . .. . . 7
D. Comlnr Mukel Flu<luallons . .. .. . .. .. . .. .. .. .. . . . . . . . . . .. .. . . 8
CHAPTER I
CHAPTBll II
CHAPTER Ill
CHAPTER IV
CHAPTER V
CHAPTER VI
CHAPTER vu
CHAPTER VHl
CHAPTER IX
CHAPTI!II X
CHAPTBll XI
PART 11.
DETAILED ARGUMENT.
The Coming Wild Boom-Unless.. . .. ..... . .... . 9
The Flash Point of Inflation .. ... ... .. . ......... 10
The Case for Managed Money. . .. . .. . . .. .. . . .. .. 13
Opposing Views About Money Rates. . . . . . . . . . . . . 17
How Bank Credit Is Inflated. .. .. . . . .. . .. . .. . . . . 18
Some Stat istics . . . . . .. . . . .. . .. . . . . .. . . . . .. . .. . 22
Chief Weapons of Monetary Control. . . . .. ....... 27
Squeezing the Banks.. .. .. . . . . . .. . . . . . .. .. . .. .. 30
Coming Fall in Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . 33
Controlling the Fall .. . . . .. . . . .. .. . . .. . . . . .. .. 37
Factors to Watch.. .. .. .. .. .. . . .. .. .. . .. .. .. . 38
Explanation of Chart . .. .. .. .. .. . .. . .. . . . . . . . . .. .. .. .. .. .. .. .. .. . 41
PART lll.
APPENDICES.
A. Cyelicallnvestment in Bonds . . ....... . .... . . . , ..... . , ... . ,, , . 43
B. The Theory of Interest Rates .... ........... ... ... ... .. .. ... . 46
C. How to Cure Unemployment .. . . . . .. .. . .. . .. . . . . . .. .. . 50
D. 1929 .. ... ... ..... .. .... .... ... ... ..... ... .. . . ...... ... ... 53
E. Social l nsura.nee and Its Influence on Bonds . . ... . ... . .... .... .. 55
F. Is the Trade Cycle Dead 1. . .. . . . .. . .. . .. .. .. . . .. . . .. . . . . S6
Origmal from
CORNELL UNIVERSITY
OUTLINE OF ARCUMENT
The essence of this pamphlet is as follows:-
1. The Roosevelt Adminiatration primed revival by inflating the bank
credit currency of America.
2. Mr. Roosevelt was aware that when the artificial " priming of the
pump" had caught, it would ouboequently be necessary to put on the
brakes. Hence the precaution of the Banking Act of 1935.
3. The time lo now approaching when the brakes must be put on, in
order to prevent a wild price inftatlon occurring as a resu.lt of a rapidly
reviving "Velocity" of money.
4. A mere reduction of Excel!s Reserves will not be enough. Positive
dellation of the recently inflated bank credit currency will be necessary.
5. Almost every means of "artificially" deftating bank credit currency
entails dearer money.
6. The "natural" industrial demand for loan money lo also increasing.
7. These two factors, i. e., "artificially rel!tricted supply" and "natur
ally increasing demand" will jointly canse a fall in the bond market; and
a shock to common stocks as weD

l a ... , - &rdi- ; .. "'""'meat - "'ic: not """' ' . IC'Oib.p,.. i i!O ............. m .. l l'f...til," aon ....... .., -if'-
&di .... ._tatidr f&ll ct .:t.a. qtln botlolb: it ntt;U)' imphct .... ,,. u,. ... a"i lkiallr n . .... l ntcnat f &t $1.
Tllc cnd01 e f A-nt. i1 i n iu d f r:ntirt'l)' 10n...S. T1ae natillhal lkbt i1 $ U biltiona (on!r 10 ti-1 t ht market
Y.t...: C..ncral l>lvtcws) , J n(lcft, if il '" UIM pu 1Ma4 i n Gral Dritoift it ._lol k $8S tlillion"' Tha int.trtM chtlf't"l on
l bt <kill IO<U, (.,...U.l to t:br 4)( ntn} , ,.. onlr tiU _,,._, hia'>< tUa wbc01 Mr . Roown lt ia 19U,
Whta tlc drbl wa. Ul trill - ,
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. .
PART I
CENERAL ARCUMENT
A.
INFLATION AHEAD.
To understand the outlook for the future, recent economic deve!opments muat be
borne in mind:
Trade slumped in 1930-32.
Irrespective of the initial causes of the slump, it soon assumed, as every slump ha.a
done in the pa.st 150 years, an essentially monetary character, the two chief features of
which were (1) that bankers ealled in loans and contraeted credit (thus dellating the total
supply of bank deposit money) ; while (2) the public, either through fear or in the hope of
lower prices, held on to sueh money as they possessed, preferring liquid assets to goods.
This of course wae: represented by a decline in the general speed of turnover of money,
called by eeonomi.sts "Velocity."
The 11elocitJ1 of money in fact declined, as well as the volu.mt of bank credit. (And
we &hall have mueh to say concerning Velocity later on!)

Some people like to lay the blame for slumps on Fear, and on lack of confidence. Others
go one step beyond Fear, and lay the blame either on a reduction in the quantity ot bank
money (contracted owing to Fear), and on Low Veloeity (also due to Fear).
But the essence of all cyclical slumps in all countries, is that no matter what the
oriqiMti1fq causes, whether they be monetary or non-monetary, all such slumps, when
once begun, soon assume a monetary character in their sec01U'larv stages- this phenomenon
displaying itself in slow velocity and also in bank credit contraction.
In other words, the continuance of a slump, as distinct from its inception, is definitely
due to Fear, or rather to the effect that Fear has on the volume and velocity of money .

The Roosevelt Administ.rat..ion naturally wi.s.hed to restore confidence so as to Nstore
the veJocity of spending. Yet to restore confidence it was necessary to make trade itself
better first. The policy adopted waa re!!ationary, i.e., to inject extra bank money (borrowed
from and created by the banks) into public circulation, spending it in the form of publle
works, relief, etc. The total quantity of bank money was thus infta.ted. The concomitant
apending thereo! caused better trade. Confidence was restored. The velocity of previously
hoarded money then began to improve.
Natural revival was thus eventuaUy superimposed on artificial revival.
Credit re.flation at last has effectively "caught."
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But that ts not all:
The public are now (January, 1937) borrowing more money "naturally" from the
banks-which inflates the bank credit currency further.
Gold is also atilt flowing in as a result of foreign investments, and a favorable trade
balance, thus further enlarging bank deposito.
The Government is also still borrowing from the banks..
Thus three force&, some natural some artificial, are atill working further in an infla-
tionary direction.
T-he wholesale price lc\'el is already rising fast.. The retail price level will follow in
ito wake.
Prices, wage,, and costa will then c.h.a.se each other in a vicious upward spiral-if
nothini is done!

This cumulative upward momentum in prices should however, in theory, be checked.
The inflationary effec:ts of an increasing Velocity of money (set in motion originally
by deliberate increases in "quantity") must, in fact, be checked by deliberately reducing
the Quantity again. Otherwise there will be a wild price inflation.
How can this in practice be done?
8.
CONTROLLING THE BOOM.
Controlling a boom consista of two phases:
A. Preventing the further growth of th.e inflationary forces already in existence.
B. Positively reducing the inflationary bank money which alreadtt exista .

Mass psychology can, it is true, for a while be played upon, by means of official threats
concerning future deflationary actions, to prevent a further rise in velocity.
But although threats, to start with, may prove effective. on Velocity, they will even-
tua11y lose their efficacy, and positive measures of a quantitative nature
will become necessary.
Comideralion A.
The measure-s needed to check a further positive inflation of the quantity of bank
deposits are as follows:
(1) For the government to cease further borrowing from the ba.nk-8.
See Chpter V for a toc;hnic:a t t xplanat.ion.
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(2) To prohibit, or sterilize, gold unporto.t
(3) To eliminate exceas reoerveo, ao that any further bank loana made to ind,..try
shall be accompanied by equal aalea or Investmenta by the banks.
Consideratwn B.
{Tlf vital J)O'iftt.)
Mere prevention of fur.Uter quantitative bank credit inftation, however, may not stop
the boom in prices, on account of Velocity continuing to expand.
(Aad I eome t.o t.M cruz of my a.rrumt.nt.)
Positive quantitative df!alicm of existing hank credit may be neceaaary.
Numerous weapons to this end are available (See Chapter VII) ; but the most
efficacious are those which will reduce, not merely the excess reservee, but also tho
excess reserves of the banks as well.t
This will cause the banka as a whole either to call in loans or sell their investments
(or both).

How will interest rates and the bond market be affected?
c.
RESULTANT SLUMP IN IONDS AND STOCKS.
When the banks are deprived of their legally required (nonooexcess) reserves, they
will have to either call in loans or sell investment&, 10 aa to adjust their "ratios."
The latter course, i.e., the selling ot bonds, will doubtless be. the one chosen, since
ealling in loans ia bad for trade. Moreover long.term bOnds will be scleeted for sale since
these are at dangerous boom time levels.
This selling will probably frighten potential buyers. Buying will, at all e\'ents !.em
porarily, dry up.
A deeline in the longterm bond market will eventuate.
(Set. Chapter IX for Tablet of Pen:ent.ac't Dancen..)
Simultaneously, public: competition for such shortterm loan money as i$ available
will enable the banks to raise ratea on their loans. Short--term money rates will a lso rise .

Since, however, the whole security market, both for bonds and common stocks, is at
present waJking on cheap-money atilts, as soon as the Monetary Control takes these stilts
away, both bonds and stocks will simultaneously deprec::iate-even though, as trade eon
tinues to expand, common stocks will eventually recover.
t Tbia was partially done in 1938, but only fn so far as bank reauvu, u distinct from
member bank depcnita, are coneemed.
chief weapons are (1) nl41n&' the leplly required rat io of reMrvee; and ubtoequenlly (2)
re.orting to (}pt.a Market Operation, g., the Federal Re&erve benlta eellinc part of their ,2.4 billion&
of on th opeD market.
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Put briefly:
(a) Mr. Roos.evelt originally aimed at re-stimulating the velocity of money by
increasing the quantity.
(b) Henceforth he will counteract velocity by reducing quantity.
(c) This will involve dearer money,
D.
COMING MARKET FLUCTUATIONS.
](, however, a pOSitive reaction in t rade, as distinct from a mere curtailment of
wildness, should result from the anti-inftationary actions of the Control, the Control will
most certainly take off the brakes, and perhaps again apply the "gas" of cheap-money and
eredit expansion.
In fact, since the policy of the Government is to control both booms and slumps, the
whole Trade Cycle, as we have learned to know it. may now be dead. Short-run, instead of
cyclical, fluctuations both in bonds, commodity prices, profits, eomrnon st.oeks, and trade,
may well occur majnly as a result of the actions of the Monetary Control.
A study of the science of Monetary Control will henceforth be. the first prerequisite
for every Investor seeking Capital Appreciation.
Eccles is in charge of the level of prices and profits, and Landis in charge of the
Dow-J ones index.
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C O R N ~ l l UNIVERSITY
PART II
DETAILED ARCUMENT
CHAPTER I .
THE COMING WI LD BOOM-UNLESS.
The Coming Velocity
Looking at the American economy a.s it exists today, there are already extant a set
of monetary forces, which if left to themselves, without artificial Control, will inevitably
land the country in a wild boom, and a period of disastrous eommodity price-inflation.
Demand depoolt.s of the 101 Reporting Member Banks are (January, 1937) some
20% higher than in 1929 (and the total time and demand deposits of the country aa a
whole, are approximately at the 1929 level), (See loose chart.)
Notes are covered 175% by gold.
Exeesa reserves are $2,130,000,000, despite the recent 60% inerease in requirements,
and this of itself aUows of a further huge credit inflation.
Business is already borrowing more !rom the banks, which is a .. natural" inftationary
influence. Already $600,000,000 have been borrowed in the fonn of commercial loans since
lat July, 1936, and if this rate continues it will further stimulate (unless
the banks &ell their investments equally fllllt, as they are now doing to some extent).
FinaJJy, and more important than all, the velotity of t urnover o! bank deposits is now
only 22 (near the low of 20) as against 35 in 1926, and 40 during the boom. There has, in
fact, been a huge velocity deftation. There is therefore scope for a formidable velocity
rtftation (or, as economists call it, a decline in the store-of-value demand for money).
Either an improvement in business confidence, or a decline in confidence in "money''
(expected higher prices), would rapid]y re--stimulate velocity, and t his would set in
motion a commodity price-boom, resulting from preS$ure to get deliveries before prices rise.
Indeed, if velocity returned to normal, i.t., rose from about 20 to 35, t hen, with the
volume or money (including bank credit currency) in circulation approximately the same
today as in 1929, there would be a 75% inc.reue in either Trade or prices..
Actually, of course, both would rise together, for, as ''elocity increases so does con-
sumer-demand in the retail shops.
The result$ of increasing velocity are a.s follows: Consumer-demand increases; inven
tories fall; factories become flooded with replacement orders; delivery is delayed, pr-ices
get marked up. There is also eventually a at retail.
The bonfire, in fact. is already set for wild price inflation-unless t he government or
Reserve Board interferes to prevent it from being lit.
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CORNEll UNIVERSITY
CHAPTER II.
THE FLASH POINT OF INFLATION.
The NH<I for a Polky
Under a heading "The Control of the Boom" on 3rd Deeember, 1986, Mr. Walter
Lippmann wrote in the New York Herald Tribune as follows:
u the. prosperity tba t haa now &rrivtd ia to be kept coinc it mutt be kept
under the rirht kind of eoctrol. Thle ia the time when vi.riJaltt't and foruiaM an
most ne.eeuary. For good tlmee are 10 pleuant that they make for tmp"'"t.ceney
and for cantltMMM. Yet it ia in tJ\..e JrOOCf that thi np l"l out of hand, boiJ
up into a boom and then end in a eraah.. So it ia now, b1/11r an wt of
bud, that the preventive mtu-uru have to be taken. For the we wait the
b&rdcr it. will be to tat. them! tha lon'"r we walt the _,.,., 4nutic and the more
d&ll&':I'OUII wiD be the meuuree that have to be. taken.'"
The above point of view is sound and important. But to underatand what actions
should be ta.keu it Is necessary to know "how prieea move . ..
How Prices Move
The way commodity prices move, is normaUy a.s follows: People with money spend it
in the. shops; this reduces inventories and shopkeepers give replacement orders to pro--
ducers. Normally competition between manufacturers pre\'ents them from marking
prices up.
When however, factory capacity becomes otrained owing to the glut of ordera (due
to the high velocity of money) manufacturers capture bargaining power from buyers, and
.since they ha"e full order books, they mark prices up.
Prices, however, rarely move until increruJing velocity (and/or increasintt quantity )
of money has outstripped the maximum speed of reproduetiye capacity.
This is what. in practice, makes prices mo,e.
Theoretically I admit the pouibility in America today, that if the quantity of bank
credit currency remains fixed, and if the increase in velocity doe& not outatrip the increase
in production, inventories need not fall and prices need not rise.
Actually, however, I anticipate such a rapid increase in velocity that productive
capacity will eventually become strained, and prices will then begin to rise.
It will, J think, be this factor, or the ant-icipation thereof, which will cause the Mone-
tary Authoritiea to apply the brake,._._rly.
Reuone for Inlerfereoce.
But why, one may ask, would anyone he so foolioh .. deliberately to risk ending
prosperity, espeeiaiJy if it involves dearer money! Why not let the country enj oy cheap
money and prosperity while it can?
Merely because uncontrolJed price intlation and wild booms are dangerous. Money
That i why there It normally a time-lal' boelw.cn th inftatJon of bank eN:dlt ita "'eatehlq."
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should in theory be kept staote (in pureh8Bing power) and not allowed to fluctuate wildly.
And the only way to etfoct this control is to manipulate the Supply of money in accordance
with ftuctuationa in the two different aorta of Demand.
The point ia thil:
Instead of there being only one sort of "demand" for money, there are two sorts.
And the difference between them ia of vital importance to an understanding of the
tary policy of the Roosevelt Administration. At first aight the reader may think it petty
to start attaching "vital" importance to such a dull and unintereating aubjeet as the two
factors which make up the ''eomposite" demand for money. But eventually the reader
will aee my point, and will agree that this t ricky subjeet is "vital."
The Two "Demand&" for Mooty.
The demand for money is, as 1 have said, of two sorts:
I. The Medium of Exchange demand, and
II. The Store o! Value demand.
The Medium of Excllange demand is easily explained and understood. When trade
increases, it increases; and vice versa.
But the Store of Value demand is much more subtle, and important.
The Store of Value demand results from Fear and nervousness. It eon3titutea a
demand for money which has nothing whatever to do with a desire to "effect exchanges
o! goods," 8B baa the Medium of Exchange demand. In !act, when the Medium o!
Exchange demand declines, as during bad trade, the Store Value demand, resulting from
Fear, positively increases-and even faster than the Medium of Exchange demand de-.
clines! So that the nd- demand for money increases in slumps, instead of diminishing.
People. in fact, hold on to their money, i.e. hoard it, for fear about the future of thelr
incomes (or perhaps because they hope for lower prices) .

The result of .such hoarding is that money is not spent &O rapidly a.s usual : velocity
decJines; other people, who might have sold things, go without incomes: they in their turn
c.annot spend; and general trade gets worse.
Fear may quite reasonably be said to be the cause; but ao also may Hoarding, or
slow Velocity, i.e. an increasing Store of Value demand for money.
The Old Faahloned VIew.
There still prevails, however, the old fashioned idea that money ia merely a Medium
of Exchange, and that it has no influence on trade itself. And obviously, if one holds this
view, one ridicules the suggestion that the extreme fluctuations of slumps (and booms)
can be prevented by deliberately manipulating the Total Supply of money.
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un tbe other hand, !Cone accepta the Idea that tbere exista a potential Store or Value
demand for money, which increases with Fear, it beoomes rational to suppose that a
manipulation of the total supply of money can counteract the deleterious influences on
busineso which an inereaaing Store of Value demand Cor money provoke3.
This ia the whole idea on which the modern philoaophy or deliberate monetary man-
agement rests, and it ia the philosophy being followed by the Roosevelt Adminiatration in
America today.
Priming the PwDp.
Money, particularly bank credit money, was deliberately manipulated upwards by
Mr. Rooaevelt during the last slump, ao as to counteract declining velocity. The idea waa
to inftate the supply of money (to meet the increasing Store of Value demand for money),
until it actually began to augment velocity, i.e., began to influence (diminiah) the Store of
Value demand itself.
This happens as follows: If supply is progressively inflated, business itself begins to
revive, and people begin to expect, not lower, but higher pricea. They therefore ceue
hoarding, and "investing" in, money. They begin to pass it on more quickly. Thus can
velocity be reo-primed, or touched off, by progressive increases in quantity. A tla.ah point,
in fact, i eventually reached.
Attendant Dangtrs. Netd for Subsequent ControL
Howe\er, when tb.is flash point of increasing Velocity i& rea.ehedt the previously
tive measures, represented by deliberate inflation, themselves begin to beoome dangerous
For, as soon as velocity is thoroughly re.primcd, the total quantity of money (by whieh
it was re-primed) itself becomes dangerous and redundant, i.e., in over-supply.
The reason for the new condition of over supply of course, decline in the
Store of Value demand" reftected by increasing velocity.
Wherefore, will the Roosevelt Adminilltration ahort\y manipulate the total supply of
bank money in order to counteract the t.endeney which Ute now rising velocity
haa to cause a wild and unhealthy boom in prices.
Such action, I argue, must be resorted to in order to prevent yet another wild price
boom similar to that of 1919-20.
Dank money, in fact. mU&t be kept "sound," i.e., roughly constant in purchasing
power (aa meaaured by index numbers),lf capitaliam is to be made to work satisfactorily
and the growtlt of Socialism prevented.
Tho Fallacious Quality Theory or Crtdlt.
Incidentally it is fallaeious to think that from a national monetary point of view, the
bank credit currency st ructure of a country is sound and healthy, provided all bank loans
are well secured. This is the "Quality'' (or "Bankmanager's") theory of eredit which is
fallacious.
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If tho total bank credit currency outstanding is so large. as to engender price inftation
(as soon as velocity increases), t he credit structure is., nationally speaking, unhealthy,
although from a banking point of view, the quality of the collat.lral behind each loan may
be unimpeachable.
Conversely, it does not necessarily improye the economic health of a country's bank
credit and economic structure, to increase the collateral requirements behind each banking
loan, thus making them more secure. For instance, during the depression when prices were
already falling, if the government had ill!isted that collateral should suddenly be doubled,
a great many bank loans would have been called in, thereby reducing the total bank credit
currency and aggravat.ing general price deflation-which would positively have reduced
trade, profits and employment, and made matters worse, not better, although individual
credit Joans would have been made better secured.
Indeed, from the national, as disHnct from the individual banker's point of view, it is
quantity, not quality, which fundamentally matters..
CHAPTER Ill.
THE CASE FOR MANAGING MONEY.
It a modern banking system is left to itself without Central control, fol1owing
events are "natural" and normal:
When general collapse has started. the individual banker, in the course of his duty
towards his depositor$, calla in loan$ as collateral shrinks in value.
This contracts or deflates the. total bank credit currency. Forced sales occur. Prices !all
further. Other loans arc caUed in. Thus prudent banking despite its wisdom, gives down
ward momentwn to general business.
The public then hoard and refuse to spend (low velocity), ejther in the expectation
of still lower prices, or because of fear concerning the future of their own incomes.
This increases tho se>alled store.-of .. value demand for money (lower veloc-ity) at the
sam& time that the supply of money is being contracted.
Result: still less t rade and still lower prices.

Conversely, when revival occ:urs and prosperity follows, busine$$1Tien borrow more
f'rom the banks. This increases the credit currency of the count.ry and constitutes a quan-
titative inflation thereof.
Velocity, however, simultaneously due partly to the z;eturn of confidence
and partly to the expectation ot higher price&. The result is a further rise in prices, develop-
ing eventually into boom conditions.
Boom causes elation: elation O\'ertrading: and over .. trading leads to strained banks
and colJapse.
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The Modera VIew.
This being so, the modern view of political economiata ia that if there is a slump in
pricea and trade, the volume of money should be deliberately inllated by a Central author-
ity, thus counteracting the inevitable calling in of loana (bank credit deflation) by prudent
smaller bankera.
when pricea otart rialng too rapidly, the Central authority should put
on the brakeeJ and contract bank deposits, to prevent the aeeeleration of the pricos which
it has previously engendered de!ibenztelv.
Or to c:hange the metaphor, the duty of the Central monetary authority is to keep,
aa far aa possible, both the priee level, the profit level and the employment level in the
middle of the road. It a awing takes plat@ too far to the left the driver or controller pulls
the steering wheel to the right. When the awing to the right looks like going too far, he
turns the ateering wheel to the left.. He meddles in fact with the People's Money. Thus
alone will the ditehes be avoided.
The opposite view ia somewhat aa follows:
1. Money is merely a medium of exchange and haa no influence on trade itself. It
is fundamental economic factor&, rather than money, whieh govern eydieal fluctuation.
2. There have always been alternate booms and slumps and it iB impossible to pre--
vent them merely by monetary manipulation.
S. It is folly to craek down on properity.
4. Monetary knowledge is not yet sufficiently advaneed to justify the riaks attendant
on management.
6. Professional bankers have never yet aueceeded in managing money suecessfuUy.
How ean mere "theorists" !
6. It Ia wrong to let bureaucrat& interfere with the banking industry.
7. Too much power should not be invested in a monetary oligarchy.
8. Why meddle with the People.' a money!

With the above "opposition" view of the the Roosevelt Admin
istration ia moat certainly not in accord. They regard the "old view" u unsound and
fallacious. They have definitely adopted a Managed Money Policy.
Mr. Roosevelt aaid so in hi Inauguration Speec:h of March 4, 1938, where he stated
that he aimed at "reatoring the price level to about the 1926 level, and thereafter provid
ing America with a money which ahould be stable in purchasing power throughout auc-
ceeding generations."
Indeed, the Banking Act of 1936 wu apeeifically framed as a means to this end.
America, in fact, has managed money. Political reputations, moreover, are at stake.
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Rtputallons at Stakt.
Mr. Roosevelt has been assured again and again that he would eventually land the
country in a da-ngerous price inflat ion because of his borrowing from the banks. Conse-.
quently there must always be at the back of his mind a determination to falsify these
fol'<!casts.
Mr. Morgenthau's reputation, in future history, also largely depends on the govern-
ment's success in putting the brakes on the country's price inflation before it becomes
economically and socially harmful.
The future reputation of Mr. Eccles, Chairman of the Board of Governors of the
Federal Reserve System, likewise depends on successfully "managing money". He espe-
cially must want to justiry the Banking Act of 1935. His future reputation depends on it.
Thus personal prestige, as well as sound sense, requires that price--inflation be pre
8
vented.
Crux of the Arg-ument.
The whole point about managed money is this:
If you accept the fact that there arc two sorts of demand for money, i.e . a "store of
value" demand, as well as a "medium of exchange" demand.- And if you accept. the fact
that confidence causes the "store of \'&lue" demand to fluctuate.-Then, you must accept
the theory that eonfid('noo (and its corollaries: hoarding, velocity, and a fl uctuating
.. store of value .. demand for money) influ('nce both trade, prices. profits and employment.
If you accept these tenets, and if you agree that wild slumps and booms are undesira
ble, then you will also (I think) agree that something ought to be done about it."
But what are the possible things to do?
Obviously. to adjust Supply to the fluctuating "store of value" Demand (after mak-
ing due allowances for ftuctuations in the "medium of exchange" demand).
In other words. something must be deliberately done on the supply side of the equa
8
tion: i.e., to increase suppl)f, as net demand increases (instead of letting it be reduced),
as happens as a rule--owing to the bankers ealling in credit as trade gets worse, (thus
deflating the supply of money, instead of increasing it) !
And if you go this far, and happen to be. a\erse to the positive printing of notes,
you must inevitably agree t hat the only other usupply" of money that can be deliberately
' 'inflated" is bank money; and the only way to increase this is to deliberately
from the banks, i.e., run into debt; and to put th4:'! borrow4:'!d money into circulation by
means of .. spending".
Jn other words, if the Government is itself going to take on the j ob, it must "increase
the national debt" by borrowing from the banks; and then it must spend the money
(either on public works or doles).
That is to say, the Government must do predsely those things which Mr. Roosevelt
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hu done, and pree.isely those things which Mr. Landon and the "orthodox" say are wron.r.
-The whole difference in practical policy bein,g due to disaareement about one very
small, though important, theoretical point in elementary eeonomiea concerning the
"demand" for money!
Either Landon is r i g h ~ or Roosevelt is right.
Whieh do you choose?- the orthodox or unorth-odox, respectable Wall Street or "spend-
thrift" WaMington 1
Or puttin$!' the matter more politely, Js Money only a "medium of exehange", or is it
nl.tJ<> a "store of vJJue"?
This point, I repeat. ia the crux of the whole problem, altbou11h it h .. been entirely
overlooked by the cl&Ssieal economists, and also by many modem at&teamen, banker&, and
economists as well.
The Cure.
The cure aeems obvious: i.e., to set up an Authority, which, as soon as the Store of
Value demanded (or money (i.e., Velocity) fluctuates (say, because of sentiment), will
counteract tltis change in Demand by deliberate manipulations of Supply!
(The Authority should, of courae, alao have the job of adjusting the supply of legal
tender to variations in the Medium of Exchange demand as well).
Interference. Ye.a!-But. it a.eems rather necessary if there are not to be \'iOient
slumps (and booms) caused by changes in Velocity or the Store-of-Value demand for
Money.
Indeed, I am inclined to belie,e that if that portion of Ute Republican Press which
led the attack on Mr. Roosevelt in the last election, because of his inflationary borrowing
from the banks and running into debt, would devote. more time to a detailed study of the
1!14tlti<J'1f ........ or good and bad trade, half of the regrettable divergencl .... between the
''wicked brain truster&" and the "wicked bankers" would diaappear over-night, to the
political and eeonomic benefit of Alnerica.
Polltieal DUIIcuJII.
As regards deliberateJy $topping inflation, it is, of course, often said that it 1s
politicaJiy impos;sible to stop inflation, because it means impeding the speed of prosperity
and cause3 an outcry. But anyone who haa li"ed in Europe during the varioua inflations
is aware that the J)Oiitieal cry of the public and the P r e ~ is always "Why does not the
government do something to prc,ent the rising cost of living!" Shades of Poincare
and 14 vie chh-e in 1926!
Anticipatory action mny be unpopular: delayed action, never. And I am inclined to
think that the Administration and the Board of Governors of the Federal Reserve Syatem
will have the courage to risk unpopularity in the- course of their monetary duty towards
the country, i.e., take anticipatory action.
E\en Governor Benjamin Strong, of the Federal Reaer\'e Syatem. t.ook action to
sterilize gold In the mid 1920's in Ameriea.
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CHAPTER IV.
OPPOSING VIEWS AIOUT MONEY RATES.
A3: will later be shown, almost every deliberate or "artificial" method of preventing
a swing towards over-inflation of prices involves an eventual increase of money r a t e s ~
particularly in a country where bank credit hM been recently over--expanded.
This is what I think will happen in America.
The Popular View. Early 1937.
The popular view however is that interest rates will remain low for many years:
(a) Because industrial plant is not yet fully employed, thus deferring the demand
for additional capital via the flotation of new capital issues.
(b) Because the Government wants cheap money.
(e) Because lending to foreigners hM e .... d.
(d) Because of the glut of foreign money in this market.
(e) Because the budget will soon be balanced and government borrowing will
eventually decline.
(f) Because savings are increaaing with the national income.
(g) Because of the glut of gold.
(h) Because the Washington and London government& are believed to have an
"agreement" to kei!p money eheap tor several years.
(J) Because America is supposed to be two years behind England in the trade cycle,
and English interest rates ha .. e not risen yet.
(k)Because the monetary proceeds of Social Insurance will create a hure demand
for government bonds.
(I) Because the government is believed (by aome) to wish to reduce the reword of
capital.
(m) Because or the huge excess r ... rves of the banks.
An Opposite Sthoolof Thought.
An opposite school of thought takes the following view;
(1) That Mr. Roosevelt's priming or the pump by deliberate credit inflation has now
,.caughtu.
(2) That iC nothing is done either by the Government, or by the Board of Governors
of the Federal Reserve System, there will be wild price inflation, and a dangerous Stock
Exchange boom.
(3) That both the Government and the Board are determined to prevent wild price
inflation.
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( 4) That it is almost impossible to do so without positively contracti-ng the volume
of outstanding bank eredit, which itself implies an eventual r ise in interest rates.
In other words, America is now under a definite $ystem of Monetary Control rnadt>
effective by the Banking Act of 1935.
A new ern, in fac4 is upon us. (Yet few persons have studied t he technique of
Control) .
Nor must it be argued that j ust because English interest rates ha,e not risen yet,
even though England is two years ahead of America in the trade cycle. that interest
rates wiJI not r ise for two years in this country. \Vorld-wide inflationary forces have
recently been set in motion, and the laggard eountries in cyelical revival may (if t hey
have a Monetary Control) find themsel\'e:S faced with dearer money at an earlier stage
in the business cycle than was the case in other countries which reached a high state of
prosperity earlier.
The Government wants cheap money, no doubt) both for its own purposes, and a.s
a stimulus to the housing and capital goods indust ries-but not at the expense of wild
price inflation.
Moreover, the only additional likely borrowing by the government in 1937 is some
$3 billions ; hence to pay an additional !% on this would only mean adding to the budget
by $30,000.000. This would be a s- mall price for the to p:..y in order to prevent
a nationally harmful commodity price inflation.
Indeed, if Machiavelli, instead of Mr. 1\Iorganthau, was Mnnager of the National
Debt, it might almost be said that he, as soon as t his last three billions of borrowing
was out of the way, might become positively anxious for a f:\11 in the bond market (due
to high interest rates) , so that he could buy back the existing debt at lower levels, out of
the proeeeds of taxation or with the income derived from Social l nsuranee.
In other words_, seeing that the government hns few further connrsions to effect. it
only needs a continuance of cheap money in so far as low interest raLcs wi1J stimulate
a revival in the housing and capital goods industries, t-hus further increasing general
tax revenue.
The go,ernment is also doubtless aware that forcing bonds up by artificial means. to
ridieulou.s.ly high levels is just as insane marketwh;e ru; pennitLin,:c a wild boom in common
stocks. It invite.s. a serious crash eventually, after the manner of stocks in 1929.
0 0 0
But before we discuss what t he government will do, let us first see actually how
interest rates move.
Plus $14 billions ct c(ln\cr"ion.e qv(! r t.he next 4 on whi-ch 1% utrn would 4:0!; t $150,000,()00
mnre per annum <m a is ()Vtl' $7,000,000.000.
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CHAPTER Y.
HOW lANK CREDIT IS INFLATED.
How Interest Rates Move.t
The interest l'Bte is a price: i.e., t he hire-price of money, as distinct from things.
The market price depends on the bargaining power between borrowers and lenders
with funds available.
Bargaining power is lost by lenders either if demand declines or if total supplies are
increased.
In the modern banking system the total potential supply of loanable money is in-
creased if banking reset\'es are increased, ( eiU\er by gold imports or governmental note
issues, or by manipulation of central bank credit).
The present excess reserves of the American banks are due for most part to gold
imports.
Competition between rival bankerg to lend and invesl has n..'(l.uccd their mutual bar
gaining power with borrowers.
Hence, the present low market rates.
Natural or art.ificinl diminut ion ot excess reserves is a restriction of potential supply,
and increases the bargaining power of lenders with borrowCrs, thus tending to raiS(!:
interest rates.
Such a tendency will be further i_ncrcased if trade revival andj or rising prices slimu
late additional borrowing.
Why AlltiinJlalion Means Dearer
To understand why a bank credit currency deflation, if deliberately engendered during
inevitably entails dearer moue)', it is essential to apprccinte the nature ot the
modern money and banking system.
What the public use for money (as to eighty per cent) is not notes or coins. but
rather the hand-written or tY'PC"'written credit -entries in the ledgers of the bnnks. These
entries are transferable by check. They come into existence p.artly through the actua1
deposit of notes or coins (in which case they hav-e a 100%- eover); but mainly they are
created out of nothing by the banks lending so called ''money" to their customers (against
collateral) and putting at their disposnJ a "transferable credit entry".
The bank, by implicat ion, promises to pay notes (or coins) on demand; but as every.
one knows this promise can only be kept as to about 10% of total deposits-which strictly
speaking should not be called "deposits" at all.
The same thing ha ppens when the banks buy extra investments. They usually "in-
flate" their miscalled ' 'deposits" to do so.
t The tun t.heorr ot intereat rate movements ill dC'SCribed in Appendix 8 of this pamphlet.
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When however, a bank lo&ea part of its legally required reaerves. it usually has to
contract its own miscalled "dePOsits" by contracting its loans or in"estmenta. The ftrat
action causes dearer short--term money; the second a decline in bond$. i.e., a rise in the
long-term rate of interest.
If modem America, and most other countries, did not use loan..antries for money,
one might be able: to engender a deliberate monetary deRation without causing
dearer loan money- but since she does, one cannot.
In other words, since it is my own view that anti-inflationary action will be necea-
aary, it is also my view that there be dearer money.
Dfgreaslon on the Theory of ilaDk Cncllt CreaUon.
Some people however habitually assert that the bank.o can not inflate (i.e., ereate), or
deftate, the deposit currency. In fact many think that bank depoeits only rise if the public
is positively saving more. Since however clear-headedness on this point is essential to our
&l'iwneot, a few worda on the "Theory of Credit Creation" must be inserted.
The modern banking manufactures "money" out of nothing; a.nd the process
is perhaps the moat astounding piece of ' ' sleight of hand" that was ever invented. In fact.,
it was not invented. lt merely "grew".
Some 80 per cent of what a modem community use$ money is not. strictly speak
ing, "money" at all, but merely a transferable entry scribbled in a bank's ledger (and
typewritten in a customer's bank Jl85" book).
Nor are the maj or part of th..., "so-called" bank-deposits strictly speaking "de-
posits" at all, because if le11al tender notes or gold had been deposited against the
creation ot t-ach such tran&f'erable pass book entry, the banks would have a 100 per cent
legal tender cover for aU their so..c,allcd deposita..
Actually moat of these (mis-called) ha\'e come into existence as a result
of 1nfta.tiona.rv bank loans and in\'estrnents made by the banks in the past.
The history ot the present-day system is quite simple. Originally for each piece ot
gold or silver depoeited with a banker (or goldsmith) a note or I. 0. U. was handed out
in exchange. These notes eventually circulated as "money."
Experience however, gradually showed the bankers that since the notes in issue were
ne\
1
er all presented for encashmcnt into coins more notes could be issued,
i.e., lent (or even spent ) by the bankers than gold was held; and the bankers, and the
public, did not regard this form of lending as unsafe or dishonest, provided that ample
salable assets wera pledged to the banks against each new loan.
Actually, the notes or I. 0. U.'s which wcra i.e., lent, against non-monetary
collateral. were not different in appearance from notes which were issued against a
100% deposit of gold or legal tender.
In reality, however, the notes which were not backed by 100 cent legal tender
statistically speaking, inRationary; but since trade was expanding and money
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was required, theae Inflationary bank issues did considerable good (e.tcept on thoae occa-
sions when notes were expanded futtt than industry was expanding) . Abusea, did how
ever occur, so definite legal ratios of gold, or silver, against notes were instit uted. This
syatem went on for some while.

Eventually, however, so-called deposit-banking developed; that ia to say, people,
owing to the risk of carrying notes about with them or of keeping t hem in'tbeir own
houses, started redepositing them in the banks, receiving "credits" in the bank's ledgers
and in their own pass boob instead. These so-ealled bank deposit$ were transferable by
cheque, just as notes had previously been transferable by hand or post.
But the birth of bank-deposit currency did not stop tho banks from progresaively
"inflating" the new so-called deposit currency. Every time they made a new Joan (or an
investment) the borrower (or seller) was credited with an entry in his pass book, created
out of nothing; which was transferable among the public in payme.nt for goods. The only
limitation to these expansions was the cash reserve-ratio whjch it was deemed prudent to
keep, or which waa fixed in some casea by law.
(Conversely every time a bank called in a loanJ or sold an investment, a so--ea.lled
deposit was cancelled and bank money waa deftated)-
The banks in fact are able to create and (and cancel) modem "deposit money", j ust
as much aa they were originally able to ere.ate, or eall in, their own original fonns of
privaU notes.. They can, in fact, inflate and deflate, i.e., mint and un-mint, the modern
'' ledger-entry'' currency.

Having proved, J hope to the reader's $8lisfaction, that the banks have the power
to lnftate or deftate, let u now go baek to the problem o! Monetary Control.
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CHAPTER VI.
SOME STATISTICS.
(The Reader c:an 5kip thi Chapter too.]
NOTES.
From 1922 to 1931 the notes in circulation never exceeded $5 billions. The lowest
figure reached in that period was in 1930 when they fell at one time to billions. Today
they arc nearJy $6.6 biJiions: a 44% rise from bottom.
DEPOSITs.
Total bank deposits throughout the eountry, both time and demand, were about $55
billions in 1929. They fell approximately 30% to $38.5 billions in 1933. And have now
recovered to $52 billions; a rise of approximately 35?0 from the bottom.
'fota.l deposil.4 inc1ude l>ot.h time deposits and net demand deposits. Time deposits
however, are more in the nature of loans to the banks than actual "monetary purchasing
power" for they are not immediately spendable money. Net demand deposits are a better
fiaure to watch from the point of view of "effective" money.
Total figures of all demand deposits are not published at frequent intervals but demand
deposits of 101 Reporting member banks arc published weekly. These figures CO\'er about
60% of tho total demand deposits of all banks and are representative of the banking
aystem as a whole. Thus they are probably the most suitable to watch for changes in the
general trend of money.
Actually "Net Demand Deposit" reports were discontinued under the "Banking Aet
of 1935'', and a new series called "Demand deposit$-Adjusted'' was instituted instead.
The new series ia not strictly comparable with the old, but for approximate purposes, since
the Mries wu about $21A. billions less than the old ''net'' figures at the time of tcnstructing
the new series, it is convenient, if one wishes to make comparisons with the past, to add
say billions to the "Demand Deposits-Adjusted" figures published subsequent lo
mld-1935. This Is what I have done on the loose graph.
GOLD.
During 1929 America held an average of S4V... billions of gold, Yalued at $20.67 per
ounce. This sum was equivalent to S7y.., billions, if revalued at $35 per ounce.
The amount held the day after revaluation on the Slst January 1934 was
$6,834,000,000.
Today U1e gold stock is or half of t he world's monetary supply.
Thus the interim rise from January 193-1 has been from $1.2 to $11.2 i.e.,
000,000 or 171.4j!O.
England has $2,500,000,000 of gold (nt $35 an ounce) in the Bank of England and
perhaps an addit ional $1,000,000,000 in the Exchange Equalisation Fund (figures unpub-
lished).
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The Nfae TTPee or Legal TeDder.
There are nine different types of currency in America in addition to bank eheck
eurreney. The backing for these various types of eurrene:y is as follows:
Vahle el ..W Wd
--
~ b l e : Ofll7 by Fcdtrll Raonw
... at 4:1tcnd.l ., 5ec:ftw7 fl'r
T......,..
N9l "'*-blc by .. ,.
See r.w N._ MfYMU.rr 8)"tnt. of tA.. V'lliUd seat..'" pabU.bed by NatloD.&llnduttrial Contem'lee
Board, IDe., 247 Park Aenue-, New York. PriM. $2.00.
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Unti1 15th August 1986, when resef\e requirements were raised 5090. the old legal
reserve ratios for bank deposits payable on demand were:
Central Reserve City Banks . .. ... . .. 1391>
Reserve City Banks . . .. . .. . .. .. . . . 10%
Country Banks .. . . . . .. . . . . .. . . . .. 7%
and the old legal rcser,.e ra tio for '' t ime deposits" was S%.
On 15th August 1936 requirement> were raised 50% and now stand a t 1910!%. 15%.
and 10'h91> respe<:tively, for "demand deposits"; and 4\4% for "time deposits."
The Banking Act of 1935 allowed the Board of Governors of the Federal Reserve
System to raise r equirements by 100%. Thus a further full rise to 100% would imply a
SSJoS% further increase on present figures, leaving t he required ratios a t 26,0, 20?'<>, 14%
for "demand deposits" and 6% for "time deposibs."
Such action, if ordered at the present time, would ha\e t he effect of r educing excess
resenes from $2,130,000,000 to $700,000,000 thereby placing the Central authorities
once more in a position to forestall a too rapid increase in credit volume through open
market operations.
The Reserve Banks hold $2,400,000,000 or securities. These can be used for Open
Market Operations, i.e., sold. Such sales to the public would cause transfers from the mem-
ber banks to the Reserve banks, and would not only reduce the s<Kalled "deposits" or the
former, but also reduce their .so-called "reserves."
The net result would be, if the legal resene requirements were raised the full 100%
and if aU these securities were sold, not only to eat up the $700,000,000 of excess resen-es
referred to above, but also reduce existing legally required reserves by $1,700,000,000.
Sueh action would require the Member Banks to can in Joana andjor selJ their invest ..
mcnts to the extent of roughly .six times (assuming reserve requirements had been raised
100%. ) The deposit deflation would in faet amount to some $10 billions, which is approxi-
mately 207<> of $52 billions.
Thus the ability to raise excess reserves again by 33}190, plus the power of t he Federal
Reserve banks to sell their securities, puts an e normous anti-inflat ionary power into the
hands of t he Board of Governors.
Factors at lasve.
The que8tion arises, When will these powers be u!!ed, and to what
As I write, t hree inflationary forees are still acti,e: (1) government deficits are still
growing, and a re still being financed by borrowings from t he banks; (2) commercial loans
are expanding, thus also creating further bank deposita (In so far as the banks do not
sell out investments to balanoo the expansion in (S) gold is continuing
to come in from abroad, thus creating further bank deposits.
All t hese forces, if left unchecked, are likely to add further Inflationary fuel to the
flames.
It would only be about eight ' imea if requltcm.tnt.s had not . rai&ed by more t han 60%.
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As regards (I) : The government could either balance its budget, or failing that,
borrow from the public (which is not inflationary), instead of borrowing from the banks,
which is.

As regards (2): Commercial loans could, I suppce, be limited by law, but no such
specific action is likely. Reliance would rather be placed on the blunderbuss weapon of
taking reserves away from the banks and letting them decide what investments t hey should
sell, or what loans they ahould call in .

As regards (S) : Before gold was partially "sterilized" in December 1986, its importa-
tion caused both demand deposits attd member bank reserves to increase, pari passu. Since
this sterilization, only member bank deposits are increased, and not their reserves.
TheoretieaUy, it is possible to prevent even member bank deposits being increased,
provided that t he Treasury borrows the money to purchase the gold, not from the member
banks but from private lenders who are not banks, in the sense of member banks. This is
done to some extent in England.
But to completely sterilize t he inftuencc of gold imports on the bank deposit currency
structure in America, it would probably be necessary to prohibit the import of gold alto-
gether, as was done in Sweden in 1917 by embargo.
This, by the way. would probably cause the POUnd to depreciate in relation to the
dollar, because Europe could no longer use gold to maintain b('r trade balance.
The price of gold in London, however, would not rise as the pound depreciated, since
the Americ.an dollar exchange would no longer be the governing factor in the London gold
market, since America would no longer buy gold.
A gold panic in London might well ensue because the chief exporting country In the
world would no longer accept it in payment of food, war materials, ete.
[8111-t on tAla u bv tA wczv.)

Whether or not America completely sterilizes gold, or eventually prohibits importation,
will of course depend on the rapidity with which gold flows in.
It must be noted, however, that it costa the American government, i.e., the taxpayer,
aometbing to borrow from the market to buy gold (which Is not wanted), ao th.at the
taxpayer is at the moment being saddled with a charge which merely benefits the pro-.
fessional gold importer.
This !actor, plus the desire to ehe<!k any expansion in member bank deJ)O$iL$, may
eventuaHy lead the American government to impose an embargo on gold imports--despite
all the fashionable talk now prevalent about "returning to gold."
WHO HOLDS THE GOVERNMENT DEBT.
(At. J une 30, 1936, Latat A.vt.iiAble Complete Fiavns..)
Banb
Savinp Banb . , .. . .
Poetal Savinp ........ . ........... ,
12 Federal Reserve BankJ
Cowrnment. Agencies ...
49 Life Insurance Compnies
Veterans' A4juated Service
Bonda ... ..... ................ ..... .
Private Tru-st Funds and
lnd!Yiduala ......................... ..
Totoll
BilHON
12.99
1.85
.so
2.43
1.48
3.55
.71
9.'14
3UiS
%
88.9
5.5
2..")
7.Z
4.4
lo.G
2.1
29.
100.
-
25
Coogk
Oillicnu
12.99
1.8.5
.80
2.43
18.07
=
%
88.9
M
2.8
7.2
53.9

.80
2AS
1.48
4.71
from
CORNELL UNIVERSITY
2.3
7.2

13.9
=
NATIONAL INCOME AND QUANTITY OF MONEY.
The Department of Comm.eree has reeently
mated the oational income produeed ln 1936 to haft.
been 161 bllllon. compared with a preriou record of
$81 bWion in 192:9, and with $39 billion in 1932, th
depre1aJon year of am.allclt incorM. The quanUty of
money In t.hc ezntry, however, i1 lrt'tater Utan it hu
ever been befon; and if the money bad eireu1ated
at the normal rates that prevailed for t hil'tJ yean
prior to the depreeaion, the national income last yea:r
would have ove.r $GO bUlion or Mty per eent
,.eater than it .,...,
On the. othe.r band, tM nation could not euil,y have
fttty per cent more aKK and rvicta. A
number of lnduatrles are alrea.cfy ftnd.i.l\8' it difficult
to the demands made upon them. and pric"
have been bid 1,1pwards aa it ie.. Aeeordina".lr. a re--
,umption of normal money drculation ratn, with
inere.ues in income, woold have in-
vok-ed sharp inereaees in t he rneral price at1'Uetul't.
In the diagn.m the aolid hrw! representa national
ineome '"'r by year, beglnnfn.g with 1899.
The 1\gure!l for 102:9 to 19S8 lnclut.le are t.tro.t pre
pared by the De.parbnent of Commoree and the
earlier one11 are thOM of tba National Industrial
Ccn_fe.renee B<>ard.
'l'be dotted line repn:eenta the total depoeita of aiJ
banks in the United States f1'om whiC'h hnP h-11
&ubtracted the savings and time deposits, and to
which hue been added the amounta ot toln and tur-
reney in elrculatlon. This pM.tdes a mea!lurement or
the effective supply of money In the eountry, the
C'ireulat.lon of whleh In a national Income.
For the 31 yurs, 1899 to 1929 incluive., it wufcund
that on the aveure t he national inc:oma was 2.66
Ume, the quantity of money, and the moqey ftcura
have. acwrdi nrly, been multiplie-d throq-hout by
that amount in order to facilitate the gr-aphie oom-
parion.
Probably the moat intereating thing abcut the
diarram b cbe regularity with whlcll national ia-
eom.e baa been approdmat.el)' equlval4!nt to the quan-
tity of money multi plied b)' 2.68. The relationahtp
pe_ra!ated from the opcninr of the GQtur,Y up to
1929, with the e.xeeption ot a moderate devatiot'l tn
tile post-w-ar depression of 1921. ln 1936 tlM mon(!y
onl,y turnOO over 1.'79 times, u eom,pared with the
len&' term averap of 2.66. The popibilitr of the
of normal drrolation rates provtdes both
the proapec:-t for prosperitJ and the problem of COD
tl'oUiDg inft.atlol'l.
ft. itt& to itolt tht&t tM New York S tock
V OM of tlte few ilutiWt"""
whiM. ruopile tltat tiWW! dqotlu, o1Uf4ving b<sftk
.UJ)Oht4, ore ut mmutarw- purtAl'Piltg power, Le.,
U..er G-"f xot i"'modiatelr traufcrable ba.wk Mtd.it
cv"MV It ie i wro.tg to Uaclwlc
wAicA '"'' tMrlv lc:t<Zrt.t TO baJtl!, wit.ll
J>O*ite wAitA or .. troM/crabU"
ctm'ctney.-L. L. B. Al<(G.UI,
19J1, &:1 Jo',.. ,...,.,. sr4'd Ext r.. .. p. r u ,..,_,;- t'llfll1o{1Wd ;,,m Aa. ;. ,.,.., &H.. orod II)' '""' N-
Y or ''"'/ ..,If llos i ,..,. &,,. o&141tiW4 ,,_ .._,,;dr rmottz bdVw4 to h "IOollrt. ht
tlot Y"'l $t<>ri EnJ,np, d1 _, ilz "'-tMY
26
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from
CORNELL UNIVERSITY
CHAPTER VII.
CHIEF WEAPONS OF MONETARY CONTROL
At this point it seems desirable to enumerate the chief weapons in
the armory of the Monetary Authorities.
The policies adoptable for controlling the boom divide themselves into two categories:
(I) Those relating to the prevention of FURTHER bank credit currency ex
pansion, i.e., to stop existing influences which are of an inflationary nature.
(II) Those relating to a poaitive DEFLATION of the existing quantity of bank
credit currency, in order to COUNTERACT the inflationary influence of
Increasing Velocity.
I .
The first group of policies comprise the three following items;
(A) Complere sterilization of gold impol'ts (see page 25); coupled poasibly
with meaaures to prevent foreign investment in American stocks (which
cause gold imports). coupled possibly with poaitive prohibition of gold
imports (which might cause a gold slump in Europe!)
(B) The cessation of go\ernment borrowing from the bankA (as distinct from
the public) so that there shall be no further bank credit inflat ion on this
score.
(C) Measures tllken to prevent an expansion of the total deposits of the banka
on account of any add.itWnaL loans they may make to industry.
This can be effected either by reducing stock exchange or other loans;
or by depriving the bank$ of the whole of their excess reserves (either by
a further raising of requirements, or by open market operations), so that
in so far as the banks lend tnore to industry they wiU have to sell their
investments pari passu.
II.
The next group of policies is concerned not merely with preventing a further quan-
tat.ive expansion of the bank credit currency, but. with effecti ng the IJ(I81tivt c:oat.rac:tion
thereof (as an antidote to increasing velocity-despite the fact that vcloc:ity may, for
quite & while, be effectively controlled by the .psychological ruse of Talk, i.e., threats con-
cerning early fut ure deflationary action, and official statements that the commodity
and/or stock markets are regarded M too wild).
Apart from the psychology of Talk, however, the foHowing weapons are &\'&ilable
to reduce statistically the total volume of effective monetary purchasing power (demand
depOsita) so as to counteract increasing velocity:
27
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1. Further elimination of excess reserves, o\'er and above th.e 50% increa3e in
reser"e requirements instituted on August 15, 1936.
This can 00: done under existing law by another 50%, i.e., a 33}i% rise in require-
menta above existing required ratios. Additional legal pOwers for still further
increases might also be obtained.
2. The Secretary of Treasury might allow government bonds, notes or bills to
mature without renewing same, i.e., financing expenditure out of taxation only.
(Taxes migAt be increasC!d !)
S. The Federal Reserve bank$ might refuse to replace their existing holdings of
government debt, as existing holdings matured and were paid off. (This would
mean transfers of publicly owned bank credit currency into the Federal Reserve
Banks, and a consequent deflation thereof. It would also mean a deflation of the
reserves of the member banks.)
4. The Federal Reserve bank$ might resort to deliberate Open Market Operations,
i.e., sell on the market part of their holdinga of government bonds ($2,400,-
000,000). The resulta would be the same as in paragraph S.
Such operations might also possibly be coupled with refusal or restriction of
rediscount facHities, and/or with higher discount rates.
5. The Federal Reserve banks mi.ght also sell their own debentures or preferred
at.oek to the public: with results similar to 8 and 4.
6. Tariffs might be reduced, thus tending to reduce prices by foreign competition.
and to eause a gold efflux.
7. Taxes might also be raised, and the proceeds as collected by the government
handed over to the member bank$ in liquidation of bank-held government debt,
thus reducing the deposits of the member banks.
8. The go,ernment at the same time might induce the banks, by moral pressure,
not to re-lend out the money recently paid baek to them out of the proceeds of
taxation. (The Comptroller of the Currency, and the F. D. I. C. might here exert
a power-ful influence.)
9. It might even be deemed fit to limit by law the absolute amount of the loans and
investments of each member bank.
10. The government itself might hoard (in the "government account" at the Federal
Reserve banks) the monetary proceeds of Social Insurance, without investing
same in government bonds, as per present plan. (This would cause a fall in
both the deposita and the resenes of the member bank$ (lf e:xeess reserves had
already been eliminated) and would sharply tighten up the whole credit
structure.
11. Part of the gold in the Equalisation Fund might be exported and sold for for-
eign-money.
The foreign balances might then be sold on the American Foreign Exchange
market for domestic balances: the domestic balances then transferred to govern-
28
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from
CORNELL UNIVERSITY
ment account with the Federal Reserve banks: thus reducing the total volume
of domestic deposits. (See paragraph 10.)
Incidentally, the dollar wou1d appreciate in value, thus stimulating imports
and checking the upward sw'ing in prices.
12. There might aJso be some legaJized form of a general price regulation and priee
limitation (despite such schemes in t he past having usually broken down). A
new N. R. A. might possibly be lnotit uted!
13. The prioo of gold might be lowered (by a new Act of Congros.s), thus stimulating
foreign competition.
14. Another potential method of reducing the total depOsit currency is for the
government to tax or frighten forcign investors out of the New York market,
so that they withdraw their funds from America in t he form of gold-an action
which would simultaneously reduce not only the deposits of member banks, but
also their reserves. (And what a KaY day the Common Stock Market would
have!)
15. Some limitat ions might be put on instalment financing' so as to check the speed
of consumer buying, i.e., the velocity of money; and so as also to check borrow
ing from the banks.
16. It might also he deemed desirable to limit charge accounts, i.e., book credit given
by retailers, and perhaps wholesalers and manufact urers also, in order to put a
bra.k:e on demand. (N.B. Although book credit is not actually money, an e x p a n ~
sion of book credit stimulates consumption and also re--production, and is itself
a stimulant to rising prices and to boom conditions.)
17. There might also be instituted certain regulationa restricting the granting of
bank credit for specific purposes, e.g., stock exchange loans, commodity specula-
t ion, and so forth.
18. The member banks might even be arbitrarily forced to sell a certain number
of their investments (under F. D. I. C. or Comptroller regulation) .


To have mentioned some of the above eighteen weapons may perhaps be tar-fetched,
but we have wished to enumerate such weapons as are . or might become available, for
anti-inflationary manoeuvres. There are also some others which we have not here
mentioned.

These various weapons need not necessarily be used in the order mentioned, although
such a sequence seems fairly rational.
Two or more weapons migtlt well be used simultaneoualy.
1 should add, however, that since the Federal Reserve banks hold $2,400,000,000 of
invesbnents, and since raising resene requirement$ by another 50%. will (after that)
only leave about $700,000,000 of excess reserves, Open Market Operations by the reserve
bank$ can reduce non-excess reserves by $1,700,000,000--which would cause a 20%
deftation of the existing bank deposit currencyt
Mr. Eccles Indeed has plenty of powers.
29
Original from
CORNELL UNIVERSITY
CHAPTER 111.
S9UEEZING THE THE PUBUC.
Results of the SqUHU.
U and when the Monetary Authorities squeeze the member banks, by decreasing
their non-uceu reserves, the member banks will be forced to take action also.
A bank'e earning aaseta are broadly invested in tix different. channels:
1. Loans to the Stock Exchange
2. Loans to commodity speculators
S. Loans to merchants and retailers
4. Loans to manufacturers
6. Inveatments in mortgages
6. Investments in bonds.
(1) If the member banks squeeze the Stock Exchange, common otoeks will fall. But
since only $1000 million of brokers' loans are outstanding, while total bank deposits are
$62 billiono (including time deposits), this is only a comparatively small item.
(2) There are few commodity speculatoro to squeeze.
(S) and (4) Calling in loano to middlemen would check purchases from manufac
turenJ for inventory replacement, and thus check the general incomes derived from
manufacture, thus checking demand and the rise in prices. A partial squeeze of this
nature is likely, later.
( 4) Manufacturers are unlikely to be squ..,ed, but if they are, they will be foreod
to borrow from the public, which demand for loan-money would raise long-tenn interest
ratea.
(6) n ia difficult for banks quiekly to terminate mortgages.
(6) Selling of investments, to comply with reduced reserve ratios, thus remains the
most likely routine to be followed.
Tbis means a probable fall in bonds, i.e., dearer long term money rates .

(There is of course an a rgument against the desirability of resorting to any or the
six actions which might be taken. But a choice will eventually have to be made. Numbers
one and six appear the most likely. Both imply a fall in securities.]
Elfeel on Cemmoa Stocks.
At this point it should perhaps be pointed out that if a general rise in wholesale
prices stimulates the Control to take monetary action at a time when wages are also
being marked up, the general level of industrial oosts wiH be rising, simultaneOu$ly, with
an attempt by the Monetary Authorities to check the velocity of money, and perhaps to
reduce its total volume.
80
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UNIVERSITY
This may tend to reduce the general demand for oommoditiea at a time when indus-
trial costs are rising. Profits margins may therefore shrink. Common stocks might tend
towards a lower level.
While further, the fact that credit was being restric.ted, and money made probably
dearer, would probably cause common stocks to fall in market price by an even greater
percentage than profito were falling. This additional fall would be due (a) to the inlluenco
of dearer money itoelf, and (b) to the possibility of Stock Exchange loans being called
in and margiru raised on account of the general credit restriction.
It is not "inevitable" that this will happen, but it is certainly a possibility whicb
ought continually to be oonsidered.
Stock EicbaDge Coatrol.
Thia brings us to an interesting poinl
It ia feasible for a wild boom to occur in the stock market without a simultaneous
wild boom in commodities; and vioo veraa.
Both types of wildness are undesirable. Consequently it is quite conceivable that the
Administration &hould see fit to make deliberate attempts to contract stock excbange
eredi4 at a time when they were not making attempta to contract commerc.ial credit.
(And vice veraa.)
There is in fact, a ease for arguing that the Chairman of the Secu.rities Exchange
Commisaion may be put more or leas in charge of the Dow.Jones Index, so that he may
prevent any such stock market wildness developing as might tend to cause (on account
of the appreciation in paper values) an overflow of wildness into commercial and indus
trial affairs also, e.g.# excessive buying on instalment. credit, speculation in commodities,
over--expansion of charge accounts (book credit with the shops), and a general condition
of overtrading.

Incidentally it is desirable to prevent. the stock market from rush11.1g too far ahead
of actual or anticipated earnings. lest., ehould it be necessary later on to restrict bank
credit in general, a sharp reaction in the general level of security values should make the
public fool so much poorer .. on paper," that trade itself, i.e., consumption, was checked
on account of the stoc.k market collapse.
Such an idea as that just mentioned, should, I think. be continuously borne in mind
by investors, particululy those who trade the market for the short-run rather than
the long.
Digreoolon 011 the Stod< Market Di .. rtlag MODey "From Industry", and Thus Hlnder!ag
Trade.
(Tbia section may be skipped. ]
If it should become necessary to reduce the credit curreney in existence, the mone-
tary authorities may think it desirable to call in such loans as are regarded as of least
benefit to the community. This would probably imply the calling in of Stock Exchange
loana (now at approximately $1 billion).
Certainly, in a banking system where credit facilities are already strained, a4ditiontJ.l
loans to speculators deprive industrialists and merehant$ of credit faeilities which might
Sl
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from
CORNELL UNIVERSITY
bo loaned directly to them. Indeed, they would be inclined to think that the Stock
Exchange was diverting money from industry.
In this respect it should, however, be remembered that when a speculator borrows
money from a bank he spends it either on an old security or on a new issue. In the latter
case the money obviously goes direct into industry on the productive side. In the former
case there are various alternatives, depending upon what the seller of the old security
does with the money.
He, however, has only three alternatives:
1. To buy aome other old ooeurity (or roal estate) - in which the same problem
merely !'fr&rises;
2. To reinvest in a new issue; or
3. To spend his profits on consumable commodities. (unless he hoards).
But in any case (bar hoarding) the money goes at one or more removes into industry
either on the consumer side (as, for ex:ampte. when profit$ are expended on commodities);
or, alternatively, into indWJtry on the producer's side, in the fonn of subscription to new
isaues.
In other words, industry is not deprived of the m<mtV lent to speculators, although
would-be borrowers from the banks may feel that industry i8 being deprived of ,.,,...
money or credit merely because thefl cannot borrow it.
Taking the country aa a whole
1
however, the money borrowed qui brokers' Joana is
r&-Spcnt eventually on either the conswner or producer aide of industry-and industry
as a whole is not hurt!
This is what happened in the 1926-9 era. Seven billions of dollars were lent short
by the banb to the stock market and reinvested or spent by the borrowers either on the
producer or consumer side of industry. It. was in fact this expansion of the bank credit
currency which monetarily-speaking "allowed" the in<l W1trial boom.
Probably, however, a government wishing to contract the total bank credit currency
ia more justified in causing loans to be called in from apeeulatora than from indu8lriali8ta
or merchants.
This calling in from speculators might cause a sharp reaction in tho common stock
market. In other words, the common stocks might fal l on this score more sharply than
bonds.
Indeed the future policy of the government may be progre94ively to restrict stock
exchange loans (a) so as to prevent stock prices being forced up too high-ao that the
eventual fall may be reduced; and (b) so that there may be very little for bankers to
call in, i! and when the market ever collapses again-thus removing one eaase of the
cumulative downward momentum which is ''normally" given to stock prices in declining
trade.
32
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C O R N ~ l l UNIVERSITY
CHAPTER IX.
THE COMING FALL IN BONDS.
Tbt Comillg Slump ID the Bond Markel.
When any of the anH-infiationary already mentioned appear to be in the
offing, the investment committees of a few of the banks., and also of the imestment trust
and insurance companies, may decide to try to be the first off Ute bond market.
The commer<:ial banks hold $12.9 billions of government bonds. It is impOssible for all
of them to sell out, especially aa national pubUc savings only total about $4 billions a year.
Success in getting clear is therefore essentially a competitive "race''--depcnding on
foresight.
A little selling by one institution may stimulate more selling by others ; and there is
the possibility of a sudden open break in fixed interest securities, due to buying: suddenly
drying up as selling increases.
Admittedly the privilege which member banks are now accorded to borrow from the
Federal Reserve Banks a.gainat governments will, if the borrowing rate is kept at one
hundred per cent, tend to check the bank$ from selling long term governments in fear of
a fall.
But the Insurance Companies, and other in.stitution3, do not possess this privilege; and
their aeiHng of long&, in fea.r of higher interest rates. may well depress the market,
particularly as the bank8 and the public would probably no longer be buyers.
I should add that if reserve ratios have already been raised stul (urlher by Mr. Eccles
(beyond the decree of August 1936) so as to stop inflation, the member banks, so as to
acquire ext ra reserves, might want to exercise their exi$ting privilege of borrowing from
the Reserve Banks in order to get extra reserves-which would frustrate Mt. Eccle&' long-
term policy, bec.atl5e such borrowing would be inflationary! Hence the present pr-ivilege
(it is nota right) ot the member banks to borrow from the Reserve Banks might be with-
drawn. And this might hasten selling of bonds by the banks.
The withdrawal of the "privilege" would in fact talce one ot the existing apparent peg$
out of the gilt edged market, and there might be a serious slump in go,ernmenb, particu-
larly in the longs.
Incidentally if one group of member banks (within a Federal Reserve district ) makes
heavy sales of investments (without re-Jending the proceeds), then, insofar as the tlients of
other member banks (for in.stanee, in tho same district) buy them, the reserves of the
latter banks will be lost, at the clearing, to the selling banks; and these other banks (who
bank for the buyers) will, unless they have excess reserves, also be forced to sell securities.
Thus one group of banks ca.n force a deflationary policy on others, (although it is not
possible on the Inflationary side), and the collapse in bonds may gather cumulative down-
ward momentum.
WiD Growmg Demand or Restrictd Supply lie lh Ca...,?
As regards the attual eause. of the (earning) slump in bonds and rise in intertst rates:
this might be caused either (1) because of growing dem4nd for Joan money, i.e., by t he.
88
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UNIVERSITY
excess reserves of the banks and the recent currency inftation causing commodity prices
and industrial profits to rise inflationarily, thus dragging up interest rates in their wake.
i.e., a{terwa.rdo; or alternatively, (2) because of a reBtricUon of tnll'PIN caused by tho
Board of Governors of tha Federal Reserve System deliberately eliminating excess reserves_,
and then positively contracting credit so as to prevent an inflationary ri8e in commodity
price.s.
The one theory is based mainly on the demand .. factor; the other on a supply factor.
The first theory expe<:ts higher intere.q,t rates to resuU from inflation: the other expects
them as a prior preventive. Price inflation, however, either actual or anticipated, will be
th-e causative force behind dearer money. And dearer money wiU eventually occur tor
both reasons..
Anticipatory Forces.
It should also be realized that even prior to any anti-inflationary measures by the
Federal Reserve Board, and even in the absence of any increase in the industrial demand
for loan money, it is al$0 po .. ible for the bond market to decline, provided that the belief
exists that i t will f()()tl decline (owing to either of the two aforesaid reasons) , etc., etc.
Anticipatory forces may cause the selling, and the market recession in bond prices
may occur even though the forces which are feared have not yet positively begun to operate.
This, in fact, is the nature of all investment markets.
Pereeotage Dangers.
As a matter of mathematics, a rise in the long term rate. of interest from to
3\4% implies a 28.6% fall in perpetual high grade irredeemable preferred stocks.
Even bonda with a ten year life would fall 7.7%: those with a fifteen per cent life,
10.2%.
Indeed with money earning only about S% it wouJd be better for an investor to forego
interest for about three years on end, rather than to face a decline in the mar ket,
such as would occur on 15 year bonds if interest rates rose .

A rise in interest rates also affects the genera1 1eve1 of common stocks---e-ven though,
i earnings e\lentually rise faster than Interest rates. the market for stocks may be only
temporarily depreoeed.

APPROXIMATE PERCENTAGE DECLINE IN BONDS CAUSED BY
AN INCREASE IN INTEREST RATES
{B.aed on an avera.ee bank port.tolio ot bonds eanytng C'OUpon!l from S?f, to 6%, payable Jlemia.nnually.)
sYur
1 '7o increaae .. - 4.4S"o
2o/o fn.ereue ... . - 8.69:7
3% ln.ertue ...... . -12.390
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10 Yf'a,.. lS
- 7.7% - 10.2?*
- UI.l"i"G
-20.9ct.. - 2&.87 ..
from
CORNELL UNIVERSITY
tO Yf'ar
-12.2%
-22.&%
-30.9%
Detalled Figures.
To estimate more accurately the percentege decline which will be witnessed with
various changes in the intere3t rate, the followin.g brief Bond Table is listed.
To use it one must assume (1) that the specific bond in question is &elling at 100 and
carrying a coupon payable semiannually at the rate listed in the left-hand column. Then
(2) if longterm interest rates rise to the flgures shown in column 2, the prices of the
bonds, will, according to their varying dates of maturity, be as per columns 3, 4, 5 and 6.
The figures in tho columns headed Maturity" indicate the new price to which the
bond will decline. to yield the percentage enumerated in column 2, to its ultimate maturity
date. Therefore an accurate estimate of t he percentage decline in the market price can be
made by deducting the new price indicated on the table from 100.
C""Jn Rot Yi.sldBtuU
s s
Sli

'"

6\i
8
3\i Sli
'
4\i
6
61;
6
61;
'I

...

...
6
6\;
7
711
8
.... 411
5
6
7
8


6\i
6
7
8
611 811
. 6
7
8
6 8
8\;
'I
8
-
BOND YIELD TABLE
(lntere.t P.ayablc Semlannually.)
M'Cl,ur1tv
SYnt 10 Yocar
100. 100.
97.7 95.8
95.6 91.8
93.3 88.0
91.2 84.4
89.1 80.9
87.2 '1'1.6
100. 100.
97.7 96.9
9Ui 92.0
93. 4 88.3
91.3 84.7
89.3 81.4
87.8 78.1
86.4 16.1
100. 100.
97.7 00.0
96.6 92.2
93.6 88.6
91.4 86.1
89.4 81.8
87.6 78.6
8UJ 75.6
83.7 72.8
100. 100.
97.8 96.1
93.6 88.8
89.6 82.2
86.8 76.2
82.1 70.7
-
-
-
.
100. 100.
97.8 96.1
95.7 92.6
91.8 85.7
87.8 79.6
100. 100.
97.8 00.2
93.7 89.3
89.8 83.0
-
100. 100.
97.8 96.3
11$.8 92.8
91.8 86.4
35
IS Year
100.
94.2
88.8
83.7
'19.0
'14.6
70.6
100.
94.4
8$.1
84.3
79.7
15.4
71.15
61.8
100
i4.&
88.6
84.8
80.3
76.2
72.4
88.7
65. 4
100.
94.7
85.2
77.0
69.7
83.3
100.
94.9
90.1
81.8
'14.0
100.
95.0
86.2
78.3
100.
95.2
90.8
82.7
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CORNELL UNIVERSITY
tO Year
100.
92.8
86.3
80.3
74.3
69.9

100.
93.1
88.9
81.1
'16.9
71.1
66.6
62.6
100.
93.4
81.4
81.9
'18.8
72.2
67.9
64.0
oo.
100.
93.7
82.6
73.3
66.3
68.6
100 .
93.9
88.4
78.8
70.3
100.
94,2
83.9
76.2
100.
94.4
89.8
80.2
Banking Risks.
From the banking point of view a sharp slump in bonds, due to rising interest rates
might be serious.
Most banks today have of their income-earning assets invested in fixed interest
securit ies, of whieh latter 60% are Federal government bonds. Thus the average Ameri-
ean Bank i$ at present, rightly or wrongly, as to about 60% of its earning as,eUJ, an invest-
ment trust institution dealing (speeulating) in bonds which have now reaehed boom time
levels.
About $14.7 billion of the debt of $33'h billions, i.e., 44% of the total,
is owned by the banks and only about half of this holding consists of shoJ"t..tenn mat urities.
Altogether, however, t he banks hold about $14 billion of long-term bonds. Conse-
quently a decline in such bonds (due to a rise in long-term interest rates) might imply
a depreeiat.ion ot nearly $1.4 billion in asseUJ.
At present the capital of the banks is $3.5 billion and the surplus and undivided profito
and resenes about $4.5 billion. Such a fa11, though not ' 'ery serious, might, ne ... ertheless,
wipe out the whole of the surpluses of some of the weaker bank$.
wnt the "Normal" Warning of Dearer Short Money Be Given?
A rise in long-tenn interest. rates, and the concomitant slump in bonds, when it
oceurs (as it some day will), may or may not be preceded by the "nonnal" warning of a
prior upturn in short-term rates, such as enables alert investors to unload.
Indeed there is a mild (though not a st rong) case for arguing th.at in the present
business cycle, long-tcnn interest rates may rise before short-term rates, owing to the
banks wanting, through c-aution, despite their excess reserves, to reduce their holdings of
longs in relation to shorts, and thus competing for shorts in consequence. Short-term rates
might thus stay stationary or fall, though long-term rates were rising.
Incidentally, if the Federl Reun-e Banke rf&Qrted to an open mad::et operation and eold their OWn
sovernmenta thJa also might eauae lonp to fall before ehorta.
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CHAPTER X.
CONTROLLING THE FALL
If a break in bonds, stocks and commodity prices, engendered by deliberate bank credit
contraction. went dangerously far it might become necessary for the Board of Governors
to step in $0 as to reverse the price tendencies which their recent deliberate poJicy had j ust
set in motion. Perhaps they might reduce reserve requirements again!
The bond market in fact might reeo,er once more, beca use of the varyin,g policy of
the Control.
As another rescue--weapon, in the event of the gilt-edged market suddenly collapsing,
there is also legally available to support the g1>vernment bond market, $1,800,000,000 of
the government fund of $2,000,000,000 derived from the profit on Devaluation; and some
day this fund (not yet in the form of money, but available in the form of g1>ld certificates)
may play a dominant part in the movements of the bond market.
But the following points should be borne in mind: The $1,800,000,000 nominally avail-
able is, as I have sajd, not yet really ''money" at al1; and it wiU not beoome "money" until
it is spent in the fonn of newly issued gold certificates. But this is in itself an inflationary
action; and the government in its attempts to stop price inflat ion might be chary of gold
certificate inflation to support the bond market (particularly aa such issues are difficult to
recall) .
Thus the $1,800,000,000 may never be used.
A much more Hkcly rescue weapon would be a re-lowering of Nserve requirements.
Future
From a market point of view, certain inferences may somewhat rationally be drawn
from the foregoing theory of deliberate Monetary Management.
It it is t rue that wheneve.r industry, velocity and prices rush ahead too rapidly, the
Control will put on the brakes; while conversely, whenever the brakes eause too much
friction they will be taken off, and possibly the gasoline (inflationary measures) resorted
to again, it may so happen t hat the normal business cycle, as we have hitherto known it,
shall have been made obsolete.
industry itself, and also the sleek market, may be made to fluctuate in eom-
parati\'ely ahort and mild cycles, ot perhaps six or twelve months on end; rather than in
lengthy and exaggerated cyc.lical swings, such as we have known over the past few decades.
Thus stock market forecasting, both tor bonds and common stocks, may resolve itself
largely into an analytic study of the policy of the Monetary Cont rol.
The trade cycle, in tact, as we have known it hitherto, may possibly be dead on account
of the growth of our Knowledg<>-and on account of the growth of the knowledge of gl)V
cmment bureaucrats and politicians!
Cyclical fluctuations may perhaps have disappeared and ironed out, and Minor Fluc-
tuations due. to monetary control may possibly have been substituted in their stead.
We hard-working (and much despised) students of money may at last have
into our own l
Sonw day this fund, If it I ever used, may, as in England, b-come a second fund {in addition to tht:
Invest ments of the Reurve Bank$) usable, after invest ments have been for f uture Open Market
Opera tiona.
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CHAPTER XI.
FACTORS TO WATCH.
Boiling our whole problem of forecasting the Bond Market (and to some extent the
Stock down to essentials, what we have to decide is four things:-
(I) How soon will an increase in the velocity (andfor volume) of bank money strain
factory capacity, so that inventories are reduced, bargaining power captured from buyers,
and prices marked up?
This is largely a question of estimating public confidence and psychology.
(11) The second question is: How soon- if and when these conditions begin to
mature-will the Board of G<.vernora begin to take action.
(Ill) Thirdly, what will them to t.ake action; and
(IV) Which weapons will the control use to start with, and in what order will they
eventually he used.
Es-timates must in fact be made of Mr. Eccles' psychology and ratiodnation, and also
that of his associates.
Hence the following questions should probably he asked (and answered):-
Practical Queotions.
( 1) Will Mr. Roosevelt let the wholesale price level go on rising, say 10% more to the
1926 level, so that a semi-inflationary profit.cxpansion may quickly cause the maj ority of
the 7,000,000 unemployed to he re-employed!
(2) Or wi.ll he (I think rather sensibly!) permit the Board of Governors of the Fed-
eral Reserve System to "interfere" to stop rising prices even before the unemployed are
re-employed 1
(3) Will Mr. Eccle$ and his associate9, if left to themselves, take anticipmory action;
or will they wait till the rise in commodity prices (a.s well as wholeaale) is already
well under way?
(4) Will a rise in retail commodity prices, if allowed to oc:cur, scare bond investors.
and bring about an o.'ltticipatory flight from bonds; and result in "dearer money'' (because
money is before antiinftationary measures are taken by the Board of
Governors?
(5) Will Mr. Eccles be content merely to take away "excess" banking thus
taking up the s/4ck of the banking system- so as to get the "feel" or the market, as in
England today (Jan. 1937) 1
(6) Or will the velocity or the credit currency already in existence increase so rapidly
that some positive quantitative deflation thereof will be necessary?
(This is perhapa the key question to the whole problem of interest ratcs!J
(7) What are the chief weapons which the Board or ('rOvernors can use?
(8) What factors will dictate the choice or
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(9) Are the weapons adequate for the purpose in view. (Surely, yes.)
(10 What are Uoe most likely mistakes that the C<>ntrol may make? Will they "crack
down" too soon! Or will they use the wrong weapOnS, and in the wrong sequence?
(11) Alternatively, will the government, in its desire for continued cheap money, and
because it is afraid of the reactions of any tightening of credit on health of the banking
system (because of the concomitant reaction on the bond market), be too afraid to take
the action which it regards as economically desirable!
Will, in fact, what might be called the normal mistakes of the past be made, Le., letting
the situation gradually get out of hand, for fear of the debit side of the equation (i.e., tern
porary political inexpediency), until at last, violent blunderbuss action will be necessary,
which wiU crack the- bond market wide open,- rc.sulting eventually in a much bigger
decline in bonds and loss to the banks, than would cnr have. been necessary if earlier
anticipatory action had been strongmindedly taken'!
Will, in fact. a very understandable though weak pOlicy of hesitancy and lai.ssez faire
eventually lead to a wide open break in the bond market similar in suddeness to that which
occurred in eommon stocks in October 1929?
(12) Will there be political and inter-departmental squabbles, which will stultify the
whole principle of Monetary Control?
(lS) Under what conditions would the Government use the remaj nder of the Gold
Profit Fund (now $1,800,000,000) to support the bond market if it falls?
(14) Ia it possible that velocity (monetary demand for goods) will not increase faster
than production, so that prices may not rise after all, and so that no intenention by Eccles
(and no dearer money) will be necessary?
(15) Or, even if he does intervene, will the demand for bonds keep pace with the
bankoffered supply, so Utat no rise in long term interest rates eventuates'!
FACI'ORS TO WATCH.
Perhaps the chief factor to watch i$ the index curve of retail prices, for it is this,
probably more than anything else. which will stimulate Mr. Eccles and his associates to
take action initially.
Since howe\'er there is nonnally a Jag between monetary inflation (and deflation)
and price inflation (and deflation). the authorities may take anti-inflationary action be!ore
retail priees start rising; consequenUy various other curves should also be watched,
$UCh a.s
Wbol .. ale Prices
Inventories
Vtloclty
Tht General Levtl of Profits
Moreover. there are sure to be numerous other faetors., at present unforesee-
able, which will also then be affecting the situation, and which will have to be eonsidered :
for instance foreign withdrawals, bank rates, the need for Treasury refinancing
in America. and perhaps a13o British monetary policy.
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The problems of the Monetary Authoritiea, however, are not only economic but also
.sociological, and to some extent especially as the Board haa today to
&hare ita responsibilities, not only with the Treasury, with the Comptroller, and with the
various State institutions, but ahlo with the Federal Deposit Insurance Corporation and
the Reconstruction Finance Corporation.
There is also the important foreign factor to con.aider.
(Even a foreign withdrawal of $500,000,000, due to trouble in Europe, would eat up
almost the whole ot the (2oth January, 1937) excess reaerveo of the New York banka.)
(N.B.- Foreign investors are supposed to hold about of American
securities, $2,000,000,000 of which are common atocka. Therefore only one--tenth involves

Incidentally, a higher interest rate in England, which must eventually be expected,
might also (so long aa the 11entleman's Tri-partite exchane agreement lasts) cause higher
interest rates in America,-although a discount on the forward rate for sterling might
iron out this tendency.

At the time of writing it is perhaps early to make any positive prediction& concerning
these various factors. (That is why 1 am instituting a Service (described at the end of this
pamphlet) to keep investors in bonds in touch with these problems).
How Future Historian& Will Report the Ne<t Two Yean.
A few years hence economic historians will however probably review the present
tendencies in the money market as foUowa :-
(1) 1nter .. t rates rose in 1987-8.
(2) They rose because the banks pressed bonds for sale and charged more for loans.
(3) They did this because Mr. Eccles took away not merely their excess reserves,
but also some of their non-excess reserves, by means of open mal'kct operations.
(4) He did thia in order to reduce the Quantity of bank credit currency.
(5) His object was to counteract the rising velocity of bank money which had begun
to mature as a result of the previous inflation of Quantity ''eakhing."
(6) The Quantity-increase was due to the nation spending its way out of the depres-
sion by means of government borrowing from banks.
(7) Dearer money was brought about partly by increased "natural" industrial
demand, but mainly by ''artificial" reduction of supply.
(8) It was the ''artificia1" element in the equation which caused interest rates to
rise a year or two earlier than was generally expected.
(9) Although the writing was clear on the Managed Money wall, few Investors could
or would, read it.
(10) The government was widely blamed for the "artificially" caused alump in
bonds, which followed the arti/iciaUy sponsored boom.
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Explanation of Loose Chart
The Dllltant Paat
Cu.ne 2, Industrial production, expanded rapidly in 192S..29.
Thia, eoupled with Curve 1, 3tock speculation, strained banking reserves, Curve 9.
Money, Curves 6 and 7 became dearer.
'nle atoek market, Cur\'e 1, suddenly broke. Nerves became shaken.
Brokers' loans, Curve 13, were called in, or paid back voluntarily. The stock market
fell further.
The public began to feel poorer on paper. They became more cautious and spent
lea rapidly. Curve 5, the velocity of money, declined.
Industrial profits and stock price$, Curve 2, declined.
Bank:en began to call in loans., Curve 12. But they increased their investments simul-
taneously, Curve 11.
The calling in of loans, however, caused forced sales. Commodity prices. Curves 3
and 4, declined.
The velocity of money, Curve 5, also fell off further.
Business became unprofitable. Borrowers were few. The rate of interest
fell pn>clpitously. The long-term rate also began to decline .

When England went off gold in September 1981, interest rates were suddenly jacked
up, but tell once more in 19S2.
When America went off' gold in April 1933, money rates once more rose quickly. But
they declined again at the end of 1988.
Meanwhile, the devaluation of the dollar in April193S, coupled with talk of inflation,
led to higher velocity, and to an industrial, commodity and stock market revival, Curves
2, 4 and 1.
This, howe\er, was largely a flash in the pan because no reflation of bank money,
Curve 16, had yet started.

In 1934, however, government spending, financed by government borrowing from
U1e member banks, inflated not only the gOvernment debt, Cune 10, but a lso the investments
and demand deposits of the banks, Curves 11 and 15.
This expansion in bank investments and deposits was made possible by the increase
in excesa reserves, Curve 9, which came about through the gold influx, Curve 17.
The inftation of demand deposits was followed. with n Jag, by a gradual revival in
busineAS and the stock market (1934-1985).
Business confidence gradually increased.
The R""nt Past
By 1986 the. revival in the consumer goods industries had led them to place orders
with the capital goods industries. Business confidence re.,ived still further.
Net demand depOsits, meanwhile continued to grow, owing (1) to the government
borrowing from the member banks ; (2) to commercial loans, Curve 12, expanding; and
(3) to the continued gold influx, Curve 17.
Consequently, in the middle of 1936, commodity prices, as wen as stock prices, began
to rise.
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Th0 government, however, fearing incipient inflationary infl uences raised reserve re-
quirements by 50% in August 1936. See Curve 9.
In December it also sterilized the effect of gold imports on banking reserves .

Between 1st Novfmlber and 31st December, 1936, wholesale prices ros.e 12%, stimu-
lated largely by war stocking up in Europe, coupled with world-wide speculation, coupled
with somewhat inelastic restriction schemes. Inftationary psychology began to grow.
The store of value demand for money then began to diminish. The veloeity ot money,
Curve 5, t urned upwards.
The Future
Other things equal, velocity is likely to return to tho levels prevnlent i n 1923-27.
This would imply an increase in either trade or prices of over 50%.
Productive capacity is unable to increase output by 50% rapidly.
The tendency therefore will be for retail prices, Curve 3, t.o rise-especia1l,y as raw
materials and wages are rising also.
Credit inflation, in fact., ha.s "caught", and is rapidly re-priming \'elocity and prices.
Cbecking Price IDO.tlon
Psychological ruses and official threat..s may for a while check the expansion of veloc
ity, Curve 5; but gradually such Talk will lose its effect. Curve 5 will continue to rise.
When U\e inflationary influence of a decreasing Store of Value demand for money,
Curve 5, exerts itself on commodity prices, it will be necessary not merely to prevent net
demand deposits, Curve 15, from r ising further, but also to make Curve 15 positively tum
downwards again-to counteract the inftationary of the proape<::tive rise in
Curve 5 (velocity).
To effect a reduction in Curve t.6, it will be necessary to cause Curve 9, cxoess re
serves, to fall further.
This w'ill be done first by arbitrarily raising required bank reserve ratios; and
s-econdly by open market operations, i.e., by the Federal Reserve banks seHing part of their
$2,400,000,000 of investments.
This will reduce excess resen'es, Curve 9, to zero and below.
The member banks will be forced either to call in loans or sell investments.
The course chosen will be to sell investments. Curve 11 will decline.
The selling of bonds by the Reserve Banks and member banks will cause a decline in
bond prices, Curve 8.
The st rained reserve. rat ios will also enable the bat1k$ to raise their charges for short
term money. Curves 6 and 7 will rise.
A fa11 in Curve 8, coupled with a rise in Curves 6 and 7 (aU of which constitute dearer
money) will cause a temporary shock to the stock market, Curve 1, beeause its general
level is a function, not only of e:trnings, but also of long term money rates .

Droadly s]l<Uklng, the poUey of the Monetary Control will be to,..,,.., Curve 15 (net
demand deposits) as L"urve 5 (velO<ity) rises.
If, however, such action checks trade itself, Ole brakes will suddenly be taken otf, and
possibly the gas of Reflation r<>-applied.
The chief curves to watch, in order to forecast the action of the Control, are Cunes 3
and 4; Curve 5, and Curve 1.
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APPENDICES
APPENDIX A.
CYCLICAL INVESTMENT IN BONDS.
lntrodudory.
Although, theoretically, the best form of long .. run investment is to switeh from
common stocks to bonds, and back, semi.-eyc1ically, m-ost trustees are required by deed to
keep all their funds in bonds throughout the cycJe. Many in.suranee and trust companies,
too, find it necessary to keep a large portion of their funds always in loan issues. Numerous
investors A.l$0 favor this compromise; consequently it is desirable to set down a series of
rules as to how best to manage these funds even though industry as a whole may be
and interest rates may be rapidly rising.
Bond Prices and the Date of Redemption.
The first fact which must be recogniZ<!d is that individual bond-prices, though they
may ftuetuate o"er a substantial range, are to a great extent regulated by the date of
redemption. A bond issue is, in essence, a loan; the original offer specifies not only the
rate of interest,. but also the date and price at which t he loan is to 00 repaid. It is usual for
loans to be repaid at par, even when they are issued at a discount ; occasionally the redemsr
tion price is fixed at a slight premium.
T-he. influence of redemption arrangement&, in determining the price of bonds. is
often a question of actuarial probabilities. Some bonds are redeemable by
spread over a period of years (the final date being fixed) , while in other cases the repay.
ment mu$t be effected at a specified date. The nearer this date approaches, or the greater
the probability or repayment within a short time. the more reluctant will the market be
to vary the quotation from the repayment priee.
Thus if a bond is paying 4'h% (nominal) , when the current interest-rate is 6%, the
natural price of the issue (apart from redempt ion) would be 75. But if the loan is to be
repaid at par within the next three years, financiers could advantageously buy at that
price, in order to receive a repayment amounting to a bonus. For this reason, prices will
be marked up until the quotation discounts the probabiHty of imminent repayment.
Thus when interest-rates are rising and bond-prices are therefore declining, there
will be a relative stability among issues with n nearby date of redemption. When the. trend
of industry and of intc.rcst..rates turns downwards, the longer-dated securities will tend
to improve; but the short;..date bonds will be less inclined to move.
Tho Semi-Cyclical Switch from Short to Long-Date Bonds.
In this way investors who are restricted to Government bonds can enjoy some of the
benefits to be derived from cyclical trade fluctuations. Their policy should be to sell
Jong-date bonds and re-invest in short-term issues, as soon as rising interest-rates are in
prospeet. Then Jater, while interest-rates are still high, but as soon as the first credit-
crisis is over, the investor should switch again into long-term Government bonds; in this
way he will benefit from the capital appreciation which occurs when both trade Anti
interest rates begin to fall.
Verbatim e-xtract from /(fr Apprc:cinh\m."
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Thesa long.term Governmant bonds should be of a low nominal rate of interest
(8% or 4%) ratller tllan of a high rate (6% or 7%); for, assuming redeemability in botll
.....,. to be somewhere near par, a 3% long-term bond standing at 50 and yielding 6%
(and redeemable at 100) will, if the long-term market rate of interest falls from, say,
6% to 4%, ri.., much faster than a 6% bond standing at 100 and also yielding 6% (if it
too is redeemable at 100 at the same date). The 6% bond may rise only a few points. The
3o/o bond may rise to 75, i.e., 50%.
Typos of Long-Term Bonds to Buy During the Rising Half of t he Cydo.
During the pariod whe-n trade has revived and when interest rates have begun 1.<1
rise, we have so far assumed only Bltort .. term bonds should be held.
This is eert..1.inly true as regards high-class Govermncnt securities. but there is con-
siderable scope for making capital profits by operating in and out of certain indust-rial
bonds-
Although it ia a fact that bonds a whole deeline as industry and interest rates
rise. it often so happen$ that depre.ased bonds in certain industries go on rising even
despite the rising long.term trend of interest rates. This frequently occurs in tho.sa
industries which are recovcrinll after a depression.
For instance, when industrial revival begins and certain industries begin to improve.
the bonds of these depressed though re,riving industries usually rise much faster (in their
early stagea of re,;val) than do fi!'llt-<1 ... G<>vemment stocks-which will probably have
risen eomiderably already.
Similarly, later on in the cycle when general trade is at last definitely prospeTing,
by switehin$!" out of bonds in indu3tries that have already revived into of indus
tries that have been recently depressed but are now also showing signs of revival, eon-
profits can be. made.
Convertible debentures are al!to pureha$es in industTies that are improving.
SuJ<g .. ted Behavior Throughout tho Cydo.
Looking at the (uncontrolled) trade cycle as a whole the following behavior
correct for bond investment.
Stege
I . Cr-.dlt and
nneral Stock
Esehanre alump.
11. lndu!ltrlal
-moet tradee
alumplng.
JIJ. In.duatria1 e.tuna-
tion.-m-ost
depreeil!d; 110mP.
slightly irnrro"ring.
IV. (i('1Wr81 novt val-
moet tnde!l' im-
prorin althouR:h a
few till
and othna
lng overlnvt:!!tecl ln.
V. Boom.

Slgtt of Ute 1'l"'u TJ11H. of 8()7td
v .... tioft
8to9 Very high bank r Ate!!.. Money on d(O'I)oeit in the banks or In
months. All l'ecorit.ies 11-h.-,rt rnaturitiM.
(Or poealbly abl'Oad ff (<\reign trade
cycles an not
1 fllinl' b4tnk
Lona"Wrm Government bonds with a
yean.
low nominal rate of lnteree.t.
Bond rbing; ordinary
!lharn: fallinJ',
l ... T.ow b11nk ratee.. bonda of an induatrial as
J1!An. bond..". well aa or a rovernment&l cha.raeter.
R.b,ing ordinary a.hare!!. Convertible debentures.
l ... S1owly rfalng bank Convertible debenture. in proa:perou11
ye-ara.. rate!\ and lona:-term induat:riea.
rntea.. bond in rcviing thnush
Ronda fairly ateadv. recently deorea.sed IDdostries. (Thee.
Ordinary e.harta. r bdnJ latter ue.ually ria;e with their trades
fast. despite the rise In lntertat rates.)
Short-term seeurltlea of high <'harac-
ter.
1
.-2 to 2
Sharply ria.in.r lon.r
Short-term bond ...
, .. ,._ term rat.ee and bank
Convertible debenture&.
rates. Or monty on deJI(ltl:lt qr abrOad.
Bondi slumping.
Ordlaaey hares etl:ll
riaJng.
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APPENDIX B.
THE THEORY OF INTEREST RATES
Wll7 lmpo11aDL
The long term rate of interest is, as stated, a vita1ly important factor in
investment. beeau.se it is an "external" factor which influences the general level of alL
securities.
A 39(t. as dist inct from a 6% long t<wm rate, tends to double t he price of all securities,
other things being equal.
"nle Quoted Rate le a Loan Rate for
4
MOnty.""
The flrst thing to note about the rate of interest is that it represents a hire price of
Money and not of goods (8.8 so many economi!;ts have su.ggested), even though goods can,
ot course., be bought with the borrowed money. The interest rate is, in fact. the loan
price of borrowed Monetary purcl\asing power .
"nle Pure Rate and the Additional Ju.k Rate.
Any given market rate of interest contains two elements :
1. The pure rate of interest.
2. An additional Risk-rate in accordanoe with the credit of the borrower m the
eyes of the lender.
This risk element partially determines the market rate at which a capib.list will, in
pract.ice, lend to a borrower.
'i'he rate of interest i!:, however. determined by the !oreea of demand and supply;
and it is necessary to split theu two sets of factors into their separate component in-
gredient ports.
The Delftand for LoanMoney.
Broadly speaking, there are three separate types of demand for loan-money:
(i) Demand by profit--seekers. e.g., business men.
(ii) Demand for non-profit seekens, e.g., governments and municipalities - for
public works, unemployment relief, war, ete.
(iii) The Distress Demand sueh as matures during a financial crisis.
As regards the pl'Oflt-dem.and: as business improves and the prospects of profit g'row,
the demand for capital to exploit thesa prospects naturally grows with it. The prospect ive
profit rate is, in fact, the ' ' normal'' major determinant of the current long term market
rate of interesl
Governments and municipalities can, howe .. er, twist the current market rate away
from the anticipated profit rate on account of their demands for capital for non-profit
making proccsaes, t .q., wars, pub1ie works, and so on.
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Thirdly, at the crisis stage of the business cycle when nerves become shaken (so that
few people arc willing to lend), and when the velocity of money stagnates so that busi
nesses do not receive- income as punctually as waa origina11y anticipated, a Distress
Demand for loanmoney, so as to meet current obligations, matures. The result i$ that
although the profit rate of industry is falling, the demand for loanmoncy, and the price
of it, may temporar-ily rise.
Fortign Demands.
Although the domestic demand is, in most countries, the dominant bctor, foreign
influences may be considerllble, either !or profit making or non-profit- making purposes.
For instance, if the rate of intcre.st in England is much higher t han the rate of
interest in America, there will be a tendency for English financiers to borrow in the
American market &a ns to re-lcnd in England, with the result that American interest rates
may be forced up by this foreign demand-and English rates lowered.
Foreign influences are particularly likely to influence the domestic loan rate, if the
foreign exchanges are r igidly fixed, as under the old gold standard.
The Short Rate and the Long Rate.
The demand for loan moncy ;nay be either short term or long term; so also may the
supply.
In the depression stages of the eycJe the short rate is usually below the long
rate:
(a) Because bank reserve ratios will probably be unstrained;
(b) Beeause the commercial a nd speculative demand for loan-money wm be sma1l
owing to the reduced scale of commereiat transactions, t he low level of com
modity prices, and to the general absence of speculation.
On the other hand, in the prosperity stages of the business cycle the short rate nor-
mally exceeds the long ra te for oJmosite reasons .

The short rate and t he long rate are essentially distinct and different; although, of
course, they, to some extent. influence each other because of the Law or Substitution; for
if the short rate is much higher than the long rate people. will prefer to borrow long rather
than short; and ''ice versa if the lonSt rate is mueh hig-her than the short rat e .

But the Demand for loan-money is not the only factor which inftuences its market
price. Supply also must be considered.
The Supply of Lo8nMoney.
The supply of money eonv!; f'ram three separate sources :
(i) Bona fide on part of the public.
( ii) Loans by the banks.
(iii) The foreign supply.
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It is. however. important to note that the supply of loan-money i!l of two separate
aorta:
(a) Bona fide savings by the public out of ineome.
(b) Artifieially ereated loan-money, created artificially by the banks.
Some economist& and bankers deny the ability of banks to create deposit-currency.
But in this they are wrong.
Modern money is 80%- bank money, namely the typewritten or hand-written entry in
a eustomer'a passbook and in the bank's ledger. This is what circulates among th<! publle
aa money, transferable, o( course, by cheque.
The modem bank ean create this money. The modern bank has, in fact, usurped what
is tailed in England one ot the prerogatives of the Crown, namely th<! minting or ereation
ot the money in practical use.
Some people, disputing this theory, say, firsUy, that the public would never be ao
silly as to use for money something created at the whim of a mere banker. Secondly, they
aay that a bank ne\er lends what it has not got. Therefore, it never creates money.
But when a bank lends to one client the deposit whith is still spendable by anoUter,
two spendable deposits come into existence and the bank has created money, even though
he, the banker, did not aetually lend what did not already exist. That is the trielt of
banking.
Banks can, in fact. by lending money to the public, or by buying investments from
the public, create which poasessea purchasing power, and which cir
culates as money.
The extent to which the banks are able to lend or imest in this way, depends, how
ever, on the-ir cash reserve ratios. If Utey have excess reserves their tendency is to com
pete to lend and to Invest, with the result that the thus artificially created suppli .. of
loan.money tend to force the market rate of interest down to below what it otherwi&e
would have been (if the only form of had been the bona fide savings of the
publie made out of lneome).
GovUD.mental ln8ueneee.
A particularly curious feature of the modern monetary system is that if a Govern-
ment borrows from the Central Bank and pays the proceeds to contractors and othera who
bank with member banks, the so-called reserves of these m<!mber bank& with the central
bank are increased, so that they jn turn ean pyramid additional loans upon these so--called
reserves.
In tact, a Government by borrowing from the reserve bank. as distinct from the
publie, can aetually set in motion monetary forces which tend to lower the market rate
of interest (beeause the potentially creatable supply of bank money is by the
foregoing reserve-inftation process), even though the Governmental demand for loans
has increased.
Governmental demand !rom the Reserve bank, AA distintt from the publie (or the
member banks), thus tenda to lower, rather than to raise, the market rate of interest. A
curious anomaly In the modern monetary system I
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The El!ect or Ba.nklntt Behavior Upon the Actual Market Rate.
The net result of the ability of the banking system to create loanable money out of
nothing, is that, on occasions although the profit rate may be rising in industry,
with a tendency for the demand for Joan money to exooed the bona fide s.aving& of Ute
public, the fact that the banks may be glutted with cash re.servcs, may keep the market
rate of interest (both short and long) abnormally low, even though the profit rate in
industry is rising.
Conversely, it is possible, particularly in the criSi$ ph.a$e of the business cycle, when
bank loans are being contracted owing t o cash reserve ratios having beeome strained, for
the calling in of short term loans by the banks, and t he selling of long term investments
(which constitute a market demand for the long term bona fide savings of the public),
to cause Ole market rate or interest to rapidly rise, even though the profit rate in industry
is not r ising, but falli ng.
Thus we see- that ftuctuations in the artificial bank-made supply of loans (due to
fluctuations in the cash reserve ratios of the banks), may tilt the market rato of interest
consjderably away from what it would otherwise be jf there were no alternate expansion
and contraction of what we have eaUed the "artifieially" ereatable (and extinguishable)
oupply or bank-made money.
Cyclleal Movements.
Having discussed the influence of the artificial supply of Joan-money on the actual
market rate of interest, let U-15 now consider seriatim the nonnal influence of trade itself
upon the long term rate, throughout the course of the business cycle.
In the early stages of cyclical revival, i.e., before most factories have become fully
employed, the demand for long-term loan-money for expansion purposes remains small,
and tends to grow less rapidly than bona fide savings, which will be increasing pari pa.88U
with general incomes.
When, however, trade revival has progressed sufficiently far to make most factories
fairly f ully employed, a dema nd for long term money will spring up for factory enlarge-
ment.
This additional long term demand will tend, more or leu suddenly, to raise the long
term rate; particularly i t at the same time the short term rate is itself increasing owing
to commodity priees r ising, more trade being done, and more speculation breaking out,
and thus straining the credit resources and reserve ratios, of the banks.
It is, in fact, when the capital goods industries begin to revive, for expansion pur
poses, somewhat late on in the rising half of the trade cycle, that the long tenn rate of
interest normally begins to rise most.
This high rate t ends to eont inue not only during the boom period, but also slightly
afterwards: for, even when the subsequent slump has begun, t he rate tends to stay high
tor perhaps nine months owing to the outbreak of Distress demands; and owing to a
la rge additional risk clement over and above "pure' ' interest, entering into the market
rate.
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Eventually, however, as trade goe'3 on declining, snd as the desire to erect new plants
subsides, the long term demand itself tend,s to diminish; and the short term demand also
diminishes because speculation dies as commodity prices fall and the volume o! commerce
diminishes.
Thua, with a lag, both the short and long term demands decline; and this inRuencea
both Mort a.nd long rates even though the available supply of long tenn money is also
probably diminishing (though not at so rapid a rate as the demand).
Furthermore, as the slump progresses and retail prices and wages fall, less and
less legal tender is required in public circulation for wage paying, pocket money, and tiD
money purposes. More and more of it returns to the banks, and cash reserve ratios are
thereby augmented.
The banks, therefore, being profit seeking institutions and since they are unable to
find a.ny large wmme-rci4l outlet for their resourcesJ tend to invest their surplus rt80urees
in wen seeured Government bonds, and to force up their prices, thereby forcing down
the long term rate of interest.
There wiiJ, it is true, be some risk.elernent over and above pure interest in theprice
of government bonds during depr0$Siona (owing to t.ax receipts having probably fallen
with the deelen$ion in general trade), but even so, since sate industrial Inves-tments,
without a falling profit trend, will be hard to find, high class government bonds will be
particularly sought after even despite their risks.
Indeed, unless there is a crisis in the credit of the Government, the r ise in Govern-
ment bonds will continue until at Jast trade revival, and the consequent demand for
industrial capital, baa once more Jed to a rise in Ute long term rate of interest.
I should add, however, that when recovery begins. and as the Government budget
becomes better and better balanced, actual recovery in Government bonds will continue
for a while (owing to the risk factor in governments diminishing), even though the profit
trend in industry is simultaneously rising-a factor which, other things equal, would
have eaused interest rates, and Government bonds, to fall, if there had not previously
existed a risk-factor.
Interest Ratts During Inftatloa.
As already said, the market rate of interest represents a hire-price for money itself.
If, however, a rapid price inflation is occurring money itselt will be depreciating in
real value owing to its purchasing power over goods falling. Lenders will, therefore, if
they are wise, demand an extra high price for their monetary loans to offset the "real,.
depreciation which is Hkely to occur in the purchasing power of money itself during the
currency of the loan. Lenders will, in tact, if they are wise, tend to hold off the loan
money market proper, and to invest their available resour<:es in equitie5, commodities,
or foreign exchange) which will a.ppreciate in tenns of money as the inflat.ion progresses.
The supply of lo.anmoney in the long market proper is, therefore, likely to decline.
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.Meanwhile, the demand for loan money will rapidly increasej for, during a period
of rapid price inflation, it is highly profitable, in tenns of money, to be a debtor and to
speculate with one's borrowings in eQuities, commodities and exchange.
During price inflationa, therefore, interest rates tend to rise particularly high.
in Germany in 1923, the ohort term rate rose for a while to 108\)1>.
Conversely, during a price deflation opposite forces operate, and interest ratca tend
to become abnormally low-at all events until the deflation itself has led to a crisis in the
banks or in Government finances; when market rates of interest usually soar, for Distress
re&aon$, refteeting abnonnal risk.
Avoid bonds during inflation. Borrow rather than lend.
Normal Elfeet of a O.ange in the Bank Rate.
A change in the bank rate, if wi<f.elv anticipatl, may have little effect on either
common stocks or bond.s.. A sudden unt:rpecttd thange, however (say, upwards), always
sends both bond$ and common stock down for a while. But if such a rise occurs in the
rising half of the eycle, common stocks usually recover afterwards, although bonds may
oontinue to remain depressed on the lower level, owing to general intere!Jt rates having
risen.
APPENDIX C.
HOW TO CURE UNEMPLOYMENT
[The urgent need for a polltlcally daring pollcy of hlgh proUts.)
Demoaalle Gonrnments Are UsuaJ)y Afralcl of Pu.raW.ng the Polldee Nec:eosary to
Caplt&liam. The Voting Masoes Suffer.
Much of the depression which occurs in modem industry could be prevented if demo-
cratic governments, who express themselves profoundly concerned with the problem of
bad trade and unemployment, would reallze that, although they are democratically elected
and depend for their votes on a public which, for the moat. part, are not capitalists except
in a Yery small way, their industrial system is neverthele.s.s still highly capitalistic.
Although they declare thenuelvcs anxious to improve trade and employment, most
governments busy keeping an eye on the voW of the masses that they either cannot
or will not see that the policy which would really improve the condition of the ma.saes
most under Capitalism is a highly capitalistic" policy, ea1culated in the short run positively
to Jose votes.
Any government wishing to stimulate trade and employment in the eapit.alist system
must appreciate that business men wHI not employ workmen unless they proftta;
and that. therefore, the first es.sential to curing widespread unemployment is to create
the belief among buain ... men, not only that high profiiB will be made, but also that the
business men will be allowed to retaift them.
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To the unemployed worlanan it may appear that such a policy of cnriehing the eapi-
talist, prior to enriching the unemployed, is immora] and unsound; and many politicians .
in their desire to please the electorate, hesitate lo advocate any policy which is deliberately
aimed at augmenting the profits ot capitalists.
But the fact is that we still live under a capitalist eyatem, and .so long as this Profits
System endures, governments must take the world as it is and alwa'l/1 pursue a policy
high profits to capitalist employers. Nor, in the long run, does this apparently
unfair policy of "favoring the capitalist" matter either to consumers or wage-earners.
In the long run, capitalism, by its process of eompetiti\e invutment, will always tend
to reduce profita in any industry to a minimum; for if any one industry becomes abnormally
prosperous and makes high profits, new capital, unless monopoly exists, will be attracted
into it; and as soon 8.'J the gestation period of the new plant is over, additional goods will
come on the market. This augmentation of supply in a competitive market will soon reduCG
both profits and prices in that industry, so that the consumer will benefit in the wake of
the eapitalist.
Similarly as regards "'ages: other things being equal, employers are naturally anxious
to keep wages at a minimum in their own businesses. But if an industry, and industry in
general, is making high profits. production wiH expand and more men wil1 be wanted.
Competition for men will grow, and t.rade unions will be able to obtain higher wages for
their workers. Capitalist&. however, must be making high profits btfore the wage-earners
have a chance of higher wages. To amplify profits is, under capitalism, the latchkey to
full employment and high wag ...
Profit Margins MUBt Be Protected.
Therefore if wages and profits at any time are low, and unemployment is rite, the
first duty of a government. under the capitalist SyStem, is to create a profit reftation: An
enlargement of profits is the firol goal at which to aim.
Socialists may object, on political principle, to profits as such, and possibly to the social
injustice. of such a plan; but they must agree, on economic principle, that 30 long as capi-
talism endures, this ia the most effective poJicy for governments to adopt, even though they
may lose some votes on the part of those who think that all profits should be reduced to a
minimum by government intervention.
How Dots the Wage Level InJiuen Employmmt!
Actually, I should add that much unemployment, and a large part of general depres-
sion too, ia, at times, due to actual money-wages being too high-so high, in fact, that
capitalists cannot make satisfactory money profiU. Under such circumstances, one of
several cures is undoubtedly to lower wages ruthlessly.
But this lowering process should not be overdone. For obviously, if wages in moat
industries were s uddenly aay halved, pu.n::hasing power would diminish to such an extent
tbat numerous other industries would .s.lwnp on account of reduced demand. Thus, instead
of general trade getting better, it would get worse!
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The above remarks, however may to some people. seem contradictory; for in one
sentence 1 said that lowering wages would make trade better, and in another I said that it
would make t rade worse.
The fact is, however, that sometimes one policy is needed-sometimes another. The
right ]Qvel is not some fixed fee, or some fixed sum, but a movin,g and balanced equilibrium.
The correct equilibrium is that which gives the capitalist a profit margin $uffic:ient to keep
him active and enterprising. Any wage level that-is lower che<:ka consumption and trade.
Any wage level that is higher cheeks employment directly.
Extremists, however, in both camps arc all too common. Some capitalists say that to
make trade better it is essential to get wages down. Some trade unionists assert just the
opposite.
The wage level in relation to the price levet is, however, what really matters, for that
is what determines the profit-level by which modern capitalism is activated. And since the
price level, as well a.s the wage Jeve.l, can be "manipulated" so as to give money profits to
capitalists, wages are only half of the problem.
Indeed, if unemployment is increasing while the general price level ia faUinq, the best
way to re-instate profit margins is to raise the price level by monetary manipulation.
Sometimes. however, to make trade (and employment) better it may be necessary.
particularly in certain isolated groups of industry which are declining in prosperity despite
a generally rising price level, to lower the scale of wages.
Amerlal. and Great Britain Compared.
Reverting to the problem of currency slumps by monetary means.
Whereas the British Government in the 1932 slump, by adopting a favorable attitude
towards business profits, had to reftate the total currency only slightly, the American Gov
ernment has frightened business, and has slowed down the velocity of money, so that to
etreet revival it has had to reflate the total quantity of money abnonnally.
The result will be that now, when at last business confidence has returned, the re-
sultant reflation of Velocity will call for a po1;itlve caJiin.g in of existing bank credit, 80 as
to prevent a wild price boom, due to Velocity returning to normaL
This calling in (I a.w.rt) will cause dearer money.
In England there is as yet (I think) little need positively to call in credit. The price
level can (I think) be kept sufficiently under control merely by not issuing more money as
trade expands. (But I am prepared to change my mind on this matter suddenly, should
general sentiment in England become wildly bulli$h) .
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APPENDIX D.
THE CRISIS OF 19H.
In the minds of many the slump of 1982 was primarily due to the excesses of the
boom of 1929; and many are those who say that wild inflation existed in 1929.
But if common sense-ia e\'er to prevail in the political and economic arena in America
the boom and slump of 1929 must be better understood. Actually the only inflation that
existed was in the Stock Market arena.
Let us consider briefly the problem of bad trade .

Certainly if national prosperity depended solely on hard work. selt-ucrifice and
natural re!$0urees. and if good t rade under modern capitalism was determined (in the short
run as well as the long) by these ethical, rather than by monetary standards, the key to
prosperity would be found solely in hard work, selfsacrifice, and natural resources.
In the long run. it is true. the ethical and monetary factors tend to coincide. But not
in the short.
In 1932 there was just aa much hard work. se1f--38erifiee a.nd natural resources in
U. $.A. as in 1929 (and in 1935). But what was the difference? The ftow or money!
The ftow fell off in 1929, and ,....flowed again in 1933.
What checked the flow in 1929? Most people say it was the wild boom and the stock
market inflation; and some blame President Hoover for that. The boom, they say, was
c<tuse of the slump.
But this, I think, is an ill stated view.
Mr. Hoover sbould, I thin!<, have stopped the banks lending $7 billion sbort to the
Stock Excllange (for reinvestment long, at one or two removes, in industrial plant and
con.sumpt ion); for, when fear took hold. these bank loans were sure to be either called in
or voluntarily paid off. Indeed, Stock Exchange loans fell $4 billion in 4!.11 months in 1930.
A grand tnatural" deflation I
But the actual cause of the slump itself was that bank became strained, and
bank credit became ultra dear, so that rational fear graduaiJy caused caution, and induced
a sudden increase in the store-value or liquidity demand for money. Hoarding increased,
velocity declined, profits and prices feU; and prudent private bankers were forced to ca11
in more loans, which made matters worse. Indeed, prudent private banking, in periods of
depression, always tends to add fuel to the ftames.
Stock prices were, it is true, because of expanded brokers' loans and lax margin
requirement$, forced somewhat unreasonably high in 1929. but there was no commodity
price inflation whate,er. Commodity prices were mildly falling!
Moreover in the Stock Market, only utilities looked abnonnally overvalued on actuali-
t ies. They yielded only 2.9% on (based on highest market prices reached in 1929).
Leading industrials however showed an a\erage earninp-yield of 4.7% and rails 6.7%!
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What was wrong in 1929, was not ao much that the abeolute level of sWck market
prices was too high, or that the absolute volume of bank credit money .. <> wluilt was too
big (indeed there was not enough of It); but that the channel of earlier injection, via the
Stock Exchange, was dangerous.
Conaequently when the slump in trade bad started, and Stoek Exehange loans began
to be ealled in, what went wrong was that the bank credit currency wu contracted when
it ought to have been expanded.
There was, in fact, no central monetary authority entrusted with anti..d,eflationary
powers such as would check the precipitous fall in prices and the bank depo.sit currency,
by means of increaaing the supply and thus counteracting the growin.r store of value
demand for money.
M.r. Hoover, in his New Era miasma, had not had time to think these things out.. (Nor
had M.r. Roosevelt-or Wall Street. They said not a word!)
Actually the 1929 ind1181ri4l boom was itoelf tremendoualy healthy in moat of its
aspecta, for here was no inftation of commodity prices (although there were Stock Market
excesset).
But Mr. Hoover's delinquencies did not ca'W8e the last slump.
The 1928 boom was itoeit based on the ample gold reoervea which came to America
as a result of war debts--so that America did wt run short of bank reserves so soon as ia
usual in most cycles. And Governor Benjamin Strong had had the .sense to prevent the
gold-price infl.ation of commodities.
But Strong died and no one took his place.
Now however, America has Eeclea, whom Wall Street large1y despises because he is
not a New York banker, (although he, I think, knows much more even than did Benjamin
Strong), so America will, I forecaat, henceforth enjoy another period of prosperity Bimila.,.
to that of 1929, but without the stock market exooss-and also without the attennath!
And another page of economic history wiU then have been written, showing that
capitalism can be made to work satisfootorily, and continuously, if (though only if) it is
given sound managtd money, and not left to drift, by monetarily ignorant helmsmen, at
the sport of the "natural" torces, whleh, unless there is Control, exist lnherenUy in our
modern monetary economy Institution$.
The more periods of prosperity like 1929 America has, the better, provided she does
not ha\e the speculative diseases, or the aft.ermaths,-and ahe need not.
Better brains at the top are all th.at is needed-and better brains America has now
got. Then aoc.ialism will die a natural death, instead of being "bred" and fostered, as it has
been for years. by inefficient capitalistic thinking, and anarchic money policy.
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The Changed CoDdltlon of the 1930's
In the present boom (of the mid 1930's) an inflation of the bank eredit currency,
simi1ar to that of 1929, is however oe<:urring. But this time the channel of inject ion is not
via brokers' loans and common stocks, but via government bonds bought direct by the
banks!
And eventuaHy, just as $41h billions of stoc-k exchange loans were in 1930 either
eaUed in or voluntarily paid back to the banks within four month$, so will a deflation of
the recent bank credit eurreney expansion some day occur as a result of the banks being
forced, by the Control, to sell their long-term investments.
Indeed it is almost an axiom that, when a credit deflation occurs, either as a plan or
by aeeident, the channel initially used for injeetion is the one most likely to suffer.
This time the ehannel will be Bonds.
APPENDIX E.
SOCIAL INSURANCE AND ITS INFLUENCE ON IONDS.
Looking at unemployment insurance from the national point of view, and reg-arding
it cyclically, the trend of modern governmental pOlicy oeems to be as follows:
1. To collect large amounts of money in good times for in bad times.
2. To invest the money in Government bonds in the meanwhile: buying them in
booms and selling them in slumps. (Q,..stion: Could the government sell its ho!dingo of Its
own bonds during a depression, or would the market crack wide open?)
3. But for a government to buy its own bonds (with insurance money) during pros
perity, is tantamount to the government buying its ov.-'11 debt, or redooming its own debts.
4. Conversely, in bad times, if the insurance money has boon invested in government
bonds. the seUing of the government bonds constitutes reducing government-held a.s.seta
(i.e., its own bonds!). which is tantamount to increasing its total debt.
5. Indeed, a fluctuating net nat ional debt (after deducting the government's holdings
of its own bonds) is t he natural corollary of an unemployed insurance fund on a national
scale.
6. If however, the idea of an earmarked fund of government bonda is abandoned
(largely because of the difficulty of selling out), i.o., if the total outstanding government
debt is allowed to fluctuate, this tluetuating national debt ean be either debt to the public or
debt to the banks.
7. A ttuetuating debt to the puMic does not eonstitute inflation or deflation from a
monetary standpoint, and therefore has no reflationary or merits.
8. A tluetuating debt to t he banks on the other hand does, and therefore has these
merits. And since, in boom periods, bank credit deflation m.ay be desirable, so as to eounter-
act increuing velocity, due to a reduced store of value demand for monay; while conversely,
in slumps, credit expansion may be desirable (for similar converse reasons), tho best
policy, from a national point of view, is somewhat obviously "a cyclically fluctuating gov-
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ernmcnt debt I<> the banks"; or, if you like, a cyclically ft uctuating budget deficit and
surplus, and a resultant cyclical fluctuation in bank credit currency.
9. In other words, what the best policy implies is a cyclical ftuct.uation in the total
government debt, particularly that incurred with the banks.
10. This, in view of most modem thinker$ who ha\e studied both unemployment
insurance and the problem of controlling the trade cycle, io the best joint policy.
11. And this is undoubtedly the one that Mr. Roosevelt is pursuing and will pursue.
illeft in office.
12. Incidentally, this is much better than raising taxes steeply for unemployment
relief in bad limes, and lowering them sharply in good times.
13. Naturally people who are not acquainted with these various interwoven favors
object to the whole policY of "priming the pump" and "borrowing one's way (from the
b<>!lks) out of depression."
14. It i. however, a fact that the four problems of
(1) Preventing cyclical industrial and price fluctuation
(2) Unemployment relief
(8) Handling the government debt; and
( 4) Monetary management
are All inextricably interwoven, and must therefore be considered. and treated, as a whole-
not separately.
To speak of one without reference to the other, Is to take a lop-sided view of the
problem.
APPENDIX F.
IS THE TRADE CYCLE DEAD?
In this book I have written an analysis of the economic probleDlB which confront
Mr. Roosevelt, Mr. Eccles and every banker and investor.
Jdy motives have been admittedly mixed. But mainly I am anxious to see disseminated
aa rapidly as is possible such knowledge as economists have made available on this moat
vital of questions. Indeed for the las-t seventeen years 1 have been writing and
consistently on this problem- which i8 the problem of the unemployed.
The trade cycle, which is natural" to an eccnomy of uncontrolled money, has nearly
wrecked our civilization.
66
Coogk
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CORNELL UNIVERSITY
Attempts are now being made to iron out. the old trade cycle. as we knew it.
Political reputations are at stake., and fierce attempts a successful action are inevitable.
Whether you approve of the policy or not, the problem is being faced by politicians and
has got to be studied by all "praetical" men in the market.
From a market point of view, certain deductions may somewhat rationally be drawn
from the foregoing theory of deliberate lrlonetary Management.
If it is true that whenever industry, velocity and pricea rush ahead too rapidly, the
Control will put on the brakes, while comersely, whenever the brakes cause too mueh
friction they will be taken off (and pOssibly the gasoline of inflationary measures resorted
to again), it may so happen that the normal business cycle. as we ha"e hitherto known it,
.>hall have been made obsolete.
General industry itself. and also the stock market. may henceforth be made to ftuctuate
in comparatively short and mild cycles of perhaps six or twelve months on end, rather than
in lengthy and exaggerated cyclical swings, such as we have known over the past few
deeades.
Stock market forecasting, both for bonds and common stocka, may in fact resolve
itself into an analytic study of the policy of the Monetary Control.
There arc, however, two schools of thought on this subject: the one saying that the
Government and the Federal Resen'e Board can. control the price level: the other arguing
either to do so is impossible, and that the inflationary movement, irresponsibly engendered,
is already out of control.
The latter school of thought. of cou_rst, buys stocks as inflation hedges, and can see
nothing except a wild and uncontrolled boom, followed by another cra.>h-and perhapa
revolution in America. Their policy is eventuaUy to "get out of the country."
I belong to another school. 1 belie .. e that the worst features of the business, or rather
the bank will henee!orth be eliminated from the American economy. I beli-eve
that the recent inflation scare is nonsense,- in view of the existence of the Monetary Con ..
trol. I belie\'e that if dQinand becomes wild, owi. ng to increasing velocity, it will be held in
check by the iron hand of Eccles, despite the opprobrium wilich will (fooliahly) be heaped
on his head.
I believe, meanwhiJe, that America wiU continue to prosper abnonnally, although
profits will not get far ahead of wages. And in many eases the unionization of industries
may cause wages, in some cases, to get ahead of profits.
Yet I am not forecasting a profit1ess prosperity. I am merely forecasting a state of
aft' airs, such u is indeed required for permanent prosperity, namely that wages should rise
pari pa8$u with output, so that there shall be no great redistribution of wealth and mone-
tary purc.haaing power in fa,or or the ultra.rich (such aa occurred in 1929),1eading to a
condition which some economists call and which in its turn tends to cause
a condition of under-consumption. overproduction and slump.
A new era is now in effect in America. A revision of old me-ntalities and market prin
ciplea is necessary.
Indeed it is not improbable that although the revival in America since April 1935 has
not suffered a single Intermediate Stock Market Readion of any importance; subsequently
57
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CORNELL UNIVERSITY
such ...,actiona, followed by recoveries, will occur-due largely I<> the Board of Covernon
putting on the brakes, and subsequently taking them off.
In other words, althongh trade aa a whole will remain at high levels, sharp shortish
run ftuctuationa In atocka and bonds aatride thio high level will occur on account of the
monetary actions or the Control.
'The art or Intermediat<l Speculation will, in fact. shortly develop into the art of
forecasting Federal Reserve Board pOlicy.
My final advice to the readers of this pamphlet ia to study the minda of Eccles and
Roosevelt for they art
10
The Money Control."
Indeed it ia only those who understand what the Roosevelt Administration is trying
to do that are likely to make the right guesses In the market.
Coogle
Original from
CORNEll UNIVERSITY
f,. tie coai<Je </-t.9J7 L. L B. AN GAS,
Ji...dmenl iJ a U1<id </lmel.e
a..t.t:k r" i<s f?'n'wzle ( aJ to iujoliem juu1e4
tie >IIUftJ' cunl..../ </ lie
(I) to in/>,_ liem. """'
rl-#m-t& U. tie Jla-,uL Jlone/1 4 twe
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Ong nal from
CORNELL UtiiVERSITY
"INVESTMENT FOR APPRECIA nON"
Tbe Problem Outlined
IDTetotmeat Objecthoea
Et.bict of Specglation
ly
L. L. 8. ANGAS
OONTENTS
(CMpUtt I &o fJ)
Crclic.l Stock Exchange Slumpo
Paaioo
The Semi-cycJicaJ Switch from &ndt to
Avensins
Pyramiding
Common Stoeb
Timins the Semi-cyclical Switch
Cyclical Policy for Bond Inve&ton
lntueat Rates
Cyclee in Single Industries
Selecting Sharea for Cyclical Profit
Sectional Market ActiTity
How Price.. Are Made
The MoYementa
(I. Their Causes)
The Intermediate. Movements
(U. Their Exploitation)
Short-run .-ertua Longrun Spec-ulation
S.U.. and Stop-10M Ordera
StopIOM Ordere in England
The Art of Ut.ing Charts
Fine Point. in Chart Reading
General Plan of Campaign
1Qe Mind of the Broker
Proeperous ''enus Unpro1peroua
lnduttriee
The Cue for Buy-ing in Early Reotival
Sb.aret to Chooee
The Timing of Buying
Rules lor Selling
Recapitulation
Oecaaiom for Special
Operating on Borrowed Money
Living on Income or Capital
The Human Factor
QU4Iiti .. Requit<d
Bear Operation.
International Investment
Manipulation
Sharp Practicee
or Old Holdinga Showing
Loeaee
Building Balaooed Portfolios
Don'ta
Survey of Rulea for lnvetting i.n Ordinary
Share.
APPENDICES
A. Forecnting a Change of Trend in the Profits
of a Single Industry
B. Cau&eS of the Busineu Cycle
C. The Mec.:banice of Good and Bad Trade
D. The Problem of Confiden.ce
E. Uow to Cure Unemployment
F. The Influence of the M111rktt on the Na
tiona) Economy
G. A Method of Anal)&ing Sccuritiee
H. Synop&is of Argument
SOMERSET PUILISHING COMPANY
461 Eighth Aveaue, New Yorlc Prlte $5
Coogk
from
CORNELL UNIVERSITY
TK& HU N AN PACTOa
It is not difficult to learn a sound $C't of economic principles;
in the long run, indeed, one would almOSt certainly make
money if one bad the odf<Ontrol to obey, continuously and
rigorously, the following few rules:
1. Never to buy into a company whose last published
profiu &bowed a decline.
2. Never to buy into an industry whose profits had been
rising for more than four yean.
3 Only to buy when the Stoelt Exchang< was slaclt, and
when shares in g<neral had been falling for say <en wedu
(i.e, during conjunaural deprcuions).
+ Never to buy during Stock Exchange booms, and never
to buy into booming industria.
5- Never to buy unless current earnings were 8% on
muket price.
6. Never to buy an ordinary share if the bank rate: wa.s
overs%.
7 Never 10 buy an ordinary share during a fall in national
profiu.
8. To cut all IO$seO of 20%.
9 To conserve two-thirds of all paper profits O\'er,
say, w%.
JO. To buy low-rate-of-interC$t long-term bonds if the above
conditions were not fulfilled.
Any invator who went abroad for twenty years, and in-
structed his agent not to break these rules except under scriow
penalty to himself, would almost certainly reap large profiu
in the course of a very few years. To stay at home and ancn-
tivc:Jy manage one's own allain is, however, an entirely ditler-
c:-nt maner. An investor working for himseU does not mind
the responsibility of occasionally taking umcicntific risks. He
makes exceptions to his known good rules, and therefore often
Coogk
Original from
C O R N ~ l l UNIVERSITY
,,.... .llee.lcee e l
" L"''KST)t]CNT Na APPaCJAneN'"
..
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Snar
M.ajor Ant 1\aa laid down the pflrodple. whkh
10\'ern In a form rnore
pact ud c:oiW':rete tlun hu brtn done bo fat
this writn ia aware) br &nf othu
Nc- Ye>k AMU,ICA"
Of .U llt.od: Major I.. L B. Ansu.
Briciah l }leCulllor, l!.t been the .._..t fW!Illac:.ulu.
NP You
Yoa wiU bel )'OWrodf Uuriped.
8oo1t or ntt Molfnt Cwa. Nc- You .
-IDYnt..eot fw ApprN:ialiM .. M all adlllltable bo.k..
deai&wd ... .... ... ,.,., ........ , .... alld the
'-''fttelf. lta a .. hw Ia. e.-iah&e tecwd.
Tar Smt.
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a.cb. Maiot A,_.a "'"h f airly tt. 4ark
ad .acc:rtaia upecta..
8.1.b0l'IS.
"'ln.-ntmt for App,MI.atMa Ia 6r.t aM forttnoOM
practical tnaftu.al. timple and dlnct l.n ttrk, a.ftd
wit h eomethiac to .. , wonh "li.n.a on .-lnu.Jly
atpeet ol h acta down 10
with the clt!ment u y or t ueeeMlul
nurltet operllion; tbr:IC h trtlla whb 1 brGad .. ,e
.croe.
Ntw YoM DAtLT hll'UTWDT "'twl.
The are rew more qu.aiiW to
bjtcc and ,;i.-e advk.e 1h1n Major An1u, who i
1 happy ()OIIIMnatJc.n or 1.'"
Jpecu.l:atcw. Hl.a battlnc avt,.lt ha. h.n
ree'llrtehle.
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On na from
CORNEll UNIVERSITY
Po:r ot Cha.rt'" pp. 41. 42.
Managed Money Chart by L L B. Angas
ill-unent Conmltaot, SOl Park Awnuo. New York City
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