One of the most important forms of regulation is the requirement of reports and the official inspection of accounts and of the method of operation. In the case of the large central banks of issue in Europe, publicity alone is usually a sufficient guard against careless administration. But where a banking sys tem is composed of numerous small banks, as in the United States, it has been found wise to provide for frequent governmental inspection, in order to make sure that the published reports do not misrepresent the facts. National banks are examined at least twice during the year.
12. "Banking" and "currency" principles.—Two schools of thought have developed, which hold different theories regarding the volume of bank notes that a community needs. The issue was sharply drawn in England during the controversy over the Bank Act of 1844'. Advocates of the "currency" principle believed that note issues should be fixed at a point where they would vary in amount exactly with changes in the supply of gold. They agreed that a small uncovered issue might be made, provided the amount of uncovered notes was so small that the de mand for note circulation could never by any chance fall below it. All notes above that amount should be covered dollar for dollar with gold. The defect of this scheme has already been pointed out. The plan assumes that a country always has need for a limited amount of bank notes. This amount is ascertained by experiment. The issue may be based upon the bank's assets, and need not be covered by gold. Any issues above that amount will merely displace gold from circulation to the exact amount of the issue, as they are issued only upon deposits of gold. No changes in the total currency supply can be brought about thru changes' in bank-note circulation.
Exponents of the "banking" principle admitted that the demand for money within a community at a given time is definite in amount, but they con tended that this amount changes from time to time. If the price level and the rates of interest are to be kept steady, the money supply should be made to vary with the demands of trade. They pointed out that variation of the bank-note circulation is the best way of securing this elasticity.
13. of the most important fea tures of a good monetary system is elasticity. The
supply of exchange media, whether it be gold or credit, should vary quickly and easily with the changing de mands of trade. The ability to expand when trade is growing is no more important than the ability to contract when business is becoming dull.
We know that there are wide variations in the de mand for money and credit in the United States and Canada. The need varies from year to year. More important still, there is a marked seasonal variation, which is due to the call of the South and West for funds with which to defray the expenses of planting in the spring and of harvesting and crop-moving in the fall. Any lack of money and credit when trade is active leads to exorbitant interest rates and low prices, while too great a supply means over-expansion and all the evils that go with it.
14. Limited elasticity of which is the foundation of every important monetary system, lacks the quality of adequate elasticity. The supply of gold coin within a given country can be increased in only three ways : by increasing production; by melt ing down gold ornaments, etc., and coining the bul lion; and by importing. The supply can be de creased only by throwing coins into the melting pot or by exporting. The production of gold does not vary sensitively with the demands of trade. Even if it did, the annual production is so small, as compared to the existing supply, that the result would not be adequate elasticity. The melting pot is used as a cure rather than a preventive. It is resorted to only after the evils of inflation or restriction have done their worst.
Importation and exportation play an important part if they are regulated wisely and effectively. It is not because the amount of gold shipped bears so large a proportion to the total supply of exchange media, but because gold acts as a basis for so much credit that even a small change in the amount of it possessed by a country means a great change in the total supply of exchange media. Unhappily, many countries—and notably the United States—have not been able so far to regulate gold shipments intelli gently. Later in this Text it will be shown how America's gold supply has been preyed upon and replenished at will by every great Elfropean country, while we have looked on in almost utter helpless ness.