THE INTERNAL DRAIN AND BANK CREDIT EXPANSION*

Abstract

ONE OF THE MOST MENTIONED and least analyzed monetary forces in recent years has been the internal drain-sometimes called the cash drain-which is the loss of bank reserves arising from increases of currency and coin in circulation outside the Treasury and Federal Reserve Banks. During the war years, both the absolute volume of currency in circulation and its proportion to demand deposits reached record levels for this century, attracting notice in the business press as well as in Federal Reserve publications, and even eliciting a sentence or two in postwar money and banking texts. Indeed, the wartime reduction of the minimum ratio of gold certificates to Federal Reserve notes and deposits was necessitated, according to the Board of Governors, by the extraordinary drain of currency into circulation.' Despite these facts, the discussion of the internal drain seems to have been-and to be-restricted to enumeration of probable reasons why it became so large during World War II. The present writer has been unable to find a single analysis conducted for the purpose of explaining the significance of the internal drain for bank credit expansion during and since the war, hence its significance for monetary policy in the period. This paper, then, is an attempt to attract attention to the need for such analy-