Monetary Forces Research Articles

THE INTERNAL DRAIN AND BANK CREDIT EXPANSION*

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-

Certain Questions Raised by Hicks' Theory of the Trade Cycle

The title of Hicks' new book, A Contribution to the Theory of the Trade Cycle, implies both that the contents embody a contribution and that Mr. Hicks is concerned primarily with a deductive rather than empirical approach to the problem of economic fluctuations. In the field of business cycles, wherein rests a multiplicity of theories, the writings of particular investigators are likely to differ considerably. The impact of cyclical swings differs in various times, places and environments; various interest groups tend to develop diverse explanations of identical events; the several writers possess varying intellectual backgrounds or methodologies; and many theories have become popular more as convenient bases for the formulation of public policies than on account of their force of logic or reality. Hicks, writing as late as 1949, has profited by earlier studies and attempts to weld the better features of several preceding theories into a whole, both logically consistent and more in accord with basic economic facts. However, he would be the last to claim his effort as a finished product. Rather, he attempts primarily to select a limited number of forces and tools, sometimes a bit too narrow for relevance in the world, to explain what forces occasion the conditions of economic fluctuations we have observed in the past. Pragmatic problems of how to control or improve such conditions have deliberately been slighted. The effort is directed primarily toward explanation. As one might expect from an economist renowned for skill in formal economic analysis, Mr. Hicks has packed the few pages of this volume with concise but difficult material. Consequently, this paper will but attempt a summary of the important tools and ideas, and concern itself principally with an analysis of some of the methodological and policy questions, both old and new, suggested therein. As a preview to this summary, it might be well to orient Hicks' general approach. Hicks contends that Lord Keynes put the cart before the horse, inasmuch as Lord Keynes emphasized and revealed the determinants of particular levels of economic activity but neglected the question of those short-term, rhythmic fluctuations that seriously limit our ability to profit by Keynes' policy formulations. Therefore, refinements of cycle theory must be developed to fill this gap. Essentially, he argues that the theory of economic fluctuations should be stated in terms of real output and that inherent real fluctuations are both a necessary and a sufficient explanation of cyclical swings. Consequently, he treats fluctuations due to monetary forces as secondary and aggravating phenomena. Now let us proceed to a summary of the antecedents and reasoning embodied in Hicks' theory of the trade cycle. Hicks acknowledges his indebtedness for the prior work of three writers, each of whom were supposed to have closely approached THE theory of the trade