Economia

The Inflationary Factors

91

insurance company keeps almost none of its assets in cash— roughly between one and two percent. The cash surrender liabilities may be approximated statistically by the total policy reserves of life insurance companies, less policy loans outstanding, for policies on which money has been borrowed from the insurance company by the policyholder are not subject toimmediate withdrawal.7 Cash surrender values of life insurance companies grew rapidly during the 1920s. It is true that, of these constituents of the money supply, demand deposits are the most easily transferred and therefore are the ones most readily used to make payments. But this is a question of form; just as gold bars were no less money than gold coins, yet were used for fewer transactions.People keep their more active accounts in demand deposits, and their less active balances in time, savings, etc. accounts; yet they may always shift quickly, and on demand, from one such account to another.

INFLATION

OF THE

MONEY SUPPLY, 1921–1929

It is generally acknowledged that the great boom of the 1920s began around July, 1921, after a year or more of sharp recession, and ended aboutJuly, 1929. Production and business activity began to decline in July, 1929, although the famous stock market crash came in October of that year. Table 1 depicts the total money supply of the country, beginning with $45.3 billion on June 30, 1921 and reckoning the total, along with its major constituents,

In his latest exposition of the subject, McKinley approaches recognition of the cashsurrender value of life insurance policies as part of the money supply, in the broader sense. Gordon W. McKinley, “Effects of Federal Reserve Policy on Nonmonetary Financial Institutions,” in Herbert V. Prochnow, ed., The Federal Reserve System (New York: Harper and Bros., 1960), pp. 217n., 222. In the present day, government savings bonds would have to be included in the money supply. On the otherhand, pension funds are not part of the money supply, being simply saved and invested and not redeemable on demand, and neither are mutual funds—even the modern “open-end” variety of funds are redeemable not at par, but at market value of the stock.

7

92

America’s Great Depression

The Inflationary Factors

93

roughly semiannually thereafter. 8 Over the entire period of the boom, wefind that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight-year period. This is an average annual increase of 7.7 percent, a very sizable degree of inflation. Total bank deposits increased by 51.1 percent, savings and loan shares by 224.3 percent, and net life insurance policy reserves by 113.8 percent. The major increases took place in 1922–1923, late 1924,late 1925, and late 1927. The abrupt leveling off occurred precisely when we would expect—in the first half of 1929, when bank deposits declined and the total money supply remained almost constant. To generate the business cycle, inflation must take place via loans to business, and the 1920s fit the specifications. No expansion took place in currency in circulation, which totaled $3.68 billion at thebeginning, and $3.64 billion at the end, of the period. The entire monetary expansion took place in money-substitutes, which are products of credit expansion. Only a negligible amount of this expansion resulted from purchases of government securities: the vast bulk represented private loans and investments. (An “investment” in a corporate security is, economically, just as much a loan to businessas the more short-term credits labeled “loans” in bank statements.) U.S. government securities held by banks rose from $4.33 billion to $5.50 billion over the period, while total government securities held by life insurance companies actually fell from $1.39 to $1.36 billion. The loans of savings-and-loan associations are almost all in private real estate, and not in government obligations....