The protection of the reserves may also be regarded as a question of safeguarding the credit that is based on reserves. Whatever the angle from which it is viewed, however, the essential element involved in the question is the maintenance of proper relations between reserves and liabilities.

There are many interesting aspects of this question, but the important aspects may, according to the fields in which they arise, be classified under the headings "national" and "international."

Nationally the main questions of interest arising in connection with protection of reserves may be briefly stated as follows: What is the absolute importance of credit in the nation's economic life? What are the circumstances determining the proportion of the total money supply available for reserve purposes? And, lastly, what methods may be employed duly to limit the credit liabilities resting on available reserves? These may be considered in turn.

The absolute importance of credit in a country and the proportion of a country's money supply that will be available for reserve purposes involve certain common factors. The first of these is habit and tradition with respect to the use of bank credit and the use of hand to hand money. The importance of habit in this connection is obvious, and was discussed in a similar connection before. Such habits are not easily controlled or changed, and while they may be rationally explained, at any given moment they must be accepted as ultimate facts. Another factor is the organization of a country's economic life. Advanced technical development, large scale production and marketing, and large and intricately organized business units necessitate a complex credit organization, with much dependence on credit media absolutely and relatively as compared with money.

Question one of relation between reserves and liabilities

National and international aspects to be considered

The national aspects

Absolute importance of credit and the proportion of total money available for reserve purposes

Habit and tradition

A third factor is the organization of a country's monetary and banking system. With respect to the money system the question involved from the purely national point of view is not so much one of the standard that is chosen as it is of the amount, character, and relation to the standard money of the other kinds of money put into circulation. In other words, the question is: What kinds of money are legally acceptable for reserve purposes and how is this money issued and controlled? Through the manipulation of its money system a government may restrain or inflate credit, preserve it or press it to destruction.

The proper organization of the banking system is quite clearly of great significance in this connection. The more closely the units of the system are knit together, the more thoroughly is their position safeguarded; while, the greater the degree to which the public interest is emphasized, the more efficiently will the system function, and the more widespread and thorough will be the dependence that is placed upon it.

The due limitation of credit liabilities resting on reserves is itself a complicated matter. It depends, in the first place, upon the percentage of reserves necessary for the maintenance of confidence in credit. This, as has been seen, cannot be determined à priori. The reserve requirement can be arrived at with accuracy only by experience, and it varies with time and with place. But, whatever the varying requirement may be, credit safety demands that it be religiously observed.

The proper limitation of credit liabilities resting on reserves depends also on the factors determining the elasticity of credit in a country.

Organization of economic life

Organization of money and banking system

Due limitation of credit an involved question

Importance of factors determining elasticity

Just what is meant by elasticity of credit was shown in a previous chapter, and the great importance of such elasticity was also set forth. In general it was indicated that in the absence of legal restriction the expansion of both forms of bank credit responds readily to demand. Moreover, it was shown that well organized local and intercommunity clearings supply a check on the excessive expansion of credit by a single bank in a community as against all its neighbors in the clearing house, and by all the banks of one community as against the banks in other communities. In like manner reference was made to the fact that international clearings tend also to limit the expansion of credit of a nation as against other nations with which the country concerned has, directly or indirectly, intimate financial relations. But the differences between domestic and international trade are from many viewpoints so serious that safe reliance cannot be placed on an automatic checking of credit inflation through international clearings. The main difficulty to be emphasized is that such automatic readjustment results only from a fundamental weakening of reserves through the exportation of gold. Expansion of credit should be restrained before inflation stimulates gold exports. Finally, it will be recalled that, from the point of view of contraction, the difference between notes and deposits is such as usually to require special pressure on the notes to insure prompt redemption.

The factors underlying elasticity of bank credit in a country were also sufficiently elucidated. On the one hand there must be considered business methods and customs, banking development and practice, and banking organization. On the other hand there is involved the question of the public regulation of banking. The business factors may be adequate but their useful influence may be interfered with by unwise legislation. Conversely, business practice may be bad notwithstanding a wise public policy with respect to banking. The situation as a whole ought, of course, to be such that a healthy expansion of credit follows an increase of demand, but inflation must be guarded against and contraction must be insured when demand falls off.