It varies from place to place

It varies also from time to time

Furthermore, there may arise at any time an unusual situation which causes a violent change in the demand for credit facilities. An unexpected catastrophe like a conflagration or a flood may upset completely the ordinary processes of business and may profoundly affect the need for banking facilities. Such disorders must, of course, be regarded as exceptional, and since they ordinarily imply the complete dislocation of the normal life of the community it is necessary all along the line to resort to heroic and unusual methods of readjustment.

Within the limits imposed by absolute demand for bank credit in any community there is also an important variation in the relative demand for the two forms of that credit. That is to say, there is no uniform apportionment of the demand as a whole between deposits and notes. A change in this relative demand may proceed from basic changes in the economic life of the community, or from not uncommon changes in the disposition that is to be made of the borrowed funds. At one time for example funds may be borrowed in order to purchase raw material, at another time to pay wages. The funds for the raw material would probably be wanted in the form of deposits, while those for the wages would be wanted in the form of notes.

Changes may arise also as a result of fluctuations in general confidence. Like other socio-psychological phenomena confidence is involved, more or less mysterious, and uncertain. A hasty word may shake it and a baseless rumor destroy it. Yet the whole system of credit depends upon its preservation, and the height to which that system can develop is limited by the degree and scope of this underlying confidence.

Unexpected situations affect demand

The relative demand for notes and deposits varies

Fluctuations in confidence may cause changes

A falling off in confidence lessens the acceptability of the check as an instrument of exchange and usually involves an increase in the demand for media of more general acceptability. Such a decline in confidence may grow out of a mistrust of individuals or out of doubt concerning the general business situation. Sometimes, for example, disquieting disclosures are made concerning important individuals who have widespread and ramified interests. Grave neglect of responsibilities may be shown, or mismanagement or dishonesty may be alleged. Disclosures of such a nature are almost bound to breed an infectious disquietude which may ultimately result in complete destruction of confidence. Thus some superficial observers charged ex-President Roosevelt with the responsibility for the panic of 1907, because of his campaign against corporation evils. Such a charge could not, of course, be substantiated, but the mere fact that it was raised illustrates the point to which allusion is here made. Similarly if the general outlook is unpromising, if business seems to be falling off, or if war clouds are hovering on the horizon, confidence begins to wane. People are a little afraid of trusting each other too much and in general the serviceability of credit diminishes. Hand to hand money then seems safer than checks and similar instruments. As a general proposition it may therefore be presumed to hold good that a decline in confidence carries with it some degree of shifting of demand from deposits to notes or to other forms of hand to hand money.

In normal times the confidence underlying credit is in a state of flux. It tends first in one direction and then in another according to the shifting influences that are constantly playing upon it. Sometimes, however, the disquieting factors are so overwhelming that an almost complete destruction of confidence results. If the prostration of confidence is so complete that it involves the confidence in the banks themselves then the notes of the banks may lose whatever acceptability they otherwise enjoy, and the whole surviving demand for a circulating medium and for a store of value may be thrown on gold or on the other forms of lawful money assumed to be equivalent to gold. Ordinarily, however, the shifting of demand is rarely so complete. There may be some readjustment all along the line but it is only isolated banks that suffer a complete loss of confidence.

A destruction of confidence would imply the destruction of all bank credit

Inability to meet an expanding demand or impediments in the way of issue of either form of bank credit may entail serious consequences. For those desiring credit in any form and unable to obtain it the situation is alarming. The normal conduct of their business may depend upon obtaining bank accommodation of an acceptable form. Stringency in the market for such accommodation is, therefore, bound to be costly and a source of anxiety.

Reference has frequently been made in the previous discussion to the fact that modern business depends vitally upon the use of credit. There are few business men who are not recurrently dependent upon the banks for advances. The charge for such advances in the form of the "discount rate" is one of the expenses of production and as such every business man likes to have it as low as possible. Stringency in the money market, however - as in the case of any other market - tends to raise the price paid, namely, the discount or interest rate. Necessitous individuals, pushed for funds, are forced to liquidate holdings of investments or of other forms of wealth at whatever terms can be obtained. Enforced liquidation of this kind may or may not be a good thing, but the point is that if it be sufficiently widespread, prices all along the line will tend downward. Falling prices, however, are the business man's bugbear. They make him skeptical about the market for his goods and discourage him from attempting to enlarge his output. If the stringency be of great severity the forced liquidation and the ensuing timidity and alarm may undermine general confidence and may pave the way for a disastrous crisis. Stringency in the money market is thus no minor matter. It is always accompanied by-higher money rates and by declining prices, and, if it becomes acute, may result in panic.