RELATION TO MONEY AND PRICES

ton 24 found such a correlation and the relationship findsexpression in practically every treatment of commercialbanking.

This relationship furthermore carries over into therates fixed on commercial paper. Mr. W. Randolph Bur-gess 25 has made a study of this relationship which heexpresses briefly as follows:

“Banks are the custodians of money in this country. When thebankers have much money to lend, money rates tend to be easy;when they have little to lend, money rates tend to be firm. Theamount a banker can lend depends upon his reserve position. There-fore, the reserve position of the banks of the country determinesshort term money rates, and the causes of changes in money ratesare to be found in the causes of changes in the reserve position ofbanks.”

Mr. Burgess presents an impressive inductive verifica-tion of this theory for the period 1904 to 1909 by com-paring the changes in the short term money rate withthe changes in the average surplus or deficit in the re-serves of New York City Clearing House AssociationBanks.

The same relationship, Mr. Burgess finds, obtains un-der the Federal Reserve System between the excess ordeficit in reserves of twenty-three New York City Banksand the closing call money rate for intra-week periodsbetween the balancing of the reserves by the Federal Re-serve Banks. Over longer periods of time, the relationshipis shown by the similarity in the movement of the open

24 Statistical Studies in the New York Money Market, Chapters VIIand VIII.

25 Factors Affecting Changes in Short Term Interest Rates, Journalof the American Statistical Association, Vol. XXII, New Series, No. 158,June, 1927, pp. 195-201.

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