Reserve credit and Treasury currency. This expansion will reflect a decline in the currency ratio like that which occurred until 1930 and was subsequently interrupted, first by a fall in net interest rates paid on deposits during the depression and then by an increase in the personal income tax during World War II. Whether this decline in the ratio will continue much further or whether there is some level considerably above zero that marks the minimum extent to which deposits can be substituted for currency, the future course of the ratio will tell.
DATA AND SOURCES
The annual figures shown in Figure 1 are for August, 1875-81, and June, 1882-1955. It would have been appropriate to use an annual average of monthly ratios for the multiple correlation reported in the text, since all the other variables refer to full years. However, such an average would have differed little from these mid-year ratios.
The numerator of the ratio is total currency outside banks and the Treasury. The denominator equals the numerator plus time and demand deposits with commercial banks held by the non-banking public. Traveler's checks of banks, which are a form of currency, are included with deposits in the basic data and cannot be separated. They are known to be small in amount, however, and cannot affect the figures appreciably. Deposits with mutual savings banks and the Postal Savings System, which are sometimes included in the money supply, were excluded.43 In any event, the major movements in the currency ratio are not significantly altered by including them.
For 1919-55, this series is shown in column 5 of Table A and equals the rate of return on deposits in column 1 minus the expected rate of loss on deposits in column 3. Earlier figures are presented in Tables B and C.
The rate of return on deposits is based on the rates of interest paid (less any charges received) by member or insured commercial banks on time and demand deposits. Since 1927, separate rates for time and demand deposits can be derived. For each year a weighted average of these rates was taken, using weights based on the distribution of the two kinds of deposits in all commercial banks on June 30. For 1919-26 no breakdown of rates on time and demand deposits is available, and an average rate paid by member banks on all deposits was used. The member-bank____________________