extreme cases, panic are the result, and these have serious
consequences other than financial.

The means employed for the protection of the public against inflation
are crude and inadequate. They may be grouped under the heads:
regulations regarding investments, reserves, and note issues. Under
the first head belong in the banking legislation of this country
limitations on real estate investments and on the amount that may be
loaned to a single firm or individual. Our national banking act and
most of our state banking acts prohibit banks from holding real estate
except for their own accommodation, and as a means of reimbursing
themselves for defaulted loans, and our national banking act prohibits
the taking of real estate security for loans, and many of our state
banking acts limit the amount of such security that may be held. Our
national banking act limits the amount that may be loaned to a single
firm or individual to one-tenth of the bank's capital and surplus, and
similar regulations are common in state banking legislation.

The purpose of these regulations is to confine the investments of
banks to what are called liquid securities, but they fail to evince a
proper conception on the part of their authors of what really makes a
security liquid. Apparently legislators and their advisers have felt
that if the securities held by the banks mature in short periods, or
are listed on a stock exchange, they are liquid; but such is not
necessarily the case.

Commercial paper only is really liquid, since it represents a current
commercial process which will soon be completed and the completion of
which automatically provides the means for its payment. Such paper
usually matures in short periods, but the characteristic of liquidity
results not from the date at which it is made to mature, but from the
commercial process which called it into existence and will ultimately
retire it. In this country very often paper of short maturity is so in
form only, its makers expecting to renew it, instead of pay it, at
maturity.

Bonds and stocks, even though they may be listed on a stock exchange
and daily bought and sold, are not liquid securities in the proper
sense of that term. An individual bank may be able to sell them in
case of need, but such sale is simply the transfer of the investment
to another bank or person, and not its liquidation. The security
still exists and must be paid, while its liquidation would take it out
of ex