Time deposits and price stability, 1922-1928

The failure of commodity prices in the United States to rise during the 1920's as a result of enormous imports of gold has been commonly attributed to the activity of the federal reserve system in sterilizing this gold. But such an explrenation hardly fits the facts of large increases in the reserve balances and earning assets of memeber banks in this period. Altrought earning assets are not spendeble deposits, their expansion by member banks gives rise to new spendeble deposits. A large proportion of these new deposits, however, instead of being spent on commodities became sterilized in time deposits. This growth in time deposits was in part the result of banks' investing in bonds, secured loans, and real estate loans intead of the more orthodox loans. The existance of such a reservoir into and out of which large sums of spendable funds may be moved at the will of the public creates certain difficulties for the central banking authorities who would control the price level.