330 
INTERNATIONAL TRADE 
pra 
ain 
Even the most guarded versions of monetary and banking theory 
contemplate that some influence will be exerted on credit and prices 
by the flow of specie from country to country, while very great 
movements of specie are expected to bring prompt and far-reaching 
effects. It is true that during this particular period most of the 
countries from which came the imposing mass of gold were not on 
a specie basis. In their case it was not the circulating currencies 
of paper money, but dead hoards of gold that were subjected to the 
drain — conditions under which it is necessary to apply quite a 
different theoretical analysis.! The United States, however, was 
completely and unequivocally on a gold basis. Here it would 
seem that the received doctrine should prove valid. Yet nothing 
points that way. The outflow of nearly 300 millions in the year 
1919 had no visible effect in checking the rise of prices at that 
time of violent speculative activity. On the other hand, the 
phenomenal inflow in 1921-24 — about a billion and a half of gold 
imported in four years — was coincident not with rising prices, 
but with a marked fall during the first of these years and with a 
stable level during the remainder. It was not the expected that 
took place, but quite the unexpected. 
The explanation of this “abnormal” turn of events is familiar 
enough, and in a way is easy enough. It is connected with the 
surprising course which the development of the banking system 
took, a development quite unforeseen by its founders, puzzling 
and even alarming to those who had to administer it. The 
Federal Reserve System had been established in 1913 with the 
express design, among others, of making the country’s cur- 
rency system less sensitive to gold imports and exports. Deliber- 
ately, it had been made insensitive rather than sensitive. During 
the war and the years following, legislation had been enacted for 
rendering it insensitive to an even greater degree than had been 
contemplated at the start. All the country’s banking reserves of 
gold were shifted into the coffers of the Reserve Banks. Much 
more effective toward the end thus had in view — that of accumu- 
lating a great reserve which should serve as a buffer against the 
1 Ag is more fully set forth in Part III, below.