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This is a kind of international rediscount process which involves the transfer of specie. In ordinary domestic rediscounting no such transfer is necessary because the country within which the operation takes place is operating upon a single uniform standard of value, and a credit granted, say, in New York is easily made available in Texas. The case is different when a transaction of the kind occurs between two independent banking systems which operate upon a different currency basis, so that an actual shift of resources from one to another is necessary. Something of this kind is seen in the Federal Reserve system at times of stringency. Under the Federal Reserve Act, provision has been made whereby one Federal Reserve bank which finds its reserve running down is enabled to rediscount, through the Federal Reserve Board, with other Reserve banks. The effect of the rediscount is to transfer gold from the account of the bank granting the rediscount to the account of the bank applying for it, thus cutting the reserve of the granting bank and increasing the reserve of the applying bank. This, as will be apparent to students of banking theory, Cuts down the volume of further credit supply in some parts of the country and increases it in others. The outcome is to readjust the specie resources and the outstanding banking credit of the different parts of the country, and so to bring about a better and fairer balance between them. The method is analogous to the process of acquiring specie by importing it, which is resorted to when one country goes to the banks of another for help. In studying the reserve policy of banks it is worth while to devote some attention to what is called inflation and deflation. By the former term, when used in banking discussion, is meant the undue or disproportionate increase of bank credit. By deflation may be meant either the curtailment or destruction of inflation, or the term may be used to mean the reduction of bank credit below the normal permanent level. How is it that inflation grows up, and what is its relation to the reserve question? Suppose the existence of a bank which stands alone in its community, and which is maintaining a safe business with a reasonable balance between income and outgo. We may assume that this bank has on hand at all times a reserve fund of 25 per cent of demand deposits. This bank has many calls upon it from customers about whose operations it feels some doubt. It, however, becomes gradually more liberal and makes a considerable number of loans which, although well secured, are not paid at maturity, but are renewed....