Therateofinterestis，attimes，affectedmoreorless
　　permanentlybycircumstances，thoughnotoffrequent，yetof
　　occasionaloccurrence，whichtendtoaltertheproportionbetween
　　theclassofinterest—receivingandthatofprofit—receiving
　　capitalists。Twocausesofthisdescription，operatingin
　　contraryways，havemanifestedthemselvesoflateyears，andare
　　nowproducingconsiderableeffectsinEngland。Oneis，thegold
　　discoveries。Themassesofthepreciousmetalswhichare
　　constantlyarrivingfromthegoldcountries，are，itmaysafely
　　besaid，whollyaddedtothefundsthatsupplytheloanmarket。
　　Sogreatanadditionalcapital，notdividedbetweenthetwo
　　classesofcapitalists，butaggregatedbodilytothecapitalof
　　theinterest—receivingclass，disturbsthepre—existingratio
　　betweenthetwo，andtendstodepressinterestrelativelyto
　　profit。Anothercircumstanceofstillmorerecentdate，but
　　tendingtothecontraryeffect，isthelegalizationof
　　joint—stockassociationswithlimitedliability。Theshareholders
　　intheseassociations，nowsorapidlymultiplying，aredrawn
　　almostexclusivelyfromthelendingclass;fromthosewhoeither
　　lefttheirdisposablefundsindeposit，tobelentoutby
　　bankers，orinvestedtheminpublicorprivatesecurities，and
　　receivedtheinterest。Totheextentoftheirsharesinanyof
　　thesecompanies（withthesingleexceptionofbankingcompanies）
　　theyhavebecometradersontheirowncapital;theyhaveceased
　　tobelenders，andhaveeven，inmostcases，passedovertothe
　　classofborrowers。Theirsubscriptionshavebeenabstractedfrom
　　thefundswhichfeedtheloanmarket，andtheythemselveshave
　　becomecompetitorsforashareoftheremainderofthosefunds:
　　ofallwhich，thenaturaleffectisariseofinterest。Andit
　　wouldnotbesurprisingif，foraconsiderabletimetocome，the
　　ordinaryrateofinterestinEnglandshouldbearahigher
　　proportiontothecommonrateofmercantileprofit，thanithas
　　borneatanytimesincetheinfluxofnewgoldsetin。（3*）
　　Thedemandforloansvariesmuchmorelargelythanthe
　　supply，andembraceslongercyclesofyearsinitsaberrations。A
　　timeofwar，forexample，isaperiodofunusualdraftsonthe
　　loanmarket。TheGovernment，atsuchtimes，generallyincursnew
　　loans，andastheseusuallysucceedeachotherrapidlyaslongas
　　thewarlasts，thegeneralrateofinterestiskepthigherinwar
　　thaninpeace，withoutreferencetotherateofprofit，and
　　productiveindustryisstintedofitsusualsupplies。Duringpart
　　ofthelastwarwithFrance，theGovernmentcouldnotborrow
　　undersixpercent，andofcourseallotherborrowershadtopay
　　atleastasmuch。Nordoestheinfluenceoftheseloans
　　altogetherceasewhentheGovernmentceasestocontractothers;
　　forthosealreadycontractedcontinuetoaffordaninvestmentfor
　　agreatlyincreasedamountofthedisposablecapitalofthe
　　country，whichifthenationaldebtwerepaidoff，wouldbeadded
　　tothemassofcapitalseekinginvestment，and（independentlyof
　　temporarydisturbance）couldnotbut，tosomeextent，permanently
　　lowertherateofinterest。
　　ThesameeffectoninterestwhichisproducedbyGovernment
　　loansforwarexpenditure，isproducedbythesuddenopeningof
　　anynewandgenerallyattractivemodeofpermanentinvestment。
　　Theonlyinstanceofthekindinrecenthistoryonascale
　　comparabletothatofthewarloans，istheabsorptionofcapital
　　intheconstructionofrailways。Thiscapitalmusthavebeen
　　principallydrawnfromthedepositsinbanks，orfromsavings
　　whichwouldhavegoneintodeposit，andwhichweredestinedtobe
　　ultimatelyemployedinbuyingsecuritiesfrompersonswhowould
　　haveemployedthepurchasemoneyindiscountsorotherloansat
　　interest:ineithercase，itwasadraftonthegeneralloan
　　fund。Itis，infact，evident，thatunlesssavingsweremade
　　expresslytobeemployedinrailwayadventure，theamountthus
　　employedmusthavebeenderivedeitherfromtheactualcapitalof
　　personsinbusiness，orfromcapitalwhichwouldhavebeenlent
　　topersonsinbusiness。Inthefirstcase，thesubtraction，by
　　cripplingtheirmeans，obligesthemtobelargerborrowers;in
　　thesecond，itleaveslessforthemtoborrow;ineithercaseit
　　equallytendstoraisetherateofinterest。
　　4。Ihave，thusfar，consideredloans，andtherateof
　　interest，asamatterwhichconcernscapitalingeneral，in
　　directoppositiontothepopularnotion，accordingtowhichit
　　onlyconcernsmoney。Inloans，asinallothermoney
　　transactions，Ihaveregardedthemoneywhichpasses，onlyasthe
　　medium，andcommoditiesasthethingreallytransferred——the
　　realsubjectofthetransaction。Andthisis，inthemain，
　　correct:becausethepurposeforwhich，intheordinarycourseof
　　affairs，moneyisborrowed，istoacquireapurchasingpowerover
　　commodities。Inanindustriousandcommercialcountry，the
　　ulteriorintentioncommonlyis，toemploythecommoditiesas
　　capital:buteveninthecaseofloansforunproductive
　　consumption，asthoseofspendthrifts，oroftheGovernment，the
　　amountborrowedistakenfromapreviousaccumulation，which
　　wouldotherwisehavebeenlenttocarryonproductiveindustry;
　　itis，therefore，somuchsubtractedfromwhatmaycorrectlybe
　　calledtheamountofloanablecapital。
　　Thereis，however，anotunfrequentcase，inwhichthe
　　purposeoftheborrowerisdifferentfromwhatIhavehere
　　supposed。Hemayborrowmoney，neithertoemployitascapital
　　nortospenditunproductively，buttopayapreviousdebt。In
　　thiscase，whathewantsisnotpurchasingpower，butlegal
　　tender，orsomethingwhichacreditorwillacceptasequivalent
　　toit。Hisneedisspecificallyformoney，notforcommoditiesor
　　capital。Itisthedemandarisingfromthiscause，whichproduces
　　almostallthegreatandsuddenvariationsoftherateof
　　interest。Suchademandformsoneoftheearliestfeaturesofa
　　commercialcrisis。Atsuchaperiod，manypersonsinbusinesswho
　　havecontractedengagements，havebeenpreventedbyachangeof
　　circumstancesfromobtainingintimethemeansonwhichthey
　　calculatedforfulfillingthem。Thesemeanstheymustobtainat
　　anysacrifice，orsubmittobankruptcy;andwhattheymusthave
　　ismoney。Othercapital，howevermuchofittheymaypossess，
　　cannotanswerthepurposeunlessmoneycanfirstbeobtainedfor
　　it;while，onthecontrary，withoutanyincreaseofthecapital
　　ofthecountry，amereincreaseofcirculatinginstrumentsof
　　credit（betheyofaslittleworthforanyotherpurposeasthe
　　boxofonepoundnotesdiscoveredinthevaultsoftheBankof
　　Englandduringthepanicof1825）willeffectuallyservetheir
　　turnifonlytheyareallowedtomakeuseofit。Anincreased
　　issueofnotes，intheformofloans，isallthatisrequiredto
　　satisfythedemand，andputanendtotheaccompanyingpanic。But
　　although，inthiscase，itisnotcapital，orpurchasingpower，
　　thattheborrowerneeds，butmoneyasmoney，itisnotonlymoney
　　thatistransferredtohim。Themoneycarriesitspurchasing
　　power，withitwhereveritgoes;andmoneythrownintotheloan
　　marketreallydoes，throughitspurchasingpower，turnoveran
　　increasedportionofthecapitalofthecountryintothe
　　directionofloans。Thoughmoneyalonewaswanted，capital
　　passes;anditmaystillbesaidwithtruththatitisbyan
　　additiontoloanablecapitalthattheriseoftherateof
　　interestismetandcorrected。
　　Independentlyofthis，however，thereisarealrelation，
　　whichitisindispensabletorecognise，betweenloansandmoney。
　　Loanablecapitalisallofitintheformofmoney。Capital
　　destineddirectlyforproductionexistsinmanyforms;but
　　capitaldestinedforlendingexistsnormallyinthatformalone。
　　Owingtothiscircumstance，weshouldnaturallyexpectthatamong
　　thecauseswhichaffectmoreorlesstherateofinterest，would
　　befoundnotonlycauseswhichactthroughcapital，butsome
　　causeswhichact，directlyatleast，onlythroughmoney。
　　Therateofinterestbearsnonecessaryrelationtothe
　　quantityorvalueofthemoneyincirculation。Thepermanent
　　amountofthecirculatingmedium，whethergreatorsmall，affects
　　onlyprices;nottherateofinterest。Adepreciationofthe
　　currency，whenithasbecomeanaccomplishedfact，affectsthe
　　rateofinterestinnomannerwhatever。Itdiminishesindeedthe
　　powerofmoneytobuycommodities，butnotthepowerofmoneyto
　　buymoney。Ifahundredpoundswillbuyaperpetualannuityof
　　fourpoundsayear，adepreciationwhichmakesthehundredpounds
　　worthonlyhalfasmuchasbefore，haspreciselythesameeffect
　　onthefourpounds，andcannotthereforealtertherelation
　　betweenthetwo。Thegreaterorsmallernumberofcounterswhich
　　mustbeusedtoexpressagivenamountofrealwealth，makesno
　　differenceinthepositionorinterestsoflendersorborrowers，
　　andthereforemakesnodifferenceinthedemandandsupplyof
　　loans。Thereisthesameamountofrealcapitallentand
　　borrowed;andifthecapitalinthehandsoflendersis
　　representedbyagreaternumberofpoundssterling，thesame
　　greaternumberofpoundssterlingwill，inconsequenceofthe
　　riseofprices，benowrequiredforthepurposestowhichthe
　　borrowersintendtoapplythem。
　　Butthoughthegreaterorlessquantityofmoneymakesin
　　itselfnodifferenceintherateofinterest，achangefroma
　　lessquantitytoagreater，orfromagreatertoaless，mayand
　　doesmakeadifferenceinit。Supposemoneytobeinprocess
　　ofdepreciationbymeansofaninconvertiblecurrency，issuedby
　　agovernmentinpaymentofitsexpenses。Thisfactwillinnoway
　　diminishthedemandforrealcapitalonloan;butitwill
　　diminishtherealcapitalloanable，because，thisexistingonly
　　intheformofmoney，theincreaseofquantitydepreciatesit。
　　Estimatedincapital，theamountofferedisless，whilethe
　　amountrequiredisthesameasbefore。Estimatedincurrency，the
　　amountofferedisonlythesameasbefore，whilethemount
　　required，owingtotheriseofprices，isgreater。Eitherway，
　　therateofinterestmustrise。Sothatinthiscaseincreaseof
　　currencyreallyaffectstherateofinterest，butinthecontrary
　　waytothatwhichisgenerallysupposed;byraising，notby
　　loweringit。
　　Thereversewillhappenastheeffectofcallingin，or
　　diminishinginquantity，adepreciatedcurrency。Themoneyinthe
　　handsoflenders，incommonwithallothermoney，willbe
　　enhancedinvalue，thatis，therevillbeagreateramountof
　　realcapitalseekingborrowers;whiletherealcapitalwantedby
　　borrowerswillbeonlythesameasbefore，andthemoneymount
　　less:therateofinterest，therefore，willtendtofall。
　　Wethusseethatdepreciation，merelyassuch，whilein
　　processoftakingplace，tendstoraisetherateofinterest:and
　　theexpectationoffurtherdepreciationaddstothiseffect;
　　becauselenderswhoexpectthattheirinterestwillbepaidand
　　theprincipalperhapsredeemed，inalessvaluablecurrencythan
　　theylent，ofcourserequirearateofinterestsufficientto
　　coverthiscontingentloss。
　　Butthiseffectismorethancounteractedbyacontraryone，
　　whentheadditionalmoneyisthrownintocirculationnotby
　　purchasesbutbyloans。InEngland，andinmostothercommercial
　　countries，thepapercurrencyincommonuse，beingacurrency
　　providedbybankers，isallissuedinthewayofloans，except
　　thepartemployedinthepurchaseofgoldandsilver。Thesame
　　operation，therefore，whichaddstothecurrencyalsoaddstothe
　　loans:thewholeincreaseofcurrencyinthefirstinstance
　　swellstheloanmarket。Consideredasanadditiontoloansit
　　tendstolowerinterest，morethaninitscharacterof
　　depreciationittendstoraiseit;fortheformereffectdepends
　　ontheratiowhichthenewmoneybearstothemoneylent，while
　　thelatterdependsonitsratiotoallthemoneyincirculation。
　　Anincrease，therefore，ofcurrencyissuedbybanks，tends，while
　　theprocesscontinues，tobringdownortokeepdowntherateof
　　interest。Asimilareffectisproducedbytheincreaseofmoney
　　arisingfromthegolddiscoveries;almostthewholeofwhich，as
　　alreadynoticed，is，whenbroughttoEurope，addedtothe
　　depositsinbanks，andconsequentlytothemountofloans;and
　　whendrawnoutandinvestedinsecurities，liberatesan
　　equivalentamountofotherloanablecapital。Thenewly—arrived
　　goldcanonlygetitselfinvested，inanygivenstateof
　　business，byloweringtherateofinterest;andaslongasthe
　　influxcontinues，itcannotfailtokeepinterestlowerthan，all
　　othercircumstancesbeingsupposedthesame，wouldotherwisehave
　　beenthecase。
　　Astheintroductionofadditionalgoldandsilver，whichgoes
　　intotheloanmarket，tendstokeepdowntherateofinterest，so
　　anyconsiderableabstractionofthemfromthecountryinvariably
　　raisesit;evenwhenoccurringinthecourseoftrade，asin
　　payingfortheextraimportationscausedbyabadharvest，orfor
　　thehigh—pricedcottonwhich，undertheinfluenceoftheAmerican
　　civilwar，wasimportedfromsomanypartsoftheworld。The
　　moneyrequiredforthesepaymentsistakeninthefirstinstance
　　fromthedepositsinthehandsofbankers，andtothatextent
　　starvesthefundthatsuppliestheloanmarket。
　　Therateofinterest，then，dependsessentiallyand
　　permanentlyonthecomparativeamountofrealcapitalofferedand
　　demandedinthewayofloan;butissubjecttotemporary
　　disturbancesofvarioussorts，fromincreaseanddiminutionof
　　thecirculatingmedium;whichderangementsaresomewhat
　　intricate，andsometimesindirectoppositiontofirst
　　appearances。Allthesedistinctionsareveiledoverand
　　confounded，bytheunfortunatemisapplicationoflanguagewhich
　　designatestherateofinterestbyaphrase（"thevalueof
　　money"）whichproperlyexpressesthepurchasingpowerofthe
　　circulatingmedium。Thepublic，evenmercantile，habitually
　　fanciesthateaseinthemoneymarket，thatis，facilityof
　　borrowingatlowinterest，isproportionaltothequantityof
　　moneyincirculation。Notonly，therefore，arebanknotes
　　supposedtoproduceeffectsascurrency，whichtheyonlyproduce
　　asloans，butattentionishabituallydivertedfromeffects
　　similarinkindandmuchgreaterindegree，whenproducedbyan
　　actiononloanswhichdoesnothappentobeaccompaniedbyany
　　actiononthecurrency。
　　Forexample，inconsideringtheeffectproducedbythe
　　proceedingsofbanksinencouragingtheexcessesofspeculation，
　　animmenseeffectisusuallyattributedtotheirissuesofnotes，
　　butuntiloflatehardlyanyattentionwaspaidtothemanagement
　　oftheirdeposits;thoughnothingismorecertainthanthattheir
　　imprudentextensionsofcredittakeplacemorefrequentlyby
　　meansoftheirdepositsthanoftheirissues。"Thereisno
　　doubt，"saysMr。Tooke，（4*）"thatbanks，whetherprivateorjoint
　　stock，may，ifimprudentlyconducted，ministertoanundue
　　extensionofcreditforthepurposeofspeculations，whetherin
　　commodities，orinovertradinginexportsorimports，orin
　　buildingorminingoperations，andthattheyhavesoministered
　　notunfrequently，andinsomecasestoanextentruinousto
　　themselves，andwithoutultimatebenefittothepartiestowhose
　　viewstheirresourcesweremadesubservient。"But，"supposingall
　　thedepositsreceivedbyabankertobeincoin，ishenot，just
　　asmuchastheissuingbanker，exposedtotheimportunityof
　　customers，whomitmaybeimpolitictorefuse，forloansor
　　discounts，ortobetemptedbyahighinterest？andmayhenotbe
　　inducedtoencroachsomuchuponhisdepositsastoleavehim，
　　undernotimprobablecircumstances，unabletomeetthedemandsof
　　hisdepositors？Inwhatrespect，indeed，wouldthecaseofa
　　bankerinaperfectlymetalliccirculation，differfromthatofa
　　Londonbankeratthepresentday？Heisnotacreatorofmoney，
　　hecannotavailhimselfofhisprivilegeasanissuerinaidof
　　hisotherbusiness，andyettherehavebeenlamentableinstances
　　ofLondonbankersissuingmoneyinexcess。"
　　Inthediscussions，too，whichhavebeenforsomanyyears
　　carriedonrespectingtheoperationsoftheBankofEngland，and
　　theeffectsproducedbythoseoperationsonthestateofcredit，
　　thoughfornearlyhalfacenturythereneverhasbeena
　　commercialcrisiswhichtheBankhasnotbeenstrenuouslyaccused
　　eitherofproducingorofaggravating，ithasbeenalmost
　　universallyassumedthattheinfluenceofitsactswasfeltonly
　　throughtheamountofitsnotesincirculation，andthatifit
　　couldbepreventedfromexercisinganydiscretionastothatone
　　featureinitsposition，itwouldnolongerhaveanypowerliable
　　toabuse。Thisatleastisanerrorwhich，aftertheexperience
　　oftheyear1847，wemayhopehasbeencommittedforthelast
　　time。Duringthatyearthehandsofthebankwereabsolutely
　　tied，initscharacterofabankofissue;butthroughits
　　operationsasabankofdeposititexercisedasgreatan
　　influence，orapparentinfluence，ontherateofinterestandthe
　　stateofcredit，asatanyformerperiod;itwasexposedtoas
　　vehementaccusationsofabusingthatinfluence;andacrisis
　　occurred，suchasfewthatprecededithadequalled，andnone
　　perhapssurpassed，inintensity。
　　5。Beforequittingthegeneralsubjectofthischapter，I
　　willmaketheobviousremark，thattherateofinterest
　　determinesthevalueandpriceofallthosesaleablearticles
　　whicharedesiredandbought，notforthemselves，butforthe
　　incomewhichtheyarecapableofyielding。Thepublicfunds，
　　sharesinjoint—stockcompanies，andalldescriptionsof
　　securities，areatahighpriceinproportionastherateof
　　interestislow。Theyaresoldatthepricewhichwillgivethe
　　marketrateofinterestonthepurchasemoney，withallowancefor
　　alldifferencesintheriskincurred，orinanycircumstanceof
　　convenience。Exchequerbills，forexample，usuallysellata
　　higherpricethanconsols，proportionallytotheinterestwhich
　　theyyield;because，thoughthesecurityisthesame，yetthe
　　formerbeingannuallypaidoffatparunlessrenewedbythe
　　holder，thepurchaser（unlessobligedtosellinamomentof
　　generalemergency），isinnodangeroflosinganythingbythe
　　resale，exceptthepremiumhemayhavepaid。
　　Thepriceofland，mines，andallotherfixedsourcesof
　　income，dependsinlikemannerontherateofinterest。Land
　　usuallysellsatahigherprice，inproportiontotheincome
　　affordedbyit，thanthepublicfunds，notonlybecauseitis
　　thought，eveninthiscountry，tobesomewhatmoresecure，but
　　becauseideasofpoweranddirtyareassociatedwithits
　　possession。Butthesedifferencesareconstant，ornearlyso;and
　　inthevariationsofprice，landfollows，caeterisparibus，the
　　permanent（thoughofcoursenotthedaily）variationsoftherate
　　ofinterest。Wheninterestislow，landwillnaturallybedear;
　　wheninterestishigh，landwillbecheap。Thelastlongwar
　　presentedastrikingexceptiontothisrule，sincethepriceof
　　landaswellastherateofinterestwasthenremarkablyhigh。
　　Forthis，however，therewasaspecialcause。Thecontinuanceof
　　averyhighaveragepriceofcornformanyyears，hadraisedthe
　　rentoflandevenmorethaninproportiontotheriseofinterest
　　andfallofthesellingpriceoffixedincomes。Haditnotbeen
　　forthisaccident，chieflydependentontheseasons，landmust
　　havesustainedasgreatadepreciationinvalueasthepublic
　　funds:whichitprobablywoulddo，wereasimilarwartobreak
　　outhereafter;tothesignaldisappointmentofthoselandlords
　　andfarmerswho，generalizingfromthecasualcircumstancesofa
　　remarkableperiod，solongpersuadedthemselvesthatastateof
　　warwaspeculiarlyadvantageous，andastateofpeace
　　disadvantageous，towhattheychosetocalltheinterestsof
　　agriculture。
　　NOTES:
　　1。Supra，bookii，ch。xv。section1。
　　2。Idonotincludeinthegeneralloanfundofthecountrythe
　　capitals，largeastheysometimesare，whicharehabitually
　　employedinspeculativelybuyingandsellingthepublicfundsand
　　othersecurities。Itistruethatallwhobuysecuritiesadd，for
　　thetime，tothegeneralamountofmoneyonloan，andlowerpro
　　tantotherateofinterest。ButasthepersonsIspeakofbuy
　　onlytosellagainatahigherprice，theyarealternatelyinthe
　　positionoflendersandofborrowers:theiroperationsraisethe
　　rateofinterestatonetime，exactlyasmuchastheyloweritat
　　another。Likeallpersonswhobuyandsellonspeculation，their
　　functionistoequalize，nottoraiseorlower，thevalueofthe
　　commodity。Whentheyspeculateprudently，theytemperthe
　　fluctuationsofprice;whenimprudently，theyoftenaggravate
　　them。
　　3。Tothecauseofaugmentationintherateofinterest，
　　mentionedinthetext，mustbeaddedanother，forciblyinsisted
　　onbytheauthorofanablearticleintheEdinburghReviewfor
　　January，1865;theincreasedandincreasingwillingnesstosend
　　capitalabroadforinvestment。Owingtothevastlyaugmented
　　facilitiesofaccesstoforeigncountries，andtheabundant
　　informationincessantlyreceivedfromthem，foreigninvestments
　　haveceasedtoinspiretheterrorthatbelongstotheunknown;
　　capitalflows，withoutmisgiving，toanyplacewhichaffordsan
　　expectationofhighprofit;andtheloanmarketofthewhole
　　commercialworldisrapidlybecomingone。Therateofinterest，
　　therefore，inthepartoftheworldoutofwhichcapitalmost
　　freelyflows，cannotanylongerremainsomuchinferiortothe
　　rateelsewhere，asithashithertobeen。
　　4。InquiryintotheCurrencyPrinciple，ch。xiv。
　　ThePrinciplesofPoliticalEconomybyJohnStuartMillBook3:DistributionChapter24
　　OftheRegulationofaConvertiblePaperCurrency1。Thefrequentrecurrenceduringthelasthalfcenturyofthepainfulseriesofphenomenacalledacommercialcrisis，hasdirectedmuchoftheattentionbothofeconomistsandofpracticalpoliticianstothecontrivingofexpedientsforaverting，orattheleast，mitigatingitsevils。AndthehabitwhichgrewupduringtheeraoftheBankrestriction，ofascribingallalternationsofhighandlowpricestotheissuesofbanks，hascausedinquirersingeneraltofixtheirhopesofsuccessinmoderatingthosevicissitudes，uponschemesfortheregulationofbanknotes。Aschemeofthisnature，afterhavingobtainedthesanctionofhighauthorities，sofarestablisheditselfinthepublicmind，astobe，withgeneralapprobation，convertedintoalaw，attherenewaloftheCharteroftheBankofEnglandin1844:andtheregulationisstillinforce，thoughwithagreatabatementofitspopularity，andwithitsprestigeimpairedbythreetemporarysuspensions，ontheresponsibilityoftheexecutive，theearliestlittlemorethanthreeyearsafteritsenactment。Itisproperthatthemeritsofthisplanfortherelationofaconvertiblebanknotecurrencyshouldbehereconsidered。BeforetouchinguponthepracticalprovisionsofSirRobertPeel’sActof1844，Ishallbrieflystatethenature，andexaminethegrounds，ofthetheoryonwhichitisfounded。
　　Itisbelievedbymany，thatbanksofissueuniversally，ortheBankofEnglandinparticular，haveapowerofthrowingtheirnotesintocirculation，andtherebyraisingprices，arbitrarily;
　　thatthispowerisonlylimitedbythedegreeofmoderationwithwhichtheythinkfittoexerciseit;thatwhentheyincreasetheirissuesbeyondtheusualmount，theriseofprices，thusproduced，generatesaspiritofspeculationincommodities，whichcarriespricesstillhigher，andultimatelycausesareactionandrecoil，mountinginextremecasestoacommercialcrisis;andthateverysuchcrisiswhichhasoccurredinthiscountrywithinmercantilememory，hasbeeneitheroriginallyproducedbythiscause，orgreatlyaggravatedbyit。Tothisextremelengththecurrencytheoryhasnotbeencarriedbytheeminentpoliticaleconomistswhohavegiventoamoremoderateformofthesametheorythesanctionoftheirnames。ButIhavenotoverstatedtheextravaganceofthepopularversion;whichisaremarkableinstancetowhatlengthsafavouritetheorywillhurry，nottheclosetstudentswhosecompetencyinsuchquestionsisoftentreatedwithsomuchcontempt，butmenoftheworldandofbusiness，whopiquethemselvesonthepracticalknowledgewhichtheyhaveatleasthadampleopportunitiesofacquiring。Notonlyhasthisfixedideaofthecurrencyastheprimeagentinthefluctuationsofprice，madethemshuttheireyestothemultitudeofcircumstanceswhich，byinfluencingtheexpectationofsupply，arethetruecausesofalmostallspeculations，andofalmostallfluctuationsofprice;butinordertobringaboutthechronologicalagreementrequiredbytheirtheory，betweenthevariationsofbankissuesandthoseofprices，theyhaveplayedsuchfantastictrickswithfactsanddatesaswouldbethoughtincredible，ifaneminentpracticalauthorityadnottakenthetroubleofmeetingthem，onthegroundofmerehistory，withanelaborateexposure。Irefer，asallconversantwiththesubjectmustbeaware，toMrTooke’sHistoryofPrices。TheresultofMrTooke’sinvestigationswasthusstatedbyhimself，inhisexaminationbeforetheCommons’CommitteeontheBankCharterquestionin1832;andtheevidencesofitstandrecordedinhisbook:"Inpointoffact，andhistorically，asfarasmyresearcheshavegone，ineverysignalinstanceofariseorfallofprices，theriseorfallhaspreceded，andthereforecouldnotbetheeffectof，anenlargementorcontractionofthebankcirculation。"
　　Theextravaganceofthecurrencytheorists，inattributingalmosteveryriseorfallofpricestoanenlargementorcontractionoftheissuesofbanknotes，hasraisedup，byreaction，atheorytheextremeoppositeoftheformer，ofwhich，inscientificdiscussion，themostprominentrepresentativesareMrTookeandMrFullarton。Thiscounter—theorydeniestobanknotes，solongastheirconvertibilityismaintained，anypowerwhateverofraisingprices，andtobanksanypowerofincreasingtheircirculation，exceptasaconsequenceof，andinproportionto，anincreaseofthebusinesstobedone。ThislaststatementissupportedbytheunanimousassurancesofallthecountrybankerswhohavebeenexaminedbeforesuccessiveParliamentaryCommitteesonthesubject。Theyallbeartestimonythat（inthewordsofMrFullarton（1*））"theamountoftheirissuesisexclusivelyregulatedbytheextentoflocaldealingsandexpenditureintheirrespectivedistricts，fluctuatingwiththefluctuationsofproductionandprice，andthattheyneithercanincreasetheirissuesbeyondthelimitswhichtherangeofsuchdealingsandexpenditureprescribes，withoutthecertaintyofhavingtheirnotesimmediatelyreturnedtothem，nordiminishthem，butatanalmostequalcertaintyofthevacancybeingfilledupfromsomeothersource。"fromthesepremisesitisarguedbyMrTookeandMrFullarton，thatbankissues，sincetheycannotbeincreasedinamountunlesstherebeanincreaseddemand，cannotpossiblyraiseprices;cannotencouragespeculation，noroccasionacommercialcrisis;andthattheattempttoguardagainstthatevilbyanartificialmanagementoftheissueofnotes，isofnoeffectfortheintendedpurpose，andliabletoproduceotherconsequencesextremelycalamitous。
　　2。Asmuchofthisdoctrineasrestsupontestimony，andnotuponinference，appearstomeincontrovertible。Igivecompletecredencetotheassertionofthecountrybankers，veryclearlyandcorrectlycondensedintoasmallcompassinthesentencejustquotedfromMrFullarton。Iamconvincedthattheycannotpossiblyincreasetheirissueofnotesinanyothercircumstancesthanthosewhicharetherestated。Ibelieve，also，thatthetheory，groundedbyMrFullartonuponthisfact，containsalargeportionoftruth，andisfarnearertobeingtheexpressionofthewholetruththananyformwhateverofthecurrencytheory。
　　Therearetwostatesofthemarkets:onewhichmaybetermedthequiescentstate，theothertheexpectant，orspeculativestate。Thefirstisthatinwhichthereisnothingtendingtoengenderinanyconsiderableportionofthemercantilepublicadesiretoextendtheiroperations。Theproducersproduceandthedealerspurchaseonlytheirusualstocks，havingnoexpectationofamorethanusuallyrapidventforthem。Eachpersontransactshisordinaryamountofbusiness，andnomore;orincreasesitonlyincorrespondencewiththeincreaseofhiscapitalorconnexion，orwiththegradualgrowthofthedemandforhiscommodity，occasionedbythepublicprosperity。Notmeditatinganyunusualextensionoftheirownoperations，producersanddealersdonotneedmorethantheusualaccommodationfrombankersandothermoneylenders;andasitisonlybyextendingtheirloansthatbankersincreasetheirissues，nonebutamomentaryaugmentationofissuesisinthesecircumstancespossible。Ifatacertaintimeoftheyearaportionofthepublichavelargerpaymentstomakethanatothertimes，orifanindividual，undersomepeculiarexigency，requiresanextraadvance，theymayapplyformorebanknotes，andobtainthem;butthenoteswillnomoreremainincirculation，thantheextraquantityofBankofEnglandnoteswhichareissuedonceineverythreemonthsinpaymentofthedividends。Thepersontowhom，afterbeingborrowed，thenotesarepaidaway，hasnoextrapaymentstomake，andnopeculiarexigency，andhekeepsthembyhimunused，orsendsthemintodeposit，orrepayswiththemapreviousadvancemadetohimbysomebanker:inanycasehedoesnotbuycommoditieswiththem，sincebythesuppositionthereisnothingtoinducehimtolayinalargerstockofcommoditiesthanbefore。Evenifwesuppose，aswemaydo，thatbankerscreateanartificialincreaseofthedemandforloansbyofferingthembelowthemarketrateofinterest，thenotestheyissuewillnotremainincirculation;forwhentheborrower，havingcompletedthetransactionforwhichheavailedhimselfofthem，haspaidthemaway，thecreditorordealerwhoreceivesthem，havingnodemandfortheimmediateuseofanextraquantityofnotes，sendsthemintodeposit。Inthiscase，therefore，therecanbenoaddition，atthediscretionofbankers，tothegeneralcirculatingmedium:anyincreaseoftheirissueseithercomesbacktothem，orremainsidleinthehandsofthepublic，andnorisetakesplaceinprices。
　　Butthereisanotherstateofthemarkets，strikinglycontrastedwiththepreceding，andtothisstateitisnotsoobviousthatthetheoryofMrTookeandMrFullartonisapplicable;namely，whenanimpressionprevails，whetherwellfoundedorgroundless，thatthesupplyofoneormoregreatarticlesofcommerceislikelytofallshortoftheordinaryconsumption。Insuchcircumstancesallpersonsconnectedwiththosecommoditiesdesiretoextendtheiroperations。Theproducersorimportersdesiretoproduceorimportalargerquantity，speculatorsdesiretolayinastockinordertoprofitbytheexpectedriseofprice，andholdersofthecommoditydesireadditionaladvancestoenablethemtocontinueholding。
　　Alltheseclassesaredisposedtomakeamorethanordinaryuseoftheircredit，andtothisdesireitisnotdeniedthatbankersveryoftenundulyadminister。Effectsofthesamekindmaybeproducedbyanythingwhich，excitingmorethanusualhopesofprofit，givesincreasedbrisknesstobusiness。forexample，asuddenforeigndemandforcommoditiesonalargescale，ortheexpectationofit;suchasoccurredontheopeningofSpanishAmericatoEnglishtrade，andhasoccurredonvariousoccasionsinthetradewiththeUnitedStates。Suchoccurrencesproduceatendencytoariseofpriceinexportablearticles，andgeneratespeculations，sometimesofareasonable，and（aslongasalargeproportionofmeninbusinesspreferexcitementtosafety）
　　frequentlyofanirrationalorimmoderatecharacter。Insuchcasesthereisadesireinthemercantileclasses，orinsomeportionofthem，toemploytheircredit，inamorethanusualdegree，asapowerofpurchasing。Thisisastateofbusinesswhich，whenpushedtoanextremelength，bringsontherevulsioncalledacommercialcrisis;anditisaknownfactthatsuchperiodsofspeculationhardlyeverpassoffwithouthavingbeenattended，duringsomepartoftheirprogress，byaconsiderableincreaseofbanknotes。
　　Tothis，however，itisrepliedbyMrTookeandMrFullarton，thattheincreaseofthecirculationalwaysfollowsinsteadofprecedingtheriseofprices，andisnotitscause，butitseffect。Thatinthefirstplace，thespeculativepurchasesbywhichpricesareraised，arenoteffectedbybanknotesbutbycheques，orstillmorecommonlyonasimplebookcredit:andsecondly，eveniftheyweremadewithbanknotesborrowedforthatexpresspurposefrombankers，thenotes，afterbeingusedforthatpurpose，would，ifnotwantedforcurrenttransactions，bereturnedintodepositbythepersonsreceivingthem。InthisI
　　fullyconcur，andIregarditasproved，bothscientificallyandhistorically，thatduringtheascendingperiodofspeculation，andaslongasitisconfinedtotransactionsbetweendealers，theissuesofbanknotesareseldommateriallyincreased，norcontributeanythingtothespeculativeriseofprices。Itseemstome，however，thatthiscannolongerbeaffirmedwhenspeculationhasproceededsofarastoreachtheproducers。
　　Speculativeordersgivenbymerchantstomanufacturersinducethemtoextendtheiroperations，andtobecomeapplicantstobankersforincreasedadvances，whichifmadeinnotes，arenotpaidawaytopersonswhoreturnthemintodeposit，butarepartiallyexpendedinpayingwages，andpassintothevariouschannelsofretailtrade，wheretheybecomedirectlyeffectiveinproducingafurtherriseofprices。Icannotbutthinkthatthisemploymentofbanknotesmusthavebeenpowerfullyoperativeonpricesatthetimewhennotesofoneandtwopoundsvaluewerepermittedbylaw。Admitting，however，thattheprohibitionofnotesbelowfivepoundshasnowrenderedthispartoftheiroperationcomparativelyinsignificantbygreatlylimitingtheirapplicabilitytothepaymentofwages，thereisanotherformoftheirinstrumentalitywhichcomesintoplayinthelatterstagesofspeculation，andwhichformstheprincipalargumentofthemoremoderatesupportersofthecurrencytheory。Thoughadvancesbybankersareseldomdemandedforthepurposeofbuyingonspeculation，theyarelargelydemandedbyunsuccessfulspeculatorsforthepurposeofholdingon;andthecompetitionofthesespeculatorsforashareoftheloanablecapital，makeseventhosewhohavenotspeculated，moredependentthanbeforeonbankersfortheadvancestheyrequire。Betweentheascendingperiodofspeculationandtherevulsion，thereisanintervalextendingtoweeksandsometimesmonths，ofstrugglingagainstafall。Thetidehavingshownsignsofturning，thespeculativeholdersareunwillingtosellinafallingmarket，andinthemeantimetheyrequirefundstoenablethemtofulfileventheirordinaryengagements。Itisthisstagethatisordinarilymarkedbyaconsiderableincreaseintheamountofthebanknotecirculation。Thatsuchanincreasedoesusuallytakeplace，isdeniedbynoone。AndIthinkitmustbeadmittedthatthisincreasetendstoprolongthedurationofthespeculations;thatitenablesthespeculativepricestobekeptupforsometimeaftertheywouldotherwisehavecollapsed;andthereforeprolongsandincreasesthedrainofthepreciousmetalsforexportation，whichisaleadingfeatureofthisstageintheprogressofacommercialcrisis:thecontinuanceofwhichdrainatlastendangeringthepowerofthebankstofulfiltheirengagementofpayingtheirnotesondemand，theyarecompelledtocontracttheircreditmoresuddenlyandseverelythanwouldhavebeennecessaryiftheyhadbeenpreventedfromproppingupspeculationbyincreasedadvances，afterthetimewhentherecoilhadbecomeinevitable。
　　3。Topreventthisretardationoftherecoil，andultimateaggravationofitsseverity，istheobjectoftheschemeforregulatingthecurrency，ofwhichLordOverstone，MrNorman，andColonelTorrens，werethefirstpromulgators，andwhichhas，inaslightlymodifiedform，beenenactedintolaw。（2*）
　　Accordingtotheschemeinitsoriginalpurity，theissueofpromissorynotesforcirculationwastobeconfinedtoonebody。
　　IntheformadoptedbyParliament，allexistingissuerswerepermittedtoretainthisprivilege，butnoneweretobehereafteradmittedtoit，evenintheplaceofthosewhomightdiscontinuetheirissues:and，forallexcepttheBankofEngland，amaximumofissueswasprescribed，onascaleintentionallylow。TotheBankofEnglandnomaximumwasfixedfortheaggregateamountofitsnotes，butonlyfortheportionissuedonsecurities，orinotherwords，onloan。Thesewerenevertoexceedacertainlimit，fixedinthefirstinstanceatfourteenmillions。（3*）Allissuesbeyondthatamountmustbeinexchangeforbullion;ofwhichtheBankisboundtopurchase，atatriflebelowtheMintvaluation，anyquantitywhichisofferedtoit，givingitsnotesinexchange。Inregard，therefore，toanyissueofnotesbeyondthelimitoffourteenmillions，theBankispurelypassive，havingnofunctionbutthecompulsoryoneofgivingitsnotesforgoldat3l。17s。9d。，andgoldforitsnotesat3l。17s。101/2d。，wheneverandbywhomsoeveritiscalledupontodoso。
　　Theobjectforwhichthismechanismisintendedis，thatthebank—notecurrencymayvaryinitsamountattheexacttimes，andintheexactdegree，inwhichapurelymetalliccurrencywouldvary。Andthepreciousmetalsbeingthecommoditythathashithertoapproachednearesttothatinvariabilityinallthecircumstancesinfluencingvalue，whichfitsacommodityforbeingadoptedasamediumofexchange，itseemstobethoughtthattheexcellenceoftheActof1844isfullymadeout，ifunderitsoperationtheissuesconforminalltheirvariationsofquantity，andtherefore，asisinferred，ofvalue，tothevariationswhichwouldtakeplaceinacurrencywhollymetallic。
　　Now，allreasonableopponentsoftheAct，incommonwithitssupporters，acknowledgeasanessentialrequisiteofanysubstituteforthepreciousmetals，thatitshouldconformexactlyinitspermanentvaluetoametallicstandard。Andtheysay，thatsolongasitisconvertibleintospecieondemand，itdoesandmustsoconform。Butwhenthevalueofametallicorofanyothercurrencyisspokenof，therearetwopointstobeconsidered;thepermanentoraveragevalue，andthefluctuations。
　　Itistothepermanentvalueofametalliccurrency，thatthevalueofapapercurrencyoughttoconform。Butthereisnoobviousreasonwhyitshouldberequiredtoconformtothefluctuationstoo。Theonlyobjectofitsconformingatall，issteadinessofvalue;andwithrespecttofluctuationsthesolethingdesirableisthattheyshouldbethesmallestpossible。Nowthefluctuationsinthevalueofthecurrencyaredetermined，notbyitsquantity，whetheritconsistofgoldorofpaper，butbytheexpansionsandcontractionsofcredit。Todiscover，therefore，whatcurrencywillconformthemostnearlytothepermanentvalueofthepreciousmetals，wemustfindunderwhatcurrencythevariationsincreditareleastfrequentandleastextreme。Now，whetherthisobjectisbestattainedbyametalliccurrency（andthereforebyapapercurrencyexactlyconforminginquantitytoit）ispreciselythequestiontobedecided。Ifitshouldprovethatapapercurrencywhichfollowsallthefluctuationsinquantityofametallic，leadstomoreviolentrevulsionsofcreditthanonewhichisnotheldtothisrigidconformity，itwillfollowthatthecurrencywhichagreesmostexactlyinquantitywithametalliccurrencyisnotthatwhichadheresclosesttoitsvalue;thatistosay，itspermanentvalue，withwhichaloneagreementisdesirable。
　　Whetherthisisreallythecaseornotwewillnowinquire。
　　Andfirst，letusconsiderwhethertheActeffectsthepracticalobjectchieflyreliedoninitsdefencebythemoresoberofitsadvocates，thatofarrestingspeculativeextensionsofcreditatanearlierperiod，withalessdrainofgold，andconsequentlybyamilderandmoregradualprocess。Ithinkitmustbeadmittedthattoacertaindegreeitissuccessfulinthisobject。
　　Iamawareofwhatmaybeurged，andreasonablyurged，inoppositiontothisopinion。Itmaybesaid，thatwhenthetimearrivesatwhichthebanksarepressedforincreasedadvancestoenablespeculatorstofulfiltheirengagements，alimitationoftheissueofnoteswillnotpreventthebanks，ifotherwisewilling，frommakingtheseadvances;thattheyhavestilltheirdepositsasasourcefromwhichloansmaybemadebeyondthepointwhichisconsistentwithprudenceasbankers;andthateveniftheyrefusedtodoso，theonlyeffectwouldbe，thatthedepositsthemselveswouldbedrawnouttosupplythewantsofthedepositors;whichwouldbejustasmuchanadditiontothebanknotesandcoininthehandsofthepublic，asifthenotesthemselveswereincreased。Thisistrue，andisasufficientanswertothosewhothinkthattheadvancesofbankstopropupfailingspeculationsareobjectionablechieflyasanincreaseofthecurrency。Butthemodeinwhichtheyarereallyobjectionable，isasanextensionofcredit。If，insteadofincreasingtheirdiscounts，thebanksallowtheirdepositstobedrawnout，thereisthesameincreaseofcurrency（forashorttimeatleast），butthereisnotanincreaseofloans，atthetimewhenthereoughttobeadiminution。Iftheydoincreasetheirdiscounts，notbymeansofnotes，butattheexpenseofthedepositsalone，theirdeposits（properlysocalled）aredefiniteandexhaustible，whilenotesmaybeincreasedtoanyamount，or，afterbeingreturned，maybere—issuedwithoutlimit。Itistruethatabank，ifwillingtoaddindefinitelytoitsliabilities，hasthepowerofmakingitsnominaldepositsasunlimitedafundasitsissuescouldbe;ithasonlytomakeitsadvancesinabookcredit，whichiscreatingdepositsoutofitsownliabilities，themoneyforwhichithasmadeitselfresponsiblebecomingadepositinitshands，tobedrawnagainstbycheques;
　　andthechequeswhendrawnmaybeliquidated（eitheratthesamebankorattheclearinghouse）withouttheaidofnotes，byameretransferofcreditfromoneaccounttoanother。Iapprehenditischieflyinthiswaythatundueextensionsofcredit，inperiodsofspeculation，arecommonlymade。Butthebanksarenotlikelytopersistinthiscoursewhenthetidebeginstoturn。Itisnotwhentheirdepositshavealreadybeguntoflowout，thattheyarelikelytocreatedepositaccountswhichrepresent，insteadoffundsplacedintheirhands，freshliabilitiesoftheirown。Butexperienceprovesthatextensionofcredit，whenintheformofnotes，goesonlongaftertherecoilfromover—speculationhascommenced。Whenthismodeofresistingtherevulsionismadeimpossible，anddepositsandbookcreditsareleftastheonlysourcesfromwhichundueadvancescanbemade，therateofinterestisnotsooften，orsolong，preventedfromrising，afterthedifficultiesconsequentonexcessofspeculationbegintobefelt。Onthecontrary，thenecessitywhichthebanksfeelofdiminishingtheiradvancestomaintaintheirsolvency，whentheyfindtheirdepositsflowingout，andcannotsupplythevacantplacebytheirownnotes，acceleratestheriseoftherateofinterest。Speculativeholdersarethereforeobligedtosubmitearliertothatlossbyresale，whichcouldnothavebeenpreventedfromcomingonthematlast:therecoilofpricesandcollapseofgeneralcredittakeplacesooner。
　　Toappreciatetheeffectswhichthisaccelerationofthecrisishasinmitigatingitsintensity，letusadvertmoreparticularlytothenatureandeffectsofthatleadingfeatureintheperiodjustprecedingthecollapse，thedrainofgold。Ariseofpricesproducedbyaspeculativeextensionofcredit，evenwhenbanknoteshavenotbeentheinstrument，isnotthelesseffectual（ifitlastslongenough）inturningtheexchanges:andwhentheexchangeshaveturnedfromthiscause，theycanonlybeturnedback，andthedrainofgoldstopped，eitherbyafallofpricesorbyariseoftherateofinterest。Afallofpriceswillstopitbyremovingthecausewhichproducedit，andbyrenderinggoodsamoreadvantageousremittancethangold，evenforpayingdebtsalreadydue。Ariseoftherateofinterest，andconsequentfallofthepricesofsecurities，willaccomplishthepurposestillmorerapidly，byinducingforeigners，insteadoftakingawaythegoldwhichisduetothem，toleaveitforinvestmentwithinthecountry，andevensendgoldintothecountrytotakeadvantageoftheincreasedrateofinterest。Ofthislastmodeofstoppingadrainofgold，theyear1847
　　affordedsignalexamples。Butuntiloneofthesetwothingstakesplaceuntileitherpricesfall，ortherateofinterestrises—nothingcanpossiblyarrest，orevenmoderate，theeffluxofgold。Now，neitherwillpricesfallnorinterestrise，solongastheundulyexpandedcreditisupheldbythecontinuedadvancesofbankers。Itiswellknownthatwhenadrainofgoldhassetin，evenifbanknoteshavenotincreasedinquantity，itisuponthemthatthecontractionfirstfalls，thegoldwantedforexportationbeingalwaysobtainedfromtheBankofEnglandinexchangeforitsnotes。Butunderthesystemwhichpreceded1844，theBankofEngland，beingsubjected，incommonwithotherbanks，totheimportunitiesforfreshadvanceswhicharecharacteristicofsuchatime，could，andoftendid，immediatelyre—issuethenoteswhichhadbeenreturnedtoitinexchangeforbullion。Itisagreaterror，certainly，tosupposethatthemischiefofthisre—issuechieflyconsistedinpreventingacontractionofthecurrency。Itwas，however，quiteasmischievousasithaseverbeensupposedtobe。Aslongasitlasted，theeffluxofgoldcouldnotcease，sinceneitherwouldpricesfallnorinterestrisewhiletheseadvancescontinued。Prices，havingrisenwithoutanyincreaseofbanknotes，couldwellhavefallenwithoutadiminutionofthem;buthavingriseninconsequenceofanextensionofcredit，theycouldnotfallwithoutacontractionofit。Aslong，therefore，astheBankofEnglandandtheotherbanksperseveredinthiscourse，solonggoldcontinuedtoflowout，untilsolittlewasleftthattheBankofEngland，beingindangerofsuspensionofpayments，wascompelledatlasttocontractitsdiscountssogreatlyandsuddenlyastoproduceamuchmoreextremevariationintherateofinterest，inflictmuchgreaterlossanddistressonindividuals，anddestroyamuchgreateramountoftheordinarycreditofthecountry，thananyrealnecessityrequired。