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。