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or because of legal obstacles. It is not until the demand for money increases that the bills reach the large banks-of-issue. It is clear how little justification there is for the assertion that the amount of the note issue of central European banks-of-issue is organically connected with the quantity of bills drawn in the community. Only some of the bills are discounted at the banks by the issue of fiduciary media; the others complete their term without calling bank credit into use. But the proportion between the two amounts depends entirely on the credit policy that the credit-issuing banks follow.

Bank legislation has taken particular account of the extraordinary increase in the demand for money round about quarter-day. Article two of the German Bank (Amendment) Act of June 1, 1909, extends the usual tax-free quota of notes of 550 million marks to 750 million marks for the tax accounts based on information concerning the last days of March, June, September, and December in each year, thus sanctioning a procedure that the banks had been in the habit of following for decades. On every day of settlement, the entrepreneur's demand for credit increases, and therefore the natural rate of interest also. But the credit-issuing banks have endeavored to counteract the increase in interest on loans either by not raising the rate of discount at all, or by not raising it to an extent corresponding to the increase in the natural rate of interest. Of course, the consequence of this has necessarily been to swell their circulation of fiduciary media. State banking policy has in general put no obstacles in the way of this practice of the banks, which undoubtedly helps to stabilize the objective exchange value of money. The German Bank Act of 1909 was the first which took steps to give it direct support.

7 The Influence of Fiduciary Media on Fluctuations in the Objective Exchange Value of Money

Thus there is no such thing as an automatic adjustment of the quantity of fiduciary media in circulation to fluctuations in the demand for money without an effect on the objective exchange value of money. Consequently all those arguments are ill founded which seek to deny practical significance to the quantity theory by reference to the alleged elasticity of the circulation of money. The increase and decrease of the stock of fiduciary media in a free banking system have no greater natural connection, direct or indirect, with the rise and fall of the demand for money in the broader sense, than the increase and decrease of the stock of money have with the rise and fall of the demand for money in the narrower sense. Such a connection exists only insofar as the credit banks deliberately try to bring it about. Apart from this, the only connection that can be established between the two sets of variations, which are in themselves independent of each other, is like that of the policy which, say, in a period of increasing demand for money in the broader sense aims at an increase of fiduciary media in order to counteract the rise in the objective exchange value of money which might otherwise be expected. Since it is impossible to measure fluctuations in the objective exchange value of money, even only approximately, we are not able to judge whether the increase of fiduciary media that has occurred during the last century in nearly all the countries of the world has together with the increase in the quantity of money kept pace with the increase in the demand for money in the broader sense, or fallen behind it, or outstripped it. All that we can be sure of is that at least a part of the increase in the demand for money in the broader sense has been robbed of its influence on the purchasing power of money by the increase in the quantity of money and fiduciary media in circulation.

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[1] See Smith, The Wealth of Nations, Cannan's ed. (London, 1930), vol. 2, pp. 28, 78.

[2] See Ricardo, "The High Price of Bullion a Proof of the Depredation of Bank Notes," in Works, ed. McCulloch, 2d ed. (London, 1852), pp. 263 ff.; "Proposals for an Economical