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By Root 1407 0

responsibility for this belongs to the not altogether fortunate manner in which it has been formulated. At the present time, the problem of the gratuitous nature of bank credit does not appear to be a very practical issue, and since the inclination toward questions of pure theory is hardly prominent among the economists of our day it is a problem that has been much neglected. Yet, if the way in which the problem is stated is modified only a little the unjustifiability of neglecting it becomes obvious, even from the point of view of those who are only concerned with the needs of everyday life. A new issue of fiduciary media, as we have seen, indirectly gives rise to a variation in the rate of interest by causing displacements in the social distribution of income and property. But the new fiduciary media coming on to the loan market have also a direct effect on the rate of interest. They are an additional supply of present goods and consequently they tend to cause the rate of interest to fall. The connection between these two effects on the rate of interest is not obvious. Is there a force that brings both into harmony or not? It is probable in the highest degree that the increase in the supply of fiduciary media in the market in which present goods are exchanged for future goods at first exerts a stronger influence than the displacement of the social distribution which occurs as a consequence of it. Does the matter remain at that stage? Is the immediate reduction of interest which indubitably follows the increase of fiduciary media definitive or not?

Until now, the treatment that this problem has met with at the hands of economists has fallen a long way short of its importance. Its real nature has for the most part been misunderstood; and where the problem was incorrectly stated to start with, it was natural that the subsequent attempts at its solution should not have been successful. But even the few theories in which the essence of the problem has been correctly apprehended have fallen into error in their efforts to solve it.

To one group of writers, the problem appeared to offer little difficulty. From the circumstance that it is possible for the banks to reduce the rate of interest in their bank-credit business down to the limit set by their working costs, these writers thought it permissible to deduce that credit can be granted gratuitously or, more correctly, almost gratuitously. In drawing this conclusion, their doctrine implicitly denies the existence of interest. It regards interest as compensation for the temporary relinquishing of money in the broader sense—a view, indeed, of insurpassable naivety. Scientific critics have been perfectly justified in treating it with contempt; it is scarcely worth even cursory mention. But it is impossible to refrain from pointing out that these very views on the nature of interest hold an important place in popular opinion, and that they are continually being propounded afresh and recommended as a basis for measures of banking policy. [14]

No less untenable is the attitude of orthodox scientific opinion toward the problem. Orthodox scientific opinion, following in this the example set by the adherents of the banking principle, is content to question the problem's existence. In fact, it cannot do otherwise. If the opinion is held that the quantity of fiduciary media in circulation can never exceed the demand—in the sense defined above—the conclusion necessarily follows that the banks have not the ability to grant credit gratuitously. Of course, they might not exact any reimbursement or compensation beyond the prime costs of the loans granted by them. But doing this would not fundamentally change the matter, except that the profits from the issue of fiduciary media that the banks would otherwise receive themselves would now go to the benefit of the borrowers. And since, according to this view, it does not lie in the power of the banks arbitrarily to increase the quantity of fiduciary media in circulation, the limitation of the issue of these would leave only small scope for the