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By Root 1211 0

for in the banking legislation of the seventies is treated as sacrosanct. The possibility of changing these provisions by substituting, say, a cover of one-quarter or one-fifth for that of one-third is never contemplated. The letter of the law has to be preserved while the assumptions on which it was based are being altered. When money substitutes in the form of deposits are augmented without provision being made for a monetary cover, the quantity of fiduciary media is increased. This is further demonstrative of the fact that even that part of the argument of the banking principle which was theoretically correct was unable to exert any influence on practical politics. Tooke and Fullarton repeatedly point out that there is no fundamental difference between notes and deposits (which they speak of as checks). Their modern successors do not dare to draw the logical conclusion from this incontrovertible fact; they stand for the differential treatment of fiduciary media according to whether they are notes or deposits. [28]

If part of the gold in circulation in Germany and part of the banknotes had been replaced by fiduciary media in the shape of deposits, this might have led to a diminution of the rate of interest only insofar as the gold that had become superfluous was employed for obtaining capital goods from abroad. The replacement of notes without a metal backing by deposits without a metal backing is of no consequence in this connection. Only so far as notes covered by metal were replaced by deposits not covered by metal would there be any increase of the circulation of fiduciary media at the expense of that of money certificates, by which gold would be released for export to other countries. But the same result could have been attained by a diminution of the ratio between cover and banknotes; nevertheless this simpler device was generally held to be impracticable, in spite of the fact that it was precisely as safe or precisely as dangerous as the other. If the gold dispensed with in this way had been exported, then the stock of other economic goods at the disposal of the German nation would have increased correspondingly. This might have led to a fall, if only a trifling one, in the rate of interest, assuming that the quantity of gold expelled from Germany was absorbed abroad with a general fall in the objective exchange value of money. But the German champions of an extension of the checks and clearing system did not think of that when making proposals of this sort. They recommended the extension of the circulation of fiduciary media in the form of deposits because they believed that this would reduce the number and extent of those applications that made demands upon the credit that the Reichsbank granted in the form of notes; and they hoped that this would lead to a reduction in the rate of interest on loans. There is a serious error in all this. The level of the rate of interest on loans depends not on the amount of the national stock of money in the wider sense, nor, of course, on the amount of fiduciary media in circulation. It was not the legal regulations concerning cover that forced the Reichsbank to aim at a discount policy that would prevent any tension from arising between the natural rate of interest and the discount rate, but its inevitable concern for its own solvency.

In all those countries whose credit system is organized on the so-called single-reserve basis so that the stock of money needed for the redemption on demand of money substitutes is administered by a central bank on which in times of emergency all the credit-issuing banks must ultimately fall back, it is the directors of this bank who are the first to notice the outward flow of gold; and it is they who must be the first to take steps to stop it, since its first effects are directed against the institution for which they are responsible. Therefore, the raising of the discount rate by the central bank usually precedes the increased severity of lending terms in the open market and in the dealings between the private banks and their clients. And