the same; the only difference is that bankers' assets and liabilities have both been increased by the amount of the loan. And the position is the same if the Government is the borrower. At the last meeting of the shareholders of the London City and Midland Bank, the Chairman, Sir Edward Holden, made this point very clear. His remarks had reference to the operations by which money subscribed for the great War Loan came back into circulation; but they apply with equal relevance to the operations by which banks create credit again and again on the basis of the same stock of coin or notes. Sir Edward asked his audience to think of the revolution of a wheel.

The banks (he said) place in the wheel the payments they make for those customers who have subscribed for the loans; the wheel carries these payments to the credit of the Government with the Bank of England; and the subscribers receive their securities. The Government then place in the wheel cheques in payment for commodities received and services rendered, for conveyance to their creditors, and the creditors then use the wheel to carry their cheques to the credit of their accounts with their banks which reestablishes the banks' reserves.'

The wheel is then in position for a fresh revolution. At the end of each circuit the banks hold the same amount of cash as at the commencement; the only difference in their position is that there is an increase in the amount which one group of their customers owe to them and an equivalent increase in the amount which they owe to another group of their customers. Now, the people who have borrowed from the banks have to pay a higher rate of interest than the banks have to pay to the people from whom they have borrowed. Each revolution of the wheel means, therefore, a definite profit to the banks; and, since the great aim and object of bankers is to earn the highest possible profits for their shareholders, it follows that it is to their interest to keep the wheel revolving quickly.

But we have seen that, although at the end of each circuit the cash in hand remains substantially unchanged, the liabilities of the banks have increased. It is true that their customers' indebtedness to them has also gone up; but that indebtedness is not, as a rule, immediately

realisable, while the money which the banks owe may be demanded at any time. The greatest asset which bankers have is the confidence of the public. There must never be any suspicion that banks will not be able to meet all reasonable demands made upon them for cash. It is absolutely essential, therefore, that the cash in hand shall never bear a very low percentage to the amount of the liabilities. Every revolution of Sir Edward Holden's wheel increases the profit of the banks, but it also lowers the percentage of cash reserves to liabilities. Consequently bankers try to make the wheel revolve as nearly as possible the greatest number of times that it can be made to revolve without reducing the percentage of cash to liabilities below the figure which experience has taught them to be necessary to ensure financial safety. It appears, therefore, that upon the basis of any definite sum in hard cash or notes is raised a structure of credit which may grow considerably, but to the growth of which there is nevertheless a clearly marked limit.

If the wheel of credit revolves very slowly, the percentage of the banks' reserves to their liabilities is extremely high. On the other hand, the amount which they have borrowed from some of their customers at a relatively low rate of interest and lent out to others at a relatively high rate is small. In such circumstances the profits of banks must be low. They might not even be sufficient to pay working expenses; and, in that case, banking would cease to be a profitable business. The wheel must, therefore, be made to revolve with at least sufficient speed to enable banking business to be conducted at a profit; and from this it follows that any definite amount of cash or notes in the hands of bankers must be the basis of a mass of credit of which the lower limit of size is clearly marked-just as the upper limit is clearly marked.

Bankers always keep a watchful eye on their liabilities, i.e. the credits which they create, in relation to their cash reserves. There is a high level of credit beyond which they dare not pass without jeopardising their capacity to meet all reasonable demands on them, and a low level the passing of which would mean having to conduct their business at a loss. Since the great bulk of a country's money finds its way to the banks, every

addition to or diminution of the national supply immediately makes itself felt by an increase or decrease of the banks' cash reserves. Every alteration of the quantity of gold or notes placed in circulation affects those reserves and, therefore, moves upwards or downwards the limits within which credit can be created.

Prof. Alfred Marshall has written:

...

'Human wants and desires are countless in number and very various in kind. . . . The uncivilized man, indeed, has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs, together with the variety in his methods of satisfying them. The price which people will be willing to pay for anything they want will be governed by their desire to have it, together with the amount they can afford to spend on it.'

Demand is indeterminate so long as nothing is said about price. Mere desire of possession, without power of purchase, is ineffective' demand; but, when the desire of possession is coupled with capacity to buy, the demand at once becomes effective.' Millionaires may perhaps be in a position to gratify all their wants and desires in so far as achievement can be effected by pecuniary expenditure; but in front of the great mass of the people of all races is spread an alluring vista of desirable objects which they would certainly acquire for themselves if only they could obtain possession of the necessary money. They would be willing, in varying degrees according to individual temperament, to discount the future if only they could get present possession. Consequently, every increase of spending capacity is inevitably transformed into an equivalent increase of effective demand, and national effective demand extends pari passu with national purchasing power.

If fresh currency be brought into circulation, it immediately adds to the cash reserves of bankers. We must disabuse our minds of any idea that banks are philanthropic institutions. They exist with the avowed object of earning the largest possible profits for their shareholders; and in order to do that they must always endeavour to keep the mass of their credit creations at the highest possible point consistent with their own

'Principles of Economics,' vol. i, pp. 86, 349.

financial stability. The methods they adopt are immaterial to the argument. Possibly customers may be allowed more liberal advances on the securities they wish to pawn; perhaps the rate of interest may be lowered. The method chosen will be the one which will most commend itself at the time to a body of acute business men. But, whatever method be adopted, the result will be to apply to the conversion of ineffective into effective demand all the purchasing power in the shape of the credit which the banks know from experience they can safely build up on the currency. Prices depend upon a nice adjustment of supply and demand. But, if demand increases as a result of the introduction of fresh money, equilibrium must be disturbed unless there is a corresponding increase of the supply of everything for which money is exchanged. As national wealth cannot be created by the wave of a magician's wand, supply cannot keep pace with demand, and prices have to readjust themselves on the basis of an increased demand and a not correspondingly increased supply. Nothing but the withdrawal of a portion of the currency could possibly prevent prices from going up.

But, it may be pointed out, an increase of demand encourages trade and stimulates supply; and the more powerful the stimulus, the sooner supply will overtake demand and force prices downwards again. Then, to continue the argument, prices will be restored to their former level while everybody will have more money: trade will be more active, and the standard of living will be raised. This is an extreme but by no means uncommon illustration of an argument from the particular to the general. The argument will not bear scrutiny. If the demand for any one group of products exceeds supply, there is certainly an immediate tendency for capital and labour to be diverted to the industry which offers opportunities of earning abnormal profits; and the competition which results from that diversion of capital and labour sets in operation forces which at once tend to bring down prices to the old level. At any given time, however, the demand for products is spread over all industries in that proportion which the community, by its way of spending its money, has decided to be best adapted to its requirements; and, if there be a general

increase of demand, due to enhanced spending capacity, the community will distribute that increase over all industries in very nearly the same proportion as it had distributed its original demand. As a result, prices everywhere will increase. And, the rise being general and uniform in all trades, there is no object in transferring capital and labour from one industry to another -the motive power which, as we have already seen, causes prices to react in a particular trade after a rise peculiar to that trade alone. On the contrary, industry pursues the same course as before.

The only real effect is a general alteration of the relative status of the different classes of the community. People with fixed incomes, e.g. annuitants, always suffer. Employers may add considerably to their profits by refusing for a time to increase their workmen's wages. On the other hand, their profits may be less than before if their workmen are strong enough to get a larger increase of pay than circumstances warrant. National wealth remains the same, but it is distributed in a different manner; and in the redistribution the strongest and best organised members of the community always manage to filch something from their weaker neighbours. A new and extremely serious evil arises if, as at present, high prices are experienced during a period when a nation's expenditure is greatly in excess of its income. Each upward movement of prices increases the cost of carrying on the war, accelerates the creation of debt, and magnifies the burden which posterity will have to bear. And, in the ordinary course of events, the debt will not be repaid until the value of money has again risen to something like its old normal relation to the values of all other things. We are, therefore, now being forced to borrow when money is of relatively small value, with the knowledge that we shall have to repay it when it has become a much more valuable commodity.

A great deal has been written about the theory of value. John Stuart Mill, who developed it on the lines at present accepted by orthodox economists, was so satisfied with his work, that he declared that, whatever else in Political Economy was inconstant, the theory of value at any rate was definitely settled for all time. He asserted that the price of every article is determined by