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goods just as other remit-

Ricardo assumes, as we have just done, the case of a number of countries which have previously only had metallic currency, instituting banks with the right to issue notes “on the same principles as the Bank of England ”, i.e. with the right to issue unbacked notes (but payable on demand). If this occurred at the same time, he says, the metallic money could not be driven out, since it would have nowhere to go, and the banks would accordingly be able to add to an already adequate circulation a further amount of credit instruments. If this is admitted, he continues, the problem is solved ; if it is denied he asks how unbacked banknotes could ever originate and come into circulation. But this argument is not quite conclusive either. Banknotes might, after all, have been issued at times when the supply of currency was not adequate for business, because an increase of population or a growth of turnover required more unless prices fell. Or they might have been issued to Governments, without any liability to redeem them, and their influence on rising prices in that case is not disputed by anybody. It is remarkable that Ricardo never examined in detail by what means the banks could succeed in putting a larger amount of their stocks of money or notes into circulation and especially what effects the lowering of the loan rate would have on the demand for credit instruments and on the level of prices. This is probably due to the fact that in his day interest rates were legally fixed at a maximum of 5 per cent. As soon as the banks reached this maximum they could not restrict their credit facilities by raising the rate of interest but had to do so directly by refusing facilities to certain customers, even though they offered first-class security. During the eighteenth century, when the

Bank of England was obliged to redeem its notes in gold, this measure was often resorted to if for one reason or another the bank’s gold reserves were threatened with exhaustion. Once freed from the obligation of note redemption, however, the banks no longer needed to refuse facilities to their customers and on principle did not do so if sufficient security was offered. I t was precisely in this circumstance that Ricardo found the principal cause of the depreciation of the banknotes.