Elements of political economy by Nicholson J. Shield (Joseph Shield) 1850-1927

Author:Nicholson, J. Shield (Joseph Shield), 1850-1927
Language: eng
Format: epub
Tags: Economics
Publisher: New York, The Macmillan company; London, Macmillan & co., ltd.
Published: 1903-03-25T05:00:00+00:00

The answer to these questions involves some of the most difficult points in monetary theory, many of

which have been the subject of controversy from the time of John Law (1671-1729), whose ideas on credit involved France in the greatest speculative mania on record (1719-1720).

The key to the answer is in the position that metallic money — we may now say gold — is the necessary foundation of this vast credit superstructure, or, without metaphor, that gold imposes real limits on the inflation of prices through the influence of credit. Omitting other points of controversy, the object of the present chapter is to give an explanation of this central truth, which, in some form or other, is generally accepted. As so often happens in economic reasoning, it is necessary to anticipate to some extent principles that are developed at a later stage, — in this instance the fundamental principles of banking.

2. Gold Reserves as a Limit to Credit Prices. — The gold reserves of a national banking system may be limited and economised to a wonderful degree, as is shown especially in the United Kingdom, in which the ultimate gold reserve is held by the Bank of England.

But, in spite of all economies, a certain amount of reserve is absolutely necessary for two purposes — first, to meet a possible/or^i^ drain. Suppose that, with an inflation of credit and speculation, there is a genei*al rise in prices. A stimulus is given to imports, and so far there is also a check to exports, with the result that eventually there is an adverse trade balance that must be met by the export of gold. The pressure on the reserve of the banking system leads to a check to advances, and thus to a contraction of credit, and prices fall* As will appear

later, a foreign drain may arise from very different causes; but the cause just noticed is a real cause, as is shown in the history of commercial crises.

Though not so striking in its immediate effects, the influence of an internal drain is equally real in imposing limits to a rise of prices through an expansion of credit. Wholesale transactions, it is true, are for the most part effected by credit documents, e.g. cheques or bills of exchange ; and, as already observed, the cheque system has been extended to smaller and smaller transactions in recent years. At the same time, however, there is in every country a g^at mass of dealings which require either metallic money or some simple form of legal tender, such as bank-notes. But — to anticipate once more the principles of banking — every developed industrial country has found it desirable to place the issues of banknotes under stringent limitations. The general effect of these regulations is that a very large reserve, in proportion to the reserve against other liabilities, is kept against the issues of notes. Accordingly bank-notes can only take the place of gold to a very limited extent. Thus the aggregate amount of legal

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