1 There is, indeed, one kind of loan to which this statement does not apply, - the foreign bills held by many of the Continental central banks; but see p. 93 below.

In securing business central banks experience no difficulty when the available funds of other banks are regularly insufficient to meet the demand for loans. This seems to have been the normal condition of affairs in England during the eighteenth, and the first quarter of the nineteenth century. It continued even later in other countries, and in Russia and Japan banks are still constant borrowers at the central banks of those countries. Elsewhere, the demand of banks for loans at the central banks during periods of depression and of moderate trade activity is slight or even entirely absent. In some countries, notably in France, a large number of small bills of exchange are regularly rediscounted at the central banks in order to take advantage of the extensive collection facilities which they have provided. Particular banks, on account of circumstances peculiar to themselves, will require occasional accommodation. There will also be a more general demand from many banks in connection with the various settlements and pay-ments which come at the end of each month, and especially at the end of each half year. Finally, in the northern hemisphere there is the seasonal demand which comes every autumn in connection with the harvesting and marketing of the great agricultural staples. But these various requirements do not provide that steady volume of business which will keep a central bank in constant touch with the money market and at the same time provide earnings for necessary expenses and reasonable dividends. Central banks, therefore, find it necessary to compete with the other banks entering the open market as lenders to individual borrowers. In this competition, however, they are at a great disadvantage, and have been able to secure only a diminishing proportion of the total volume of banking business of all kinds. In part this is due to a relative increase in kinds of loans which central banks are unwilling to accept. The growth of purely domestic business in most countries has not been accompanied by a corresponding growth in the volume of commercial paper in the form of bills of exchange - the variety of paper which central banks are most ready to take. They are at a further disadvantage owing to the lack of flexibility in the terms upon which they are accustomed to accommodate borrowers. There are two official rates at most central banks - the rate of discount, and a somewhat higher rate for collateral loans. The market rates, that is the rates of other banks and brokers, are highly flexible, corresponding to every slight variation in the character of the security, the duration, and other conditions of the loan. The best paper is therefore ordinarily not taken by borrowers to the central bank. Recognizing this situation, the Bank of England for many years has followed the market rates in dealing with regular customers. The Reichs-bank adopted the same policy for a number of years, but discontinued it in 1896 largely on account of agrarian protest.

During periods of intense trade and speculative activity the demand of banks for accommodation at central banks becomes more frequent and assumes larger proportions, though it may still continue to be highly irregular. Positive action must then be taken by a central bank if it is to maintain itself in a strong position. Measures designed to prevent the depletion of its reserve, and if possible to increase it, must be taken. The central bank no longer leaves the money market free to follow its own course but endeavors to subject it to some measure of control and to confine the expansion of credit within safe limits.

A variety of devices are made use of in putting into effect the precautionary policy which is required amid the conditions which develop during periods of general prosperity and widespread optimism. Some of these devices are entirely within the direct sphere of operation of the central bank, while others require the co-operation;of the other banks or the control of their operations. The Bank of France has relied in the past largely upon the device, peculiar to itself, of a premium upon gold withdrawn for export. In Germany the Reichsbank is said to have prevented gold exports by agreement with other banks even when there would be a clear and immediate profit from the operation. Many of the central banks facilitate gold imports by advances upon gold in transit. The Bank of England can within narrow limits change its buying and selling prices for gold in bars and for foreign coin. Most of the Continental central banks regularly hold considerable quantities of foreign bills, which can be used to check gold exports and to secure gold imports. This device is the main reliance of the Bank of Belgium; it is of very great importance in the case of the Bank of Austria-Hungary; and it seems to be regarded with increasing favor at the Reichsbank. The effectiveness of the policy would largely disappear if it were universally adopted. It is noteworthy that the bulk of the foreign bills thus held are upon London, on which the rest of the world for many years has relied as the one certain and immediate resource in times of emergency.

These various devices, with the exception of the premium policy of the Bank of France to be considered later in connection with the history of that institution, are all of secondary importance, serving only temporarily and to a slight extent either to enlarge the reserve or to obstruct its depletion. They do not enable a central bank to check, much less prevent, further credit expansion which is invariably the fundamental cause of the difficulties with which the central bank is confronted.

There remains for consideration, however, one device, the sliding scale of discount, which is made use of by all central banks and which is of pre-eminent importance. This device, though in varying degree in different circumstances, is a means both of safeguarding the reserve and of moderating the influences tending toward excessive credit expansion.