We are next told that a contracted circulation raises prices; upon what evidence or principle does this favourite dogma rest? Bank-notes really convertible are identical in value with gold; the slightest difference of value between them would instantly bring the banknotes to the issuer for gold. Nothing which happens to convertible notes can affect their value; the value of the gold must rise or fall before the notes can be touched. In fact, bank-notes may be regarded as tickets entitling the holder to obtain the gold out of the vault when he likes. An issue of notes smaller than what the public could employ and keep out in circulation means only an inconvenience really trifling; cheques and bills would be more freely used, and that would be the whole of the matter. A little more gold coin would perhaps be employed; but the quantity would be trifling, and the value of gold is determined, not in England, but in Europe generally, or rather over the whole world.

And then " to limit bank-notes is to raise the rate of interest" But how? No doubt a banker by issuing notes procures more to lend to his customers; he can grant larger discount to those who bring him commercial bills. But the funds which he thus obtains to lend he acquires from the public. His notes enable him to lend more, but what he lends the public provides; there is no increase of things to lend. The rate of interest on loans and discounts depends on the spare capital which owners all over the country cannot employ themselves, but are willing to lend to others who can make use of it in trade and industry. A diminution of bank-notes does not make this spare capital smaller; it only places less of it at the disposal of the issuing banker. Bank-notes are but paper - paper tools-not the property or capital itself. Interest does not depend on more or fewer tools of paper being used, but on wealth available for lending. Banking, with all its machinery of bank-notes, cheques, bills, and the like, is only intermediate agency; the only thing it does is - not to create property, but simply to place it in different hands. There is only one case in'which an issue of bank-notes might tell on interest, and that is in a particular spot, at a special time, and under stated circumstances, in a panic in the money market. Whether such an issue is possible, and if so, under what conditions, will be discussed in the next chapter.