134 POST-WAR BANKING POLICY 
fallen.* On old-fashioned theory this is a para- 
doxical situation, the simple explanation being 
that policy has prevailed over the movements of 
gold. 
RIGIDITY OF BRITISH SYSTEM 
To revert to the position in this country, I said 
just now that it makes no difference to the total of 
bank cash, which I repeat is the foundation of 
bank credit, whether the Bank of England buys 
gold or anything else. That is true; but it makes a 
great difference to the Bank of England reserve 
and to the ratio of reserve to liabilities. When the 
Bank buys gold its reserve is strengthened and the 
ratio improved; when it buys anything else the 
reserve remains unaffected and the ratio declines. 
It naturally follows that an increase of bank cash 
which arises from an influx of gold is regarded 
with equanimity and even satisfaction, while a 
proposal for an increase of bank cash specifically 
to meet trade needs would not be viewed with 
the same cordiality. 
It is here that the rigidity of the Bank of Eng- 
land system comes into view. In the United States 
credit can be readily expanded to meet trade 
requirements more or less regardless of the move- 
ment of gold, while with us such movements are 
the guiding factor. The explanation of the differ- 
ence is to be found in the far greater elasticity of 
*¥ The figures ate as follows End Nov. Increase (+) 
1924 1926 or Decrease(—) 
Monetary stock of gold, $ millions... 4,570 4,495 — 75 
Deposits of reporting member banks, 
$ millions iy eo - .. 18,061 18,732 
Index number of wholesale prices, 1913 
= 100 ve oe .e 143 148