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POLITICAL  ECONOMY

A  few  words  more  may  be  said,  nevertheless, ­
  of  the  problem  of  the  bullion
reserve.  One  advantage  of  a  small  reserve
is  that  it  compels  the  bank  or  banks  in
charge  of  it  to  keep  a  sharp  watch  on
the  state  of  business  and  nip  in  the  bud
such  an  excessive  issue  of  credit  as  would
deplete  it.  But  the  small  reserve  has  grave
countervailing  disadvantages.  Foreign  demands ­
  have  to  be  met  out  of  the  reserve,  and
of  exports  of  bullion  over-trading  may  not
have  been  the  cause,  but  as  soon  as  the
reserve  begins  to  shrink,  if  it  is  small,  it
becomes  necessary  to  raise  the  bank  rate  with
the  object  of  restoring  it  and  reducing  the
claims  that  can  be  made  upon  it.  A  rise  in
the  bank  rate  checks  importations  of  goods,
and  relatively  stimulates  exports,  because  by
limiting  the  quantity  of  borrowed  money  in
the  country  it  drags  down  home  prices.  It
may  occasionally  happen,  therefore,  that
business  as  a  whole  has  to  be  excessively  discouraged ­
  by  a  high  discount  rate  at  a  time
when  it  requires  encouragement  rather  than
discouragement.  Were  the  reserve  very  substantial, ­
  a  small  elevation  of  the  bank  rate
would  frequently  be  all  that  was  necessary
after  foreign  withdrawals  of  bullion,  and
possibly  in  many  cases  no  alteration  in  the