240 ECONOMIC PRINCIPLES

advantage with its investment in the bills on the country
under discussion.
The raising of its rate of discount is the usual and principal
 means adopted by the Bank of England to protect its
reserve. In order that it may be effective, the rate charged
by other lenders, the market-rate, must follow the bank-rate.
There is a tendency for this to happen, since the funds lent
are largely deposits in banks on which the banks pay interest.
The rate they pay is conventionally 1% per cent, below bankrate,
 so that the rise in bank-rate makes deposits cost the
bankers more, and thus acts as a stimulus for them to charge
more for loans, If the loanable funds remain so plentiful
that this stimulus does not become effective, the Bank of
England can, and does, borrow part of these funds and thus
bring about a scarcity of loanable funds, which leads to a rise
in lending rates.
The charging of a premium on gold by the Bank of
France serves to protect its gold from withdrawal for export
without any notable change in discount rates, and thus the
phenomenon of a comparatively stable rate of discount in
Paris, and a changing one in London, is seen. The other
devices which assist in preserving or reconstituting the gold
reserve include the charging of a slight advance on the usual
tariff rates for foreign gold coin, and the making of loans on
especially favourable terms on condition that they are repaid
in gold, thus throwing on the borrowers the onus of meeting
the expense of procuring gold from abroad.
From the argument of this chapter, it may be seen that
the rate of exchange between two countries is practically an
expression of the relation of the price-levels in those countries.
When, as in the case of inconvertible paper currencies, the
corrective of altering the money-supply is not made operative,
the prices of the one country may, as a whole, move differently
 from those of others in commercial relations with it.
Exchanges between gold-using and silver-using countries
also illustrate the point.
Thus, for twenty years after 1873, the level of prices in
India remained, on the average, not much changed, while
prices in England, on the average, fell substantially, Indian