BANKS CAUSE PRICE FLUCTUATIONS 61

Many believed that the currency may become very considerably
 inflated before the export of specie, operating through convertibility,
 begins to exert its corrective influence.! And the most
common explanation of commercial crises, as we shall later see,
was that they result from the alternating expansion and contraction
 of the media of payment which occurs wherever a currency
of convertible bank notes exists.
Several writers, of whom Secretary William H. Crawford was
perhaps the first,® placed the emphasis not so much on the possibility
 of an inflation of the currency by bank notes, as on the
necessity of more intense contraction when an outflow of specie
does occur than would be required were there no credit currency.
Bank credit is based on a fractional reserve, and the loss, through
export, of a given quantity of gold accordingly calls for the contraction
 of bank credit in similar proportion to that which the
specie exported bears to the total amount of specie available for
bank reserves. Thus, under a régime of paper money involving
an element of credit, specie movements result in a shrinkage of
the media of payment to a multiple of their amount.* Hildreth
and Francis Bowen attempted, rather unconvincingly, to controvert
 this thesis that the use of credit currency gives a multiple
influence to gold exports.’
The rather meager support given in the earlier decades to the
doctrine that convertibility precludes the possibility of overissue
may well have been due in large measure to the great difficulties
in the way of actually securing the redemption of notes. This was,

! Raymond, Elements of Political Economy (1823), ii, 151; Gouge, “Convertible
Paper,” Journal of Banking (1842), p. 369; cp. p. 275; C. F. Adams, Reflections upon
the State of the Currency (1837), p. 14.
? See Chapter XVI, infra.
* Crawford, Report on the Currency (February 24, 1820), American State Papers,
Finance, iii, 499.
¢ C.F. Adams, Reflections upon the State of the Currency (1837), pp. 8, 9; Fisk,
Banking Bubble Burst (1837), p. 55; Tucker, Theory of Money and Banks (1839), pp.
184, 185; Vethake, Principles of Political Economy (1838), pp. 180, 181; Amasa
Walker, Nature and Uses of Money (1857), pp. 27, 28.
S Hildreth, Banks, Banking, and Paper Currencies (1840), pp. 1035, 106; Bowen,
Principles of Political Economy (1856), p. 454; also J. S. Ropes, “Currency, Banking,
 and Credit,” Bankers’ Magazine (1859), xiv, 166.