BANKS INCREASE THE COUNTRY’S CAPITAL 37

notes enhance a country’s wealth directly only by displacing
costly metallic currency, adds that any issue of notes beyond
that which results in the export of a like amount of specie, effects
but a depreciation of the monetary unit, and does not affect the
interest rate, which depends on the amount of loanable capital
and the demand for it.!
That banks raise the interest rate by increasing the volume of
debts was the curious theory of a writer in the late eighteenfifties,
 who brought more of stimulating originality to bear upon
the problems of banking than he did of ability. Bank notes and
deposits, he observed, are but bank debts, and are invariably
accompanied by a counter-debt on the part of the community.
“To this incubus of debt,” he added, with less cause for commendation,
 “we owe the exorbitant rate of interest, so constantly
prevailing in this country, and the constant scarcity of money
for all the purposes of life.” 3
William Douglass shared with his contemporaries the opinion
that the interest rate varies with the supply of money, but qualified
 this with a remarkable contribution to the theory of interest.
Increase in the amount of silver money lowers the interest rate,
he granted, but increase in the amount of paper money
sinks the value of the Principal, and the Lender to save himself, is obliged
to lay the growing Loss of the Principal, upon the Interest. Rhode-Island
who have much exceeded us in their Emissions, have for some Time rose
their Rate of Interest to 10 or 12 per Cent and give this very Reason for
so doing.t

While retaining, then, the fallacy of confusing money and
other forms of loanable capital, and of regarding the rate of
interest as dependent upon the supply of money, Douglass is
probably to be credited with being the first to state clearly the

! Gallatin, Considerations on the Currency and Banking of the United States
(1831), p. 23.
? Charles H. Carroll wrote no book upon money and banking, but expressed his
views at considerable length, and with frequent repetition, in a number of articles
in Hunt's Merchants’ Magazine.
Carroll, “Money and Banking,” Hunt's Merchants’ Magazine (January, 1858),
XXXViii, 36.
4 Douglass. “Essay,” etc. (1738), Reprints, iii, 243. The italics are mine.