CHAPTER VI
BANKS CAUSE DISTURBING FLUCTUATIONS IN PRICES
Introductory. — The charge that banks cause price fluctuations. — The doctrine
that convertibility prevents overissue. — Criticism of this thesis. — Theory that
the manner in which notes are placed in circulation prevents overissue. — And that
the amount of notes in circulation is a result of conditions of trade. — A just adjudication
of the dispute. — Colwell’s well-considered views. — Summary.
THE most mischievous of all the heresies of early banking theory
was that which attributed to banks the power of adding to the
nation’s capital through the simple process of inflating the currency.
To this the reply was soon made that such inflation does
not affect the real capital of the community in the least; that it
signifies, in fact, but a depreciation of the monetary standard.
The direction in which this criticism leads is obvious, and it was
not long before the possibility of increasing the quantity of media
of payment through note issue, with resultant price fluctuations,
became the ground for the gravest of all the charges against
banks. The effect of temporary, rather than permanent, increase
in the volume of currency was the point at issue here.
The remarkable controversy that occurred in England during
the Restriction Period, continuing until the Bank Act of 1844 had
more or less definitely secured the victory of one of the opposing
schools, dealt almost exclusively with the matter of the influence
of banking on prices. American writers did little more than to
adopt one or another of the conflicting views to which their English
brethren were giving so exhaustive a study. In England two
different trends had been taken by those who opposed the doctrine,
later labeled the currency principle, that bank notes are
subject to mischievous overissue. The first was that convertibility
precludes the possibility of notes being issued in excess. Any
redundancy would promptly be returned to the bank. The second
was that bank notes can never be overissued, provided only that
the banks emit them in the process of discounting none but real
