68 BANKING THEORIES IN UNITED STATES
he warned, is often ascribed to expansion of the currency, when
the two are in fact joint products of speculation. In seasons of
confidence, business men are at once prone to buy in large quantities,!
 and afforded the facility of doing so by liberal credit terms.
There is “a great issue of bills of exchange and promissory notes
of merchants and dealers, who thus multiply their engagements,
without immediately increasing the quantity of goods in the
market.” Many of these bills are discounted at the banks and
thus converted into bank notes, but the issue of the latter is an
alleviation of the evil, rather than an aggravation, for it aids the
sale of the goods purchased, upon which the solvency of the speculators
 depends. To be sure, the high state of confidence which
gave rise to such large purchases on credit would not have existed
 but for the possibility of converting the commercial paper
into bank currency. But the initial fault lies with the business
men, and not with the banks. “That an increased issue of bank
notes, consequent upon over trading, may stimulate prices, especially
 in the retail trade, is very probable, but not to the extent,
nor in the way many suppose.”

To summarize the discussion: It was generally accepted that
changes in the volume of convertible paper money affect prices
quite as directly as variations in the supply of specie currency.
Some held, however, that bank notes can produce no mischievous
price fluctuations because convertibility prevents their overissue.
But the advocates of this view were not very numerous. Nor was
the doctrine that bank notes admit of no excessive issue because
they are put into circulation only in accordance with the needs of
trade any more popular. For the most part, it was believed that

1 Colwell, 0p. cit., p. 567.
2 Ibid., pp. 534, 535. Like many others who attached but minor importance to
the influence of an expanding currency upon prices, Colwell viewed a contraction
of bank credit with less equanimity. To maintain the convertibility of their demand
 obligations, he repeatedly remarked, imposes upon banks the necessity of
drastically contracting the currency whenever a considerable loss of gold threatens.
A collapse of prices results. He would, presumably, attribute this to the psychological
 influence of curtailed bank accommodations rather than to the operation of
the quantity theory itself. Ibid., pp. 483 ff.