CURRENCY AND PRICE MOVEMENTS 119 
credit. It is not till later that the earnings of consumers are 
affected owing to the consequent crisis or slump in trade, and 
then only if the decrease in the effective circulation has 
not been counterbalanced by the development of banking 
processes, whereby unemployed holdings are reduced to 
a minimum and the existing stock of money is made to 
circulate with much greater velocity. 
Finally, the Quantity Theory only takes into account 
the influence of the volume of currency in so far as that 
effect makes itself felt through the consumer upon goods 
already produced. It neglects the influence which an 
increase or decrease in the volume of currency in circula- 
tion may have upon production, and thereby on the supply 
of goods. But such variations are far from negligible in 
this respect. In order to see this, it is only necessary to 
observe the efforts of banks to put into circulation as 
much money as possible by inducing private individuals 
to make deposits which are used for credit operations. 
This process, so far from being unknown to economists, 
is emphasised in those passages which deal with banking, 
but its effect on production, and so also on the supply 
of goods, is generally forgotten in sections dealing with 
monetary theory.? Now under different headings and 
1 It should also be pointed out that in expounding the Quantity Theory 
its application through an increase or decrease in the amount of money has 
been considered in a market in which, by hypothesis, the money is immediately 
and entirely spent in purchases and in which any increase or decrease in the 
amount of money therefore corresponds exactly to a proportional variation in 
demand. Now it is far from true that any variations in the monetary stock of a 
country correspond to variations in the demand for goods in the same country; 
currency circulates with greater or less velocity, it will lie in larger or 
smaller quantities in the pockets of individuals or the vaults of banks, 
which sometimes increase the velocity of circulation by a liberal credit 
policy, 1.e., by lending money deposited with them, and sometimes reduce 
the effective circulation and purchasing power by contracting credit. 
2 Present-day economists have readily acknowledged that the intro- 
duction of the credit factor complicates the mechanism of trade, and several 
English writers (in particular Keynes, in his “Tract on Monetary Reform,” 
and Hawtrey in “Currency and Credit”) have analysed the question. But 
those economists who follow the method of deduction have commonly 
neglected the compensating effect of credit on supply. Moreover, however 
cautiously they may speak of the application of the Quantity Theory in a