120 MODERN MONETARY SYSTEMS 
using different words, speaking sometimes of the expan- 
sion of credit and sometimes of an increase in the quantity 
of money, and looking at the question from different 
angles, it is always the same phenomenon which is under 
consideration. By accepting deposits and using them to 
give credit, banks put into circulation money that would 
not otherwise circulate. They thus increase the demand 
for goods and incidentally stimulate a rise in prices 
during a boom which is often followed by a slump. But 
also—and this is the point which is of essential importance 
in any description of credit machinery—by supplying 
manufacturers with the means of purchasing equipment, 
raw materials and labour, they foster production and there- 
fore the supply of goods and so ultimately create one of 
the factors in a fall in prices. 
Nor does the problem appear in a different light when, 
setting aside any particular mechanism for increasing the 
circulation, we come to consider the effects of such an 
increase. Whether the increase in the amount of money in 
circulation?! is produced, as described above, by the practice 
of making bank deposits, or whether a Bank of Issue in a 
country like France, where the practice of making bank 
deposits is less common than in England, issues uncovered 
notes and thus directly increases the number of monetary 
community where credit is highly developed, they reason as if its effect 
were continuous and proportional to the factor of money; out of this has 
grown the theory of purchasing power parities and of the stabilisation of 
exchanges by contracting and expanding the circulation, which will be 
discussed later. 
1 We say advisedly “in circulation,” for an increase in the amount of 
money only has an effect in so far as its circulation increases. Contrary to 
the statements contained in certain official documents, money which is 
hoarded has no effect on demand and therefore on prices. Possibly hoarding 
may increase the amount of notes which leave the vaults of banks, since they 
have to be replaced, but it does not increase the circulation in the exact 
meaning of the term. Conversely, it is not necessary that the stock of 
money should rise in order that the circulation should increase; it will be 
enough if credit is adequate to this increase in the amount of money in 
circulation. Therefore the French financial administration, in passing 
strictures on persons who hoard money and in advising the public to use 
cheques, i.c., bank deposits, to a greater extent “in order to reduce the 
circulation” are making a double mistake from the theoretical pointof view,