132 
POLITICAL ECONOMY 
A few words more may be said, never 
theless, of the problem of the bullion 
reserve. One advantage of a small reserve 
is that it compels the bank or banks in 
charge of it to keep a sharp watch on 
the state of business and nip in the bud 
such an excessive issue of credit as would 
deplete it. But the small reserve has grave 
countervailing disadvantages. Foreign de 
mands have to be met out of the reserve, and 
of exports of bullion over-trading may not 
have been the cause, but as soon as the 
reserve begins to shrink, if it is small, it 
becomes necessary to raise the bank rate with 
the object of restoring it and reducing the 
claims that can be made upon it. A rise in 
the bank rate checks importations of goods, 
and relatively stimulates exports, because by 
limiting the quantity of borrowed money in 
the country it drags down home prices. It 
may occasionally happen, therefore, that 
business as a whole has to be excessively dis 
couraged by a high discount rate at a time 
when it requires encouragement rather than 
discouragement. Were the reserve very sub 
stantial, a small elevation of the bank rate 
would frequently be all that was necessary 
after foreign withdrawals of bullion, and 
possibly in many cases no alteration in the