nominal value of one-third of the gold substitutes placed on the world's markets since August 1914. In the light of these figures no investigation of the causes of existing high prices can be of much value if so important a factor as the output of paper money be ignored.

Prices were at their lowest in 1896. By that time Germany and the United States had completed the conversion of their standards from silver to gold; and the fresh supplies of the more precious metal which they required had become normal. Austria and India had begun, in 1892 and 1894 respectively, an active demand for gold for conversion purposes; but after 1896 that demand very considerably decreased, and, from the same year, the output of the Transvaal mines began to grow rapidly. This combination of circumstances gives us a unique opportunity of testing by the historical method the theory of Adam Smith, Cairnes, and Bagehot, that prices will rise if the supply of gold increases at a more rapid rate than trade in general. I append tables showing the world's output of gold and the index numbers of prices in the United Kingdom from the year 1896. The latter is taken from returns published by the Board of Trade. It will be seen that from 1896 to 1914 there was a fairly steady and, in the aggregate, a considerable rise in general prices.

INDEX NUMBERS (BASED ON THE WHOLESALE PRICE OF COMMODITIES).

So far, we have not considered rapidity of circulation. It is obvious, however, that if, during any given period, a sovereign changes hands a dozen times it performs twelve times as much work as another which only changes hands once. There is also the question of credit. It is well known, not only that modern trade is conducted to a far greater extent on a credit than on a cash basis, but also that credit documents can be, and are in fact, created to such an extent that they overwhelmingly exceed in amount the total money issued in the form of coin and notes. Because of the growth and development of the modern banking system, these two factors have acquired enormous importance since the middle of last century. So great is the capacity of banks to create credit that, for the last fifty years at least, writers on Political Economy have tacitly assumed that the amount of the currency has had very little effect upon prices, since it is nothing but a relatively small part of a circulating medium which is principally composed of credit documents. Acceptance of this view has probably led us, and not only us but our Allies and enemies also, to view without apprehension the enormous masses of practically inconvertible paper money which have recently been placed on the markets. It has also blinded us to the fact that some at least of the increase of prices from which we are suffering is due to currency inflation.

Few people nowadays desire to keep in their own pockets more money than is required for immediate needs; and all shopkeepers of any importance have banking accounts into which they pay surplus cash received from day to day. The result is that the great bulk of a nation's money is stored in the banks. The primary object of bankers can be summed up in a few words: it is to borrow money from the public and to lend it out again at a higher rate of interest. No one wants to borrow money from a banker except with the object of paying it to some one else; and, when the borrower pays it away, the receiver promptly places it in his own bank. It may not be the same bank as the one which advanced the loan to the original borrower, but, whether it is or not, the net result is that the aggregate amount of cash actually held by banks remains Vol. 228.-No. 452.

F

the same; the only difference is that bankers' assets and liabilities have both been increased by the amount of the loan. And the position is the same if the Government is the borrower. At the last meeting of the shareholders of the London City and Midland Bank, the Chairman, Sir Edward Holden, made this point very clear. His remarks had reference to the operations by which money subscribed for the great War Loan came back into circulation; but they apply with equal relevance to the operations by which banks create credit again and again on the basis of the same stock of coin or notes. Sir Edward asked his audience to think of the revolution of a wheel.

The banks (he said) place in the wheel the payments they make for those customers who have subscribed for the loans; the wheel carries these payments to the credit of the Government with the Bank of England; and the subscribers receive their securities. The Government then place in the wheel cheques in payment for commodities received and services rendered, for conveyance to their creditors, and the creditors then use the wheel to carry their cheques to the credit of their accounts with their banks which reestablishes the banks' reserves.'

The wheel is then in position for a fresh revolution. At the end of each circuit the banks hold the same amount of cash as at the commencement; the only difference in their position is that there is an increase in the amount which one group of their customers owe to them and an equivalent increase in the amount which they owe to another group of their customers. Now, the people who have borrowed from the banks have to pay a higher rate of interest than the banks have to pay to the people from whom they have borrowed. Each revolution of the wheel means, therefore, a definite profit to the banks; and, since the great aim and object of bankers is to earn the highest possible profits for their shareholders, it follows that it is to their interest to keep the wheel revolving quickly.

But we have seen that, although at the end of each circuit the cash in hand remains substantially unchanged, the liabilities of the banks have increased. It is true that their customers' indebtedness to them has also gone up; but that indebtedness is not, as a rule, immediately

realisable, while the money which the banks owe may be demanded at any time. The greatest asset which bankers have is the confidence of the public. There must never be any suspicion that banks will not be able to meet all reasonable demands made upon them for cash. It is absolutely essential, therefore, that the cash in hand shall never bear a very low percentage to the amount of the liabilities. Every revolution of Sir Edward Holden's wheel increases the profit of the banks, but it also lowers the percentage of cash reserves to liabilities. Consequently bankers try to make the wheel revolve as nearly as possible the greatest number of times that it can be made to revolve without reducing the percentage of cash to liabilities below the figure which experience has taught them to be necessary to ensure financial safety. It appears, therefore, that upon the basis of any definite sum in hard cash or notes is raised a structure of credit which may grow considerably, but to the growth of which there is nevertheless a clearly marked limit.

If the wheel of credit revolves very slowly, the percentage of the banks' reserves to their liabilities is extremely high. On the other hand, the amount which they have borrowed from some of their customers at a relatively low rate of interest and lent out to others at a relatively high rate is small. In such circumstances the profits of banks must be low. They might not even be sufficient to pay working expenses; and, in that case, banking would cease to be a profitable business. The wheel must, therefore, be made to revolve with at least sufficient speed to enable banking business to be conducted at a profit; and from this it follows that any definite amount of cash or notes in the hands of bankers must be the basis of a mass of credit of which the lower limit of size is clearly marked-just as the upper limit is clearly marked.

Bankers always keep a watchful eye on their liabilities, i.e. the credits which they create, in relation to their cash reserves. There is a high level of credit beyond which they dare not pass without jeopardising their capacity to meet all reasonable demands on them, and a low level the passing of which would mean having to conduct their business at a loss. Since the great bulk of a country's money finds its way to the banks, every

while the air-waves, diverging downwards, shook windows and startled pheasants at several places within it. What heights the wave-paths attained we do not know, but they must have been least at the western end of the silent zone. For there the sound-waves returned to earth after their shortest aërial journey and the air-waves manifested their principal effects.

Several interesting problems must remain unsolved owing to our ignorance of the essential atmospheric conditions. The reason why the sound-waves and airwaves came back to the ground in the outer area can only be surmised. There was probably some change in the direction or the velocity of the wind at a height of not more than a few thousand feet. Nor is it easy to explain why the inner sound-area was so abruptly limited towards the south, and so distorted in the directions of Canterbury and Northampton. The repetition of the reports in the outer area is another feature worthy of attention. It is easy to say that the sound-waves split up and crossed the silent zone by different paths, less easy to explain what made them take their several ways.

For the solutions of these problems we must look to future investigations made in happier times. But many of the difficulties which attend such enquiries will remain. They are independent of official reticence. None can forecast an explosion nor provide us with a complete knowledge of the atmospheric structure at the moment when it shall occur. The best that we can do is to collect the facts when they present themselves, and thus provide the mathematical physicist with materials for the complete solution which he may some day give us.

CHARLES DAVISON.