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• Preface
• Publisher’s Note
• Foreword [to the Original Edition]
• The Rationale of Central Banking
• Chapter I: Introduction
• Chapter II: The Development of Central Banking In England
• Chapter III: The Scottish System
• Chapter IV: The Development of Central Banking In France
• Chapter V: The Organisation of Banking In America: Decentralisation Without Freedom
• Chapter VI: The Development of Central Banking In Germany 1
• Chapter VII: Discussions On the Theory of the Subject In England and America Prior to 1848
• Chapter VIII: The Discussions In France and Belgium
• Chapter IX: The Discussions In Germany
• Chapter X: The Post-1848 Discussions In England
• Chapter XI: Discussions In America Prior to the Foundation of the Federal Reserve System
• Chapter XII: The Arguments In Favour of Central Banking Reconsidered
• Appendix: On the Working of the “automatic Mechanism” of Credit Control
• 1.: The Note–issuing Case
• 2.: The Deposit Credit Case

Appendix

On the Working of the “Automatic Mechanism” of Credit Control

In order to make clear the argument on pp. 178-184 of the last chapter we append the following arithmetical example:

1.

THE NOTE–ISSUING CASE

Assume that there are two banks (or groups of banks), A and B. Both carry on the same volume of business in the first instance. Each lends 10,000 and has 10,000 loans falling due on each settlement day.

A now increases its lending on a given day by 10,000 and all these extra loans fall due for repayment four clearing periods later, so that there are three clearings in between. Assume further (a) that if B draws gold from A, B does not immediately increase its note issue to the extent that would bring its reserve ratio back to its former level, but only to the extent necessary to replace the notes that have not come in as usual, but have stayed out in the circulation (this merely makes it possible for it to lend currently the same amount as before); (b) that A correspondingly reduces its outstanding note issue by the amount of the loss of gold, that is, by the amount of extra notes it has returned to it by B through the clearings. Then the total note issue outstanding of A and B together remains the same throughout the period under consideration.

A receives 5,000 of its own notes and 5,000 of B’s.

B receives 5,000 of its own notes and 5,000 of A’s.

Notes are therefore cleared without any transfer of gold.

A receives 5,555 of its own notes and 4,444 of B’s.

B receives 4,444 of its own notes and 5,555 of A’s.

B draws 1,111 gold from A.

A receives 5,433 of its own notes and 4,567 of B’s.

B receives 4,567 of its own notes and 5,433 of A’s.

B draws 826 gold from A.

A receives 5,341 of its own notes and 4,659 of B’s.

B receives 4,659 of its own notes and 5,341 of A’s.

B draws 682 gold from A.

A receives 10,530 of its own notes and 9,470 of B’s.

B receives 4,735 of its own notes and 5,265 of A’s.

B loses 4,205 gold to A.

2.

THE DEPOSIT CREDIT CASE

We may assume in this case that the recipients of checks paid out by the borrowers of the additional 10,000 pay these checks into their banks for collection immediately. It is reasonable to suppose, unless there is an uneven distribution of deposit business between the two banks, that half of these checks will be paid into each bank.

B receives 5,000 in checks drawn on A against which there is no counterclaim of A on B; B therefore claims 5,000 in cash from A.

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