Front Page Titles (by Subject) Remedy for the Sensitiveness of the Money Market. - Money and the Mechanism of Exchange
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Remedy for the Sensitiveness of the Money Market. - William Stanley Jevons, Money and the Mechanism of Exchange 
Money and the Mechanism of Exchange (New York: D. Appleton and Co. 1876).
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Remedy for the Sensitiveness of the Money Market.
The present state of things in England is not to be cured by any legislation. No government can save those from trouble who will make unlimited transactions in gold, without a sure prospect of finding the gold when wanted. It is absurd to suppose that any single establishment like the Bank of England, itself becoming hardly more important than some of the great city banks, can prop up the whole fabric of English commerce.
The only measure which can restore stability to the London market, or prevent it from becoming more and more sensitive, is to secure by some means the existence of more satisfactory cash reserves, either in actual coin, or in Bank of England notes, representing deposits of coin in the Bank vaults. It would be of comparatively little use, however, for some banks to become more prudent and self-denying, while others are allowed to stretch their resources to the utmost possible point, and outbid the more prudent banks in the rates of dividend they can pay. Combined action, therefore, seems requisite, somewhat in the manner suggested by Mr. Bagehot, as regards the city bankers.
As the Bank of England pays no interest upon the eight millions which it on the average of the last four years holds as the deposits of the London bankers, there seems to be no sufficient reason why the Bank should be allowed to make a profit out of so large a sum. If held by a committee of the depositing banks it would be equally safe, almost equally available, and might, moreover, by the investment of a portion in government stock, yield a profit to the depositors. It may be asked, Why not leave each bank to hold its own reserve in its own vaults? But there would then be no security against some banks running their reserves dangerously low, and trusting to extrinsic aid in times of difficulty. One objection which I should make to the scheme as put forth is, that government stock should not be allowed to form any part of the ultimate reserve. When loanable capital is very scarce, such stock can only be converted into actual bullion by forced sales which depreciate the funds, shock public confidence, and drain away money from those who would in some other channel have employed it in the money market. Unless government stocks be sent abroad, their sale cannot possibly increase the stock of gold in the country. A cash reserve ought to be composed of cash, and although it may be very convenient to bankers to use this word in a loose and ambiguous manner, it ought not to mean, in speaking of the ultimate reserves of the country, anything but gold coin or bullion, or warrants, actually issued against coin or bullion, on the deposit system previously considered.
It has been pointed out, moreover, in an able article in the Bankers' Magazine for February, 1875, that the proposed scheme would be very insufficient if carried out merely by a narrow circle of city bankers. The association should include, in one way or another, all the more important banks in the three kingdoms. The vast trade of the country cannot be placed upon a sound basis until the force of public opinion among bankers imposes upon each member the necessity of holding a cash reserve bearing a fair proportion to the liabilities incurred. It matters little who holds the reserve, provided it actually does exist in the form of metal, and is not evaporated away by being placed at call, or deposited with other banks which make free use of it. In the absence of some common action among bankers, it is certain that the sensitiveness of the money market will increase, and it is probable that commercial crises will from time to time recur, even exceeding in their violence and disastrous consequences those whose history we know too well.
A Tabular Standard of Value
At the outset it was observed that money, besides serving as a common denominator of value, and as a medium to facilitate exchange, was usually employed likewise as the standard of value, in terms of which contracts extending over long series of years are expressed. In letting land on long or perpetual leases, in lending money to governments, corporations, and railway companies, it is the general practice to make the interest and capital repayable in legal tender gold money. But there is abundance of evidence to prove that the value of gold has undergone extensive changes. Between 1789 and 1809, it fell in the ratio of 100 to 54, or by 46 per cent., as I have shown in a paper on the Variation of Prices since 1782, read to the London Statistical Society in June, 1865. From 1809 to 1849 it rose again in the extraordinary ratio of 100 to 245, or by 145 per cent., rendering government annuities and all fixed payments, extending over this period, almost two and a half times as valuable as they were in 1809. Since 1849 the value of gold has again fallen to the extent of at least 20 per cent.; and a careful study of the fluctuations of prices, as shown either in the Annual Reviews of Trade of the Economist newspaper, or in the paper referred to above, shows that fluctuations of from 10 to 25 per cent. occur in every credit cycle.