OH. 13
To the question whether Prof. Cassel’s theory containsor implies more than this, we shall return later.
Now the association of changes in Bank-rate withchanges in the supply of bank-money is often or gener-ally a factor in the situation. But the association iscertainly not invariable ; nor is the effect on pricesproportionate to the change in the supply of money.Numerous qualifications and complications have to beintroduced, and, by the time these are complete, thetheory will really have become a different one. Atany rate I shall argue that a discussion of Bank-rateon these lines alone is incomplete, and overlooks anessential element.
2. The second strand is that which is generallyuppermost in discussions by practical bankers. Theyregard Bank-rate policy primarily, not as a means ofregulating the price-level, but as a means of protectinga country’s gold-reserves by regulating the rate offoreign lending. The point of raising Bank-rate, thatis to say, is to make it higher relatively to theinterest rates current in other international financialcentres and so turn the balance of international in-debtedness in our favour by influencing the inter-national short-loan market.
The use of Bank-rate for this purpose was developedby the Bank of England as a practical expedient inthe two decades following 1837. The first clearaccount of how it worked was given in Goschen’sForeign Exchanges , x first published in 1861. ButGoschen regarded changes in Bank-rate as being inthe main a reflection of market conditions rather than
1 See particularly chap, vi., “ Review of the so-called Correctives of theForeign Exchanges ”. Prof. Clapham, however, has drawn my attentionto a passage in Tooke’s History of Prices, vol. ii. p. 296 (published in 1838),in which Tooke attributes to a rise of bank-rate the effect of “ diminishingthe facility, consequently the extent, of negotiations of foreign securitiesand of the financial arrangements of the banks of the United States. . . .But more especially would a moderate pressure on the money market . . .have restrained the extravagance of extent to which credits were granted inAmerica upon this country.”