THE THEORY OF INTEREST

ing. From these changes, rather than from a merely tech-nical banking situation, come high rates of interest.

Thus the banker registers the effect of the increasingincome stream. The reverse situation of descending in-come stream, lessened opportunity to invest, lessenedloans and deposits, tend toward idle reserves and lowinterest.

Normally the banking function should do little morein relation to the rate of interest than to transmit theeffects of the income stream. This would be substantiallythe case if we had a scientific adjustment of the ultimatesource of bankers’ reserves, the world’s supply of mone-tary gold. If this were so adjusted as to maintain a con-stant purchasing power of that gold and so of moneyunits, the banker could be trusted to adjust properly,even if unconsciously, the rates of interest to the incomesituation of the country.

Unfortunately, we do not yet have such a scientificcurrency system, but are still exposed to every wind thatblows in the gold bullion market. The consequence is thatsuperimposed on the normal credit operations are ab-normal ones by which the rate of interest is pervertedthrough the very banking machinery which should makeit normal.

Banking thus becomes, in practice, not simply a reg-ister of fundamental economic influences, not merelytheir facilitator, but a most powerful independent influ-ence. Practically, then, the banking machinery often in-terferes with, rather than transmits, the normal influenceof society’s income situation. If the gold mines becomedepleted, gold reserves become inadequate to support thegrowing inverted pyramid of credit based upon it andrequired by the expanding income of society. The banker

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