The notion that the Bank of England has a control over the Money Market, and can fix the rate of discount as it likes, has survived from the old days before 1844, when the Bank could issue as many notes as it liked.  But even then the notion was a mistake.  A bank with a monopoly of note issue has great sudden power in the Money Market, but no permanent power:  it can affect the rate of discount at any particular moment, but it cannot affect the average rate.  And the reason is, that any momentary fall in money, caused by the caprice of such a bank, of itself tends to create an immediate and equal rise, so that upon an average the value is not altered.

What happens is this.  If a bank with a monopoly of note issue suddenly lends (suppose) 2,000,000 L. more than usual, it causes a proportionate increase of trade and increase of prices.  The persons to whom that 2,000,000 L. was lent, did not borrow it to lock it up; they borrow it, in the language of the market, to ‘operate with’ that is, they try to buy with it; and that new attempt to buythat new demand raises prices.  And this rise of prices has three consequences.  First.  It makes everybody else want to borrow money.  Money is not so efficient in buying as it was, and therefore operators require more money for the same dealings.  If railway stock is 10 per cent dearer this year than last, a speculator who borrows money to enable him to deal must borrow 0 per cent more this year than last, and in consequence there is an augmented demand for loans.  Secondly.  This is an effectual demand, for the increased price of railway stock enables those who wish it to borrow more upon it.  The common practice is to lend a certain portion of the market value of such securities, and if that value increases, the amount of the usual loan to be obtained on them increases too.  In this way, therefore, any artificial reduction in the value of money causes a new augmentation of the demand for money, and thus restores that value to its natural level.  In all business this is well known by experience:  a stimulated market soon becomes a tight market, for so sanguine are enterprising men, that as soon as they get any unusual ease they always fancy that the relaxation is greater than it is, and speculate till they want more than they can obtain.

In these two ways sudden loans by an issuer of notes, though they may temporarily lower the value of money, do not lower it permanently, because they generate their own counteraction.  And this they do whether the notes issued are convertible into coin or not.  During the period of Bank restriction, from 1797 to 1819, the Bank of England could not absolutely control the Money Market, any more than it could after 1819, when it was compelled to pay its notes in coin.  But in the case of convertible notes there is a third effect, which works in the same direction, and works more quickly.  A rise of prices, confined to one country, tends to increase imports, because other