But why, we may ask, should not an excess of gold in the banks find its way into the hands of the general body of consumers of a nation, and so raise prices all round, instead of being sent abroad to other nations? The answer is as before, banks are private institutions, and it is no more the way of banks in ordinary humdrum times to lend money except on actually existing security, than it is of private money lenders. To begin with, they do not lend money to the wage earners, who form the bulk of a nation, at all, (that is the function rather of the pawnbroker), and when they lend it to the wealthier class of consumers as such, it is only on actually existing securities - bonds, stocks, or what not, - which can be turned into gold again when necessary at a moment's notice; but as this money lent to the consumer at the beginning of the year, say, must be repaid out of his income at the end of it, nothing so far has occurred which can permanently raise prices by increasing the demand for commodities.

On the other hand, when money is lent by banks as an accommodation to capitalists actually engaged in productive industrial undertakings (and this is a bank's normal function), again not a sovereign or bank note is lent except on quickly realizable existing securities, or by discounting bills believed by the bank to be drawn on actual business transactions, whether on fixed capital in working operation, the current 'turnover' of merchants and retailers, or what not; and more important still, the money advanced in all cases is in ordinary times meted out strictly in proportion to the business doing, or believed to be doing, by the persons who receive the loan. So far then nothing again has occurred, so far as the banks are concerned, which will occasion a greater demand for any of the commodities in which these borrowers deal (and so will tend to raise prices) than the already existing demands of the public. And therefore as the banks in their advances keep pace only with the genuinely industrial demands of the public, and do not precede them, it follows that even were their vaults stacked to the ceilings with ingots and coins, not a coin of it would leave these vaults in the ordinary way of business, except on the good faith of definitely existing business transactions, nor an additional coin of it except by an addition to these transactions.

And the conclusion follows that if prices had to wait to rise until the bankers took to scattering their gold and bank notes abroad on purely speculative credits as a means of getting rid of the excess of it in their vaults, they never would rise at all. And this gives us our first definite law or principle, namely that just as the population in the present day increases not from the miscellaneous haphazard capture of temporarily appropriated females, but from the regulated entry of children into life through the institution of marriage and the household; so in the present capitalist form of industry, which can only be mediated through the institution of banks, a rise or fall of prices does not depend primarily on the haphazard amount of gold in their vaults at all, but on the contrary, the gold in use as a medium of exchange will depend on the amount of it needed to effect the exchanges arising out of an increased or diminished volume of industrial operations; and the prices of commodities, in consequence, will be determined both primarily and ultimately by the relation of demand to supply, and of supply to demand, among the commodities themselves.

Now when this is once seen, it will be seen also that gold as a medium of exchange is like food; for just as although a certain minimum of fat-producing food is necessary to the body, still the amount of the fat does not therefore vary in proportion to the amount of the food, but depends on the amount of it utilisable by the constitutional tendency of the individual organism to fatness, or leanness, or a medium condition, respectively; all excess being thrown off as surplusage and useless excreta; so too is it with gold as a medium of exchange. For although a certain amount of it is a necessary and ultimate element in the determination of prices, still the variation in prices does not depend primarily on the amount of gold, but the amount of gold used will depend on the amount of business done in the supply and demand of the commodities themselves; the rise or fall of prices being the direct effect of the business actually transacted, and not of the supply of gold. And hence the argument on which Mr. Pigou and the orthodox economists rely as their ultimate weapon in defence of Free Trade, namely the agency of gold sliding from the back of one nation on to that of another, and making a perpetual inclined plane for itself, by tilting first one end and then the other, and so, by its own weight, raising and lowering the prices of the same commodities in each nation alternately, is a dream.

The above, as I have said, has reference only to ordinary everyday business and trade. But before we can bring the full scope of our doctrine into clearness and unity, we must refer to the part played by Gold and the Banks in those great inflations and contractions to which trade is periodically liable, and which characterise what are known as times of booming: and of panic respectively.

These periods of abnormal exaltation or depression differ from the normal course of trade in ordinary times in this, - that whereas in ordinary times the money advanced by the banks is in connection with the future extensions of those businesses which have already their firm roots in the soil of the present, and so have in themselves a guarantee for its security; the money advanced in times of inflation, on the contrary, is in connection with business enterprises which are newly sprung on the world, and whose future success or failure, in consequence, is entirely a matter of speculation which only the unknown future can determine. But although this introduces a fresh complication into our subject matter, it will be found on analysis, not to seriously invalidate the general conclusion so far reached, namely that the relative prices ruling among nations at any given time depend on the amount of actual industrial transactions done or being done at the time between them, and not on the amount of gold that is employed in negotiating these transactions; - always excepting the slight turn of the Foreign Exchanges on which we will concentrate in our next chapter.