OH. 2

BANK-MONEY

27

the others, will be governed by the average behaviourof the banks as a whole—to which average, however,it is able to contribute its quota small or large. EachBank Chairman sitting in his parlour may regardhimself as the passive instrument of outside forcesover which he has no control; yet the “ outside forces ”may be nothing but himself and his fellow-chairmen,and certainly not his depositors.

A monetary system of this kind would possess aninherent instability; for any event which tended toinfluence the behaviour of the majority of the banksin the same direction whether backwards or forwards,would meet with no resistance and would be capableof setting up a violent movement of the whole system.We shall see that actual monetary systems are notgenerally as bad as this and that checks on theirinherent instability have been devised. Neverthelessthis tendency towards sympathetic movement on thepart of the individual elements within a bankingsystem is always present to a certain extent and hasto be reckoned with. Moreover, where the conditionsfor a “ closed ” system are satisfied, as in the case ofa country having an inconvertible paper currency orin the case of the world as a whole, the tendency toinstability by reason of sympathetic movement is acharacteristic of the utmost practical importance.

In the hypothetical case just considered, we haveassumed that all payments are made by cheque andthat the member banks are under no obligation ornecessity to maintain cash reserves. These limitationswe must now remove. If some payments are madeby cash, the amount of cash so used will generallybear some proportion, more or less stable, to the amountof bank-money. In this case the creation of morebank-money by the banks as a whole will lead toa drain of cash out of the banks as a whole, whichwill set a limit to the extent that the banks canafford to create bank-money unless they are in a