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A TREATISE ON MONEY

BE. I

the member banks will be under the control of theCentral Bank , provided the latter can control theaggregate of its note-issue and its deposits. In thiscase the Central Bank is the conductor of the orchestraand sets the tempo. It may be, however, that theamount of deposits created by the Central Bank itselfis placed by law or custom outside its deliberatecontrol, being regulated by some rigid rule, in whichcase we might describe it as an “ automatic ” system.Finally, it may be that the Member Banks themselveshave some power, perhaps within limits, of increasingat will their deposits with the Central Bank or theamount of the notes which they draw out of its note-issuing departments. In this case, sympathetic move-ments on the part of the Member Banks will gatherstrength as they go and provide their own food inthe shape of increased reserve-resources, with theresult that it will be difficult to restrain the inherentinstability of the system.

I have endeavoured to say enough to show thatthe familiar controversy as to how and by whombank-deposits are “ created ” is a somewhat unrealone. There can be no doubt that, in the most con-venient use of language, all deposits are “ created ”by the bank holding them. It is certainly not the casethat the banks are limited to that kind of deposit, forthe creation of which it is necessary that depositorsshould come on their own initiative bringing cash orcheques. But it is equally clear that the rate atwhich an individual bank creates deposits on its owninitiative is subject to certain rules and limitations;—it must keep step with the other banks and cannotraise its own deposits relatively to the total depositsout of proportion to its quota of the banking businessof the country. Finally, the “ pace ” common to allthe Member Banks is governed by the aggregate oftheir reserve-resources.