Page:Stabilizing the dollar, Fisher, 1920.djvu/225

7, D] factor in the case, the importance of which is seldom realized—the rate of bank discount.

Under almost any sensible banking system the rate of discount is one of the regulators of the volume of credit relatively to reserve. If there is undue expansion of credit relatively to the reserve, the rate of discount is raised to curb it. If, on the other hand, there is a plethora of reserve, the rate of discount is lowered to stimulate an increase of credit. As the expansion and contraction of credit are directly related to the price level, the rate of bank discount is thus concerned very vitally with the price level.

The greatest of banks, the Bank of England, is a model in this respect. It alternately defends and releases its gold reserve, which is the basic gold reserve of England, by raising and lowering the bank rate.

The report, after the Armistice, of the Lord Cunliffe Committee on Currency, Banking and Foreign Exchange shows clearly how the bank rate keeps the English price level in tune with world price levels. Speaking of this long-established system the report says: