said with truth that it is by an addition to loanable capital that the rise of the rate of interest is met and corrected.
Independently of this, however, there is a real relation, which it is indispensable to recognise, between loans and money. Loanable capital is all of it in the form of money. Capital destined directly for production exists in many forms; but capital destined for lending exists normally in that form alone. Owing to this circumstance, we should naturally expect that among the causes which affect more or less the rate of interest, would be found not only causes which act through capital, but some causes which act, directly at least, only through money.
The rate of interest bears no necessary relation to the quantity or value of the money in circulation. The permanent amount of the circulating medium, whether great or small, affects only prices; not the rate of interest. A depreciation of the currency, when it has become an accomplished fact, affects the rate of interest in no manner whatever. It diminishes indeed the power of money to buy commodities, but not the power of money to buy money. If a hundred pounds will buy a perpetual annuity of four pounds a year, a depreciation which makes the hundred pounds worth only half as much as before, has precisely the same effect on the four pounds, and cannot therefore alter the relation between the two. The greater or smaller number of counters which must be used to express a given amount of real wealth, makes no difference in the position or interests of lenders or borrowers, and therefore makes no difference in the demand and supply of loans. There is the same amount of real capital lent and borrowed; and if the capital in the hands of lenders is represented by a greater number of pounds sterling, the same greater number of pounds sterling will, in consequence of the rise of prices, be now required for the purposes to which the borrowers intend to apply them.
But though the greater or less quantity of money makes in itself no difference in the rate of interest, a change from a
