less quantity to a greater, or from a greater to a less, may and does make a difference in it.
Suppose money to be in process of depreciation by means of an inconvertible currency, issued by a government in payment of its expenses. This fact will in no way diminish the demand for real capital on loan; but it will diminish the real capital loanable, because, this existing only in the form of money, the increase of quantity depreciates it. Estimated in capital, the amount offered is less, while the amount required is the same as before. Estimated in currency, the amount offered is only the same as before, while the amount required, owing to the rise of prices, is greater. Either way, the rate of interest must rise. So that in this case increase of currency really affects the rate of interest, but in the contrary way to that which is generally supposed; by raising, not by lowering it.
The reverse will happen as the effect of calling in, or diminishing in quantity, a depreciated currency. The money in the hands of lenders, in common with all other money, will be enhanced in value, that is, there will be a greater amount of real capital seeking borrowers; while the real capital wanted by borrowers will be only the same as before, and the money amount less: the rate of interest, therefore, will tend to fall.
We thus see that depreciation, merely as such, while in process of taking place, tends to raise the rate of interest: and the expectation of further depreciation adds to this effect; because lenders who expect that their interest will be paid, and the principal perhaps redeemed, in a less valuable currency than they lent, of course require a rate of interest sufficient to cover this contingent loss.
But this effect is more than counteracted by a contrary one, when the additional money is thrown into circulation not by purchases but by loans. In England, and in most other commercial countries, the paper currency in common use, being a currency provided by bankers, is all issued in the way of loans, except the part employed in the purchase of gold and silver. The same operation, therefore, which adds to the currency also adds to the loans: the whole increase of currency
