in the first instance swells the loan market. Considered as an addition to loans it tends to lower interest, more than in its character of depreciation it tends to raise it; for the former effect depends on the ratio which the new money bears to the money lent, while the latter depends on its ratio to all the money in circulation. An increase, therefore, of currency issued by banks, tends, while the process continues, to bring down or to keep down the rate of interest A similar effect is produced by the increase of money arising from the gold discoveries; almost the whole of which, as already noticed, is, when brought to Europe, added to the deposits in banks, and consequently to the amount of loans; and when drawn out and invested in securities, liberates an equivalent amount of other loanable capital. The newly-arrived gold can only get itself invested, in any given state of business, by lowering the rate of interest; and as long as the influx continues, it cannot fail to keep interest lower than, all other circumstances being supposed the same, would otherwise have been the case.
As the introduction of additional gold and silver, which goes into the loan market, tends to keep down the rate of interest, so any considerable abstraction of them from the country invariably raises it; even when occurring in the course of trade, as in paying for the extra importations caused by a bad harvest, or for the high-priced cotton which, under the influence of the American civil war, was imported from so many parts of the world. The money required for these payments is taken in the first instance from the deposits in the hands of bankers, and to that extent starves the fund that supplies the loan market.
The rate of interest, then, depends essentially and permanently on the comparative amount of real capital offered and demanded in the way of loan; but is subject to temporary disturbances of various sorts, from increase and diminution of the circulating medium; which derangements are somewhat intricate, and sometimes in direct opposition to first appearances. All these distinctions are veiled over and confounded, by the unfortunate misapplication of language which designates the
