LA:^D AiND WATER^. 
March 2, 1916. 
ria '• 
the line 
dcmancl 
states — what is often forgotten — that loans create bank 
credits, and if we regard all the Banks in London as one, 
the business of banking becomes little more than a matter 
ot book-keeping — the transfer of credit from one person 
to another. He then proceeds as follows : — 
The right sfde of the triangle shown here represents the 
loans of tln' whole of tli: banks, and the left side represents 
the cash Inilanoc or reserve. If, then, you draw a line from 
the left of the base and equal to the base, you get the cash 
credits in existence. If Iheli.iansand credits as represented by 
the two sides of the triangle were the only two elements which 
bankers had to take into 
consideration, then there 
would be no necessity 
for them to restrict their 
loans at all. and tradei-s 
could increase their 
.^ , ^ business and obtain loans 
-JP/ N^ ad lili'.um. Hut there is 
^/ — - — ^^ another element, and a 
most imj^wrtant one, to 
be taken into considera- 
tion, and it iti the fact 
that all the credits as 
represented by the left 
side of the triangle and 
drawn from the base, are practically payable on 
and in gold, assuming of course, that I5ank of 
England notes represent gold. 
Itverv banker must therefore, make up his mind by what 
amounts his credits are liable to be diminished, both in ordin- 
ary and extraordinary times, and when he has thus made up 
his mind, he ought to" keep that amount of available resources 
in gold, or as a means of olitainmg gold. Let us consider, 
then, (hit th^ base of the triangle consists of gold, and it 
is the ratio of the base of the triangle to the total credits 
(both created and cash credits) which restrict bankers from 
increasing undulv their loans. If business increases imduly, 
and if bankers continue to increase the loan side of the 
triangle, of course concurrently increasing tlieir credits, and 
not Ix'ing able to increase tlu-'gold base of the triangle, then 
evidently thev are getting into danger, and the only judicious 
course which "they can pursue is to curtail their loans, curtail- 
ing an undue increase of business, which curtails the credits, 
and thus re-establish the ratio. 
You here see the direct connection between trade on the 
one hand and gold on the other, and that it is not so much 
the production of gold as the amount of gold which can be 
obtained for the purpose of increasing the bankers' reserves. 
I venture to think that the above explanation will enable you 
to come to the conclusion that, if the gold base of the triangle 
cannot be increased, then the danger spot is the LO.\x. 
I want you to remember that the banking system of 
every country has its triangles, and that the principles enuncia- 
ted above, exist in every triangle of every banking system 
based on gold in the world ; that being so, it is clear, generally 
speaking," that the business of tht- world is carried on by 
means of loans, that loans create credits, that the stand-by 
for the protection of credits is gold, and that therefore gold 
controls trade. 
It may happen that the trade of one country grows by 
leaps and bounds, the loans and credits, of course, following, 
while the trade of other countries remaips normal. What, 
then takes place ? The gold base of the triangle of the lonner 
becomes too small, and it is necessary to enlarge it. How is 
the increase effected ? It is effected hj: the representative 
bank of the more prosperous country attacking the gold Imsis 
of the triangle of other countries, and the instrument by which 
th.' attack is made is the rate of discount. By this means 
L'uld will !)(' attracted from the bases of the triangles of other 
countries, and unless those bases are too great for the adequate 
protection of the credits, the representative banks of those 
countries will meet the attack bv also putting up their rates. 
But it may happen that the trade of every country has in- 
creased bv leaps and bounds, and that all loans and credits 
havCalsuincreased. Then the light biggins by c-very country 
putting up its rate, first to prevent its base being dimmished, 
and, secondly, to increase it if possible. 
Let us clearly understand the meaning of this very 
lucid and tnithfiil illustration. Our producing classes 
are being urged to dt) their best to capture German trade. 
Now no extension of trade is possible under present 
conditions except through the increase of bank loans. 
Supposing that these loans are granted and the enterprise, 
skill and industry of our peoole are rewarded by a great 
increas'j in trade. NN'hat certainty have they that they 
will Ix- permitted to kc(;p this trade ? And wliat is to 
The answers are (i) that since trade depends upon 
the credit allowed by the banks, which in turn depends 
upon the amount of the gold reserves, there is absolutely 
no certainty. (2) That the limit is gauged neither by 
the cnterpri.se of our people nor the extent of the markefK 
open for British goods, but by the same accidents, ev;^nts 
and conditions which make all our industrial operations 
so uncertain, viz : — the imports and exports of gold. 
Now London is the only free gold market in the world. 
Supposing therefore that after the War, Germany or the 
L'nited States, or both, determine to wage a relentless 
commercial war for the World's markets. Not only will 
they attack by endeavouring to undersell us. but they will 
try to cripple us in our most vulnerable spot : — viz, oju 
Gold Market. By withdrawing gold from London they 
can compel our banks to reduce their loans to British 
merchants, and our efforts at capturing German trade will 
be fruitless. And the only weapon of self-defence our 
bankers control is the Bank rate ! In a former article 1 
gave an illustration of the relation of gold to credit and 
commerce by means of this inverted pyramid. 
If we apply Sir Edward Holden's conclusion-, to th.e 
hgure of this inverted pyramid, we shall see at a glance 
how the movements of "gold affect our trade and com- 
merce. We have as before a comparatively smrll amount 
of gold supporting an enormous \olume of credit, bank 
loans, etc., on which 
rests the vast business 
interests of the nation. 
Now this volume of 
credit is supposed to 
bear a certain relation 
to the gold reserves 
held by the banks. 
Exactly what this is. 
the public can never 
tell, for the reason 
that only two banks 
in London publish their gold holdings, viz. :— the Bank 
of England and the London City and Midland Bank, of 
which Sir Edward Holden is its very able chairman. 
Of course, tliis relation necessarily varies from time 
to time, but no banker would go on indelinitely increasing 
his loans without increasing his gold reserves. And vice 
versa, if his gold reserves are shrinking the prudent 
banker will necessarily be compelled to call in that pro- 
portion of his loans corresponding to the redtiction in his 
reserves. Now the ratio of gold to bank credit m practice 
i^ supposed to vary from 10 to 20 per cent. Supposing our 
foreign competitors succeeded in withdrawing £5,000,000 
in gold from the Bank of England. The bank loans 
must be reduced to the extent of £25,000,000 to 
£50,000,000 to preserve the previously existing ratio. 
And by withdrawing this credit, of course the trade and 
commerce dependent on such loans are destroyed. 
Our Fig. 2 graphically represents the disastrous 
elTect on credit and commerce by this export of gold. 
Sir Edward Holden's Liverpool address was a very frank 
admission that the gold basis— together with our free 
gold market— places British trade and industry at the 
mercy — not only of our trade competitors but— of the 
buUion dealers" and speculators of the world! His 
illustrations show that any long continued period of 
indu.strial prosperity is made impossible by the restric- 
tions imposed by the gold-redemption system. He 
further shows (no doubt unconsciously) that the gold 
basis is a brake upon the wheels of industry, continually 
interfering with the rate of production. Here also is the 
explanation of the phenomenon that periods of prosperity 
are inevitably followed by periods of depression. 
Increased trade demands increased banking facilities 
- -increased loan.s— but the moment credit is increased to 
meet this demand, tlK; gold reserves are strained, the bank 
rate is raised, loans are called in. the brake is applied .0 
the wheels of industr\-, production is checked, employees 
are discharged, enterprise is discouraged, and the extra 
demand for nicmey and credit, which prosperous times 
retpiire, is choked off ! 
In short, our financial system destroys prosperity, 
and reduces trade to tlu^ amount of gold available. So 
that the mechanism of exchange, instead of facilitating 
trade at all times, actuallv checks it. It first stimulates 
industry, and then destroys it. The gold basis has 
bL'come both the life and death of Trade. 
