The loanable fund is restricted, or controlled, not by the growth of the country’s wealth, but by the production of gold. To control it by so artificial and arbitrary a circumstance as the output of gold may seem absurd, and from a strictly logical and economic standpoint it is absurd. The loanable fund ought to be governed entirely by the production of wealth, and not by something entirely independent of wealth and having no natural or economic connection with it. I am now speaking of the loanable fund which collects in the joint stock banks. Of the other loanable fund, which collects in the Bank of England, I will speak later. What the banks lend is liquid wealth, but the amount they can lend at any given moment is governed less by the amount of wealth that is brought to them than by the amount of gold they possess. This is the gold which, we say, constitutes their reserves. Let us assume that it is the custom of the banks to keep a gold, or, rather, a legal tender reserve--it is chiefly composed of Bank of England notes--equal to fifteen per cent. of their combined pure and loan deposits. It follows that the growth of these deposits must be controlled by this fifteen per cent. reserve. This is so in practice. When the reserve begins to fall below this fifteen per cent., then the banks cease liquefying wealth and increasing the loan fund. When the reserve increases beyond the fifteen per cent., then the banks continue to liquefy the wealth. It is then said that money--some say credit--is abundant, and the banks cannot find full employment for it. When the reserve falls it is said that money--or credit--is becoming scarce. We find, therefore, that the loan-fund actually contracts when trade is active, and expands when trade is depressed. In the economic interests of the nation the fund should grow simultaneously with and commensurately with the growth of trade and commerce. In times of activity more wealth is created. It is like an abundant harvest resulting from a favourable season. In times of inactivity less wealth is created, to be likened to bad seasons and poor harvests. In times of activity there is necessarily and inevitably a greater demand for capital, that is to say, for more liquefied wealth. Bills of discount multiply, and they are taken to the banks as security for loans, in other words, to be converted into liquid form. Another phrase is, into floating capital. If they could not be so converted, the needs of the community in such times could not be met, for the bills of discount could not be used as currency, or capital, like cheques. They are discounted at the banks in order that they may be transformed into cheques, the representatives of floating or circulating capital. In this form they are able to reproduce wealth more rapidly than if they had to remain in their original form. So it is with other forms of wealth, all are taken to the banks to be converted into quickly reproductive shape.