Banks lend by creating credit. They create the means of payment out of nothing. - Ralph George Hawtrey

When credit is expanding, the rising price level and high profits bring about a high rate of interest. When the expansion has reached, the limit permitted by the stock of gold, the rate of interest is put still higher in order to bring about a fall in the price level. When the fall in prices takes effect, a low rate of interest becomes appropriate, and when credit contraction has proceeded so far that a redundant supply of gold has accumulated, the rate of interest is depressed still lower in order to bring about a renewed rise in the price level. Thus a high rate of interest corresponds first with rising, then with falling, prices, and so synchronizes with high prices. A low rate of interest corresponds first with falling, and then with rising, prices, and so synchronizes with low prices.

The use of money does not disestablish the normal process of creating credit. Money, it is true, is always being paid into the banks by the retailers and others who receive it in the course of business, and they of course receive bank credits in return for the money thus deposited. But for the manufacturers and others who have to pay money out, credits are still created by the exchange of obligations, the banker's immediate obligation being given to his customer in exchange for the customer's obligation to repay at a future date. We shall still describe this dual operation as the creation of credit. By its means the banker creates the means of payment out of nothing, whereas when he receives a bag of money from his customer, one means of payment, a bank credit, is merely substituted for another, an equal amount of cash.

Indeed it would have been a mean-spirited course to go back on the century-old standard on account of so trifling a premium on gold, a premium which, as it turned out, the action of the market wiped out in a few months, before any of the provisions of the Act of 1819 had come into operation.