CAN THE BANKING SYSTEM CONTROL THE PRICE LEVEL?

I reach at last the crux of the whole matter. We have endeavoured to analyse and to classify the multifarious factors which determine the price level and the means by which the central bank in a closed system, or the aggregate behaviour of central banks throughout the world, can influence and dominate the behaviour of the banking and monetary system as a whole. But when all is said and done, does it lie within the power of a central bank in actual practice to pursue a policy which will have the effect of fixing the value of money at any prescribed level? If, for example, the duty of preserving the stability of the purchasing power of money within narrow limits were to be laid upon a central bank by law, would it be possible for the central bank to fulfil this obligation in all circumstances?

Those who attribute sovereign power to the monetary authority in the governance of prices do not, of course, claim that the terms on which money is supplied is the only influence affecting the price level. To maintain that the supplies in a reservoir can be maintained at any required level by pouring enough water into it, is not inconsistent with admitting that the level of the reservoir depends on many other factors besides how much water is poured in-for example, the natural rainfall, evaporation, leakage and the habits of the users of the system.