9. The Gold-Exchange Standard29

Peel’s Bank Act, and the ideas on which it was based, still sets the standard by which credit policy is ultimately governed nowadays; even those countries that do not follow the example of the English bank legislation, or do not follow it so faithfully as others, have yet not been able to withstand its influence altogether. Here we are confronted with a strange phenomenon.

The most obscure and incorrect concepts are current concerning the nature of the discount policy of the central banks-of-issue. Often the principal task of the banks is said to be the protection of their cash reserves, as if it would pay them to make sacrifices for such an aim as that.

4. The Gold-Premium Policy11

The legal provisions which have permitted the Bank of France to follow the gold-premium policy were absent in those countries which until recently were on a pure gold standard.

In the returns of the Bank of France it has been repeatedly asserted that the gold-premium policy was directed only against those who wished to withdraw gold from the bank for speculative purposes.

The endeavors of the central banks-of-issue to build up as large gold reserves as possible have led to the employment of devices which have just the opposite appearance to that of the premium policy and the systems similar to it. By raising the price they paid for gold imports the banks used to try to diminish the cost to the importer of importing gold and so to reduce the lower gold point.

In Germany, where before the war relatively very much gold was in circulation, there was a constantly growing endeavor to withdraw it from circulation by an extension of check and clearing transactions and to divert it into the vaults of the Reichsbank. The aim of this propaganda is set forth in a circular of the elders of the Kaufmannschaft of Berlin, s.d.

Since the time of the Currency School, the policy adopted by the governments of Europe and America with regard to the issue of fiduciary media has been guided, on the whole, by the idea that it is necessary to impose some sort of restriction upon the banks in order to prevent them from extending the issue of fiduciary media in such a way as to cause a rise of prices that eventually culminates in an economic crisis. But the course of this policy has been continually broken by contrary aims.

It is the object of this chapter to investigate the connection between the amount of money in circulation and the level of the rate of interest. It has already been shown that variations in the proportion between the quantity of money and the demand for money influence the level of the exchange ratio between money and other economic goods. It now remains for us to investigate whether the variations thus evoked in the prices of commodities affect goods of the first order and goods of higher orders to the same extent.