The Theory of Money and Credit

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. Where the gold coins have not been supplemented by any money substitutes, fiat money, or credit money, with unlimited legal tender by any payer including the central credit-issuing bank, the fiduciary media have had to be redeemed at their full face value in money without a premium being charged in addition.17  But in actual fact these banks also were tending to adopt a policy different in degree but certainly not in kind from the described procedure of the Bank of France.

In most countries, the central bank-of-issue was only obliged to redeem its notes in legal tender gold coins of its own country, after the pattern of English banking law. It is in accordance with the spirit of the modern monetary system and with the ultimate aims of monetary policy that this obligation has been understood also to refer to the surrender of gold ingots to exporters at the legal ratio or at least at a price that made it more profitable to procure bullion than coins. Thus until 1889 the Bank of England voluntarily extended its obligation to redeem its notes by paying out on demand in ingots the value of the notes in full-weight gold coins. It did this by fixing its selling price for gold bullion once for all at 77s. 10½d. per ounce of standard gold.18  For a time the Continental banks-of-issue followed this example. But they soon determined upon a different procedure, and eventually the Bank of England too relinquished its old policy and adopted the practice of the Continental banks.

The Bank of England and the German Reichsbank, apart from the Bank of France the two most important credit-issuing banks in the world, were in the habit of issuing for export purposes worn gold coins only of inferior value. Sovereigns, as issued by the Bank of England for export, were usually from two to three percent worse than newly minted sovereigns. The weight of the twenty-mark pieces received by a person who withdrew gold coins from the German Reichsbank for purposes of exportation was, according to the calculations of experts, 7.943 grams on an average as against a standard average of 7.965 grams; that is, something over a quarter of one percent less than their mint value.19  The Bank of England sometimes refused altogether to issue gold ingots, and sometimes would only issue them at a price in excess of the 77s. 10½d. which alone was usual until 1889. It sometimes raised the selling price of ingots to as much as 77s. 11d.20

As regards the range and the effect of these measures, nothing need be added to what has already been said about the French gold-premium policy. The difference—as has been said—is only quantitative, not qualitative.21

The other “little devices” which have also been employed for making the export of gold more difficult have their effect in precisely the same fashion. As, for example, when the German Reichsbank sometimes prohibited the issue of gold for export purposes except in Berlin by invoking the letter of section 18 of the Bank Act, which had the effect of making the export of gold more costly by burdening the gold exporters with the risk and cost of transporting the gold from Berlin to the place of export.

• 17Even at the time when the thaler was still unlimited legal tender and so occupied position analogous to that of the French five-franc piece, the German Reichsbank never followed a gold-premium policy on the French pattern, although it was often advised to do so. This is probably to be ascribed not so much to the circumstance that the number of thalers was relatively small as to the influence of Bamberger’s ideas throughout the Reich. An open break with the principles of the banking and currency reform of the period after 1870-71 was, in view of the prevailing opinion, out of the question.
• 18See Koch, Der Londoner Goldverkehr (Stuttgart, 1905), p. 708.
• 19Ibid., pp. 81 f.
• 20See Clare, A Money Market Primer and Key to the Exchanges, 2d ed. (London, 1893), p. 22.
• 21Rosendorff (”Die Goldprämienpolitik der Banque de France,” p. 636) would appear to be mistaken in thinking it possible to detect a difference of principle between the procedure of the Bank of England and the Reichsbank in paying out gold and the gold-premium policy of the Bank of France. He bases his view on the argument that, whereas the latter refuses altogether to pay out French gold coins and is thus theoretically able to raise the amount of the premium indefinitely, the Bank of England and the Reichsbank, which in contrast to the Bank of France always redeem their notes at their full value in current gold coin and have never attempted to refuse to pay out gold, are able to raise the selling price of bullion only by the amount of the cost of minting and an allowance for wear and tear. Rosendorff, in arguing from the statement that the Bank of France is “theoretically” able to raise the amount of the gold-premium indefinitely, flatly contradicts what he says in the rest of his book. In fact it does not do it, quite apart from the consideration that the law forbids it also. But if it did it, then it would completely alter the character of the French monetary system. It could not be expected that the French government and the Chambers would sanction the transaction to a credit-money standard which would be involved in such a procedure.