THE PASSING OF THE GOLD RESERVE A STUDY IN NATIONAL FINANCE AND CURRENCY BY GEORGE KOEHLER, LL.B. Until Lately Connected with the United State* Treasury Department, Washington, D. C. Author of "Importers First Aid in American Tariff and Customs Procedure" and Director of "Importers First Aid Service," Washington and New York 1920 ** '''>'. . .*;. : :; :>,> ;>, * * > >. PUBLISHED BY IMPORTERS FIRST AID SERVICE 1423 NEW YORK AVENUE N. W. WASHINGTON, D. C. ,\ COPYRIGHT, 1920, BY IMPORTERS FIRST AID SERVICE AU rights reserved, including translation Made in U. S. A. BALTIMORE. MD.. U. S. A. PREFACE It is now spring of the year 1920. A year and a half has elapsed since the close of hostilities of the World War. The demobilization of the armies engaged in that conflict has been practically com- pleted and a general resumption of the civil and industrial activities of peace should be close at hand. In our own country, the United States of North America, we find that rapid strides are made in that direction ; but that the high prices of war-time are still with us and that a gradual betterment of those conditions is hoped for. As to European countries the situation does not appear quite so promising. Having suffered con- siderably financially, their resources and credit are greatly exhausted and their progress towards finan- cial and industrial recuperation is correspondingly impaired. Thus we learn from the daily Press that there is a great demoralization of the foreign exchanges ; that the British Pound Sterling has been quoted at $3.25 or less at New York, as against its par value of $4.86; that the French franc has been quoted at $.10 as against its par value of $.193 ; that the Ger- man mark has been quoted at $.01 as against a pre- war value of $.238 and that the foreign exchanges of other countries are likewise greatly depressed. Through it all we hear that long established Fi- nancial Systems of European countries are break- ing down ; that enormous quantities of legal tender paper currency have been issued ; that there is in- sufficient gold available to support these issues on a pre-war basis; that available gold supplies are 442G07 iv PREFACE being hoarded; that credits abroad are exhausted; that commerce with foreign countries is becoming more difficult and that for want of a sound and stable currency at home, domestic commerce and industry, so necessary to an early recuperation of the nations, are impeded. Much is said about inflation of the currency ; we are admonished to work and save ; various schemes for the establishment of international currency and credits are brought forward, based upon a policy of borrowing from others, while no very determined effort is made to first build up at home. The all and overbearing importance of obtaining and holding gold as a reserve against an over-expanded paper currency is constantly before us. Already we hear it openly discussed abroad whether after all the maintenance of the gold reserve is not too great a task for the nations to bear, while serious thought is given to finding a solution of that great problem. We too may therefore well wonder as to the all absorbing necessity of maintaining the Gold Re- serve Currency System of the present and whether after all it has not in reality outlived its day and generation and in the ever onward moving course of events, it is not about ready to give way to a more modern and more enlightened system that will best serve mankind. In the study of the following pages of this book let us therefore give serious thought to this prob- lem, so that we may each and all more fully under- stand its importance and to be the better able to judge as to the soundness of the conclusions reached. GEORGE KOEHLER. Washington, D. C. May, 1920. TABLE OF CONTENTS CHAPTER PAGE I. Financing the Government 1 II. Financing the Public 15 III. Financing the Banks 19 IV. Emergency Currency 24 V. The Gold Reserve 46 VI. Balance of Trade 49 VII. The Gold Standard 53 VIII. The Tyranny of the Gold Reserve 55 IX. Equalizing Foreign Exchange 64 X. Financing the War 69 XI. Inflation of the Currency 73 XII. Deflation of the Currency and the Passing of the Gold Reserve . 76 OAUFOJ-- THE PASSING OF THE GOLD RESERVE CHAPTER I FINANCING THE GOVERNMENT It requires no very great stretch of the imagina- tion to contemplate, that a country, rich in natural resources, favored with fertile fields, inhabited by an intelligent and industrious people, eager and willing to till the soil to gather therefrom suste- nance for man and beast ; a country rich in mineral wealth, endowed with bounteous deposits of coal and oil, the ores of lead, iron, copper and zinc, and having an abundant supply of forests, furnishing materials affording warmth, shelter and other com- forts of life ; but having no deposits of gold or silver, can, or should be able to live unto itself and grow strong and prosperous. The tillers of the soil, as they dispose of the sur- plus products of their fields, should be able to accu- mulate savings manifested in the shape of improve- ments to their lands; modern buildings; efficient farm implements and machinery, live stock, and other evidences of industry and wealth. The industrial workers of the Nation, by their daily toil, should also be able to accumulate savings, invested in homes and other evidences of comfort and thrift. The same should be true as to the com- mercial community engaged in facilitating the ex- change of commodities between those who produce and those who consume. THE GOLD KESERVE Thus there should be an opportunity to develop a populous mlodern community, or nation, rich in agriculture and industry. The past teaches us, however, that such developments have been slow and uncertain, much of the difficulty having arisen through the methods employed in effecting the ex- change of commodities between those who produce and those who consume, and also in finding some method of compensating those engaged in the inter- mediate activities of commerce. Economists tell us that the primitive method of effecting an exchange was by the direct barter of one commodity for another and that by various long and tedious stages a system of exchange was finally developed, whereby all commodities and labor were measured in terms of some fixed standard called money. By virtue of certain qualities of inherent beauty, serviceability, etc., discovered in the precious metals, gold and silver, those metals at an early day came to be utilized extensively for the purpose of money, the value of which was measured according to certain fixed standards of weight and purity. As the fixing of this standard for the measure- ment of values was a matter which vitality affected the welfare of all members of the community as well as the fortunes of the nation itself, it soon became the prerogative of established Government to " coin money and to regulate the value thereof." Thus it is provided by Section VIII of Article I of the Constitution of the United States that: " The Congress shall have Power .... to Coin Money, regu- late the value thereof and of foreign coin, and fix the Standards of Weights and Measures." So all governments have at various times utilized either one, or the other, or both of these precious FINANCING THE GOVERNMENT 3 metals for the coinage of money. During early times silver was almost exclusively used as the standard, then both gold and silver at varying ratios of value, as compared with each other, until at the present day gold has become practically the sole standard of value, silver being used chiefly for purposes of minor coinage. As heretofore stated the modern state, or nation, which we have here under contemplation, and in the progress and development of which we are for the present interested, has no deposits of gold or silver. It is therefore in no position to authorize the coin- age of gold and silver by legislative enactment, to provide money for active circulation. The nation, like all vigorous and progressive countries, we will assume, has an established and stable form of Gov- ernment in which are vested legislative, executive and judicial powers. As the country is living with- in itself no revenue can be derived from imports, as no goods are imported from other countries. Its principal source of revenue would therefore most likely be that derived from internal taxation on spirituous liquors, manufactured tobacco, cigars, etc., together with taxation on incomes, excess profits, and the like. Experience has shown that taxes on incomes and excess profits where imposed are not paid into the public Treasury day by day, like duties on imports, or the ordinary internal revenue stamp taxes ; but are generally paid at certain definite periods an- nually or semi-annually, or near the close of the fiscal year. It may therefore happen (and in fact it has so happened) that a Government depending upon this source of revenue for its existence may at times find itself in urgent need of funds to meet its daily running expenses, the payment of which 4 PASSING OF THE GOLD BESERVE cannot be deferred to await the collection of the taxes on incomes. Where such conditions exist at the present day it is therefore the policy of es- tablished Governments to borrow temporarily money on the credit of the Government, from bank- ing institutions, either private or semi-private, on what are generally called " Treasury Bills " or " Short Term Notes," or Treasury Certificates of Indebtedness. " Thus in England it is one of the functions of the Bank of England : "To make advances to the Treasury in the shape of ' defi- ciency advances ' when the Government balances are too low to admit of the payment of the quarterly interest on the British debt without replenishment, or against ' ways and means ' advances at times when the revenue is coming in more slowly than government expenditure is proceeding." A like practice has been recently resorted to by the United States Treasury, through the issue of so-called " Treasury Certificates of Indebted- ness " or " Short Term Notes " which have been offered for sale to banking institutions at current rates of interest and made redeemable within a short period (usually 90 days) after the date of issue. Where such " Treasury Bills " or " Short Term Notes " are redeemable within a short time after issue and are secured by the credit of the Gov- ernment with the definite assurance that taxes are in course of collection sufficient to take them up at maturity, they are generally considered, by the banking community, to be gilt edge securities, are freely sought after as liquid investments, and are usually floated at low rates of interest favorable to the Government. Having thus far made no provision for the estab- lishment of banking institutions, either govern- mental or private, our modern country cannot bor- FINANCING THE GOVERNMENT 5 row from such institutions in order to obtain ready funds to defray its necessary daily running ex- penses. It is therefore obvious that other methods of financing the government must be resorted to. In the past, under like circumstances, it has been the policy of some governments, to issue paper money, making the same legal tender for the pay- ment of debts, both public and private. Such legal tender currency has generally been issued in the course of some great public emergency, thus during the American Civil War 1861-1865 Legal Tender Notes were provided by : " The Act of February 25, 1862 (12 Stat. 345), which author- ized the issue of $150,000,000 United States Notes, not bearing interest, payable to bearer at the Treasury of the United States, and of such denominations, not less than five dollars, as the Secretary of the Treasury might deem expedient, $50,000,000 to be applied to the redemption of demand notes authorized by the Act of July 17, 1861; these notes to be a legal tender in payment of all debts, public and private, within the United States, except duties on imports and interest on the public debt, and to be exchangeable for six per cent United States bonds. The Act of July 11, 1862 (12 Stat. 532), authorized an addi- tional issue of $150,000,000 of such denominations as the Sec- retary of the Treasury might deem expedient, but no such note should be for a fractional part of a dollar, and not more than $35,000,000 of a lower denomination than five dollars; these notes to be legal tender as before authorized. The act of March 3, 1863 (12 Stat. 710), authorized an additional issue of $150,- 000,000 of such denominations, not less than one dollar, as the Secretary of the Treasury might prescribe; which notes were made a legal tender as before authorized. The same act limited the time in which the Treasury notes might be exchanged for United States bonds to July 1, 1863." (Report of the Secretary of the Treasury, 1919, p. 582.) It will be observed that these notes were " not to be accepted by the Government in payment of duties on imports "; but were to be exchangeable for United States six per cent bonds within a speci- fied period. Although but $450,000,000 of such notes were issued they soon depreciated in value 6 PASSING OF THE GOLD RESERVE as compared with gold, the latter going to a con- siderable premium during the period of the war and afterwards, owing no doubt to the fact that these notes were of but limited legal tender value and were convertible into United States bonds, the market values of which were also fluctuating ac- cording to the fortunes of war. By reference to the annual report of the Secre- tary of the Treasury for the fiscal year ended June 30, 1919, pp. 616 and 627, it will be observed that during the years 1791-1919, both inclusive, the receipts from Customs, Internal Revenue, and other ordinary receipts and disbursements of the United States Government were as follows : ( There is also shown in a separate column the " Premium on Gold " where one existed for that period). It will thus be noted that during the four active years of the Civil War (1862-1865 inclusive) the total ordinary disbursements were greatly in excess of the total ordinary receipts of the Government. To tide over this deficiency in receipts efforts were at first made to replenish the United States Treas- ury by the issue of legal tender notes to the amount of $450,000,000 as stated. Thereafter to make up any further deficit in the receipts bonds bearing varying rates of interest were issued by the Na- tional Government. It will also be noted that during the years 1866 to 1879 inclusive, the ordinary receipts were in excess of the ordinary disbursements for the year and that notwithstanding such excess in receipts, gold remained at a premium until 1878 when by " The Act of January 14, 1875 (18 Stat. 296), the Secretary of the Treasury was authorized to use any surplus revenues from time to time in the Treasury not otherwise appropriated, and to issue, sell, dispose of, at not less than par in coin, either of the descriptions of bonds of the United States described in the Act FINANCING THE GOVERNMENT TABLE I. ORDINARY RECEIPTS AND DISBURSEMENTS OF THE UNITED STATES RECAPITULATION OF RECEIPTS BY FISCAL YEABS Year. Customs. Internal revenue. Ordinary receipts. Ordinary disbursements. Pre- mium on gold. 1791 $4,399,478.09 3,443,070.85 $208,942.81 $4,409,961.19 3,669,960 31 1793 4,255,306.56 337,705.70 4,652,923.14 4,801,065.28 274,089.62 6,431,904.87 1795 .... 5 588,461.26 337,755.36 6,119,334.59 1798 6,567,987.94 475,289.60 8,420,829.65 1707 7,549,049.65 576,491.45 8,688,780.99 1793 7,106,061.98 644,357.95 7,979,170.80 1799 6,610,449.81 779,136.44 7,646,813.31 1800 9,080,932.73 809,396.55 10,848,749 10 1801 10,760,778.93 1,048,033.43 12,945,465.95 1802 12 438,235 74 621,898.89 14,996,798.95 1803 10,479,417.61 215,179.69 11,064,097.63 1804 11,008,565.33 50,941.29 11,826,307.38 1806 12,936,487.04 21,747.15 13,560,693.20 1806 14,667,61)8.17 20,101.45 15,559,931.07 1807 15,845,521.61 13,051.40 16,398,019.26 1808 16,363,550.58 8,190.23 17,060,661.93 1809 7,257,506.62 4,034.29 7,773,478.12 1810 8,688,309.31 7,430.63 9,384,214.28 1811 13,313,222.78 2,295.95 14,422,634.09 1812 8 958,777.63 4,903.06 9,801,132.76 1813 13,224,623.25 4,756.04 14,340,709.95 1814 6,998 772.08 1,662,984.82 11,181 710.96 1816 7,282,942.22 4,678,059.07 15,708,468.56 1816 36 306 874 88 5,124,708.31 47,746,650.82 1817 26,283,348.49 2,678,100.77 33,366,868.88 1818 .... 17 176 385.00 955,270.29 21,585,583.66 20,283,608.76 229,593.63 24,603,874.37 1820 15,005 612.15 106,260.53 17,840 669.55 13,004,447.15 6w.027.63 14,578,379.72 1822 17,589,761.94 67,665,71 20,232 427.94 1828 19,088 433 44 34 242.17 20,540,666.26 1824 17,878 325.71 34 663.37 19,381,212.79 1825 20,098,718 45 25,771.35 21 840,858.02 23,341 331.77 21,5S'J.93 25 260,434.21 1827 19,712,283.29 19,835.68 22,966,363.96 1828 23 205,528.64 17,451.54 24, 763, 62!). 28 1829 22 681,965 01 14 502 74 24,827 627.38 1830 21,922 391.39 12,160.62 24,844,116 52 1831 24,224,441 77 6 933 5 1 28 526,820 82 1832 28,465 237 24 11,630.65 31,867,450.66 1833 29 032,508 91 2 769.00 33 943,426 25 1834 16,214,957.15 4,196.09 21,791,935.55 1835 .... 19 391 810 59 10 459.48 35 430,087 10 1836 23,409,940.53 370.00 50,826,796.08 1837 11,169,290 39 5,493.84 24,954,153.04 1838 16 158,800 86 2 467.27 26 302 561.77 23,137,924 81 2,553.32 81 482,749.61 1840 13 499 502 17 1,682.25 19 480 115 33 $24 314 518 19 1841 14 487,216.74 3,261.36 16 860,100.27 26,481,817.84 1842 18 187 908.76 495.00 19 976,197.25 25 134 886 44 1843 (6 months) 7,046 843.91 103.25 8,231,001.26 11, 780, 092. 6 1 1844 26,183 570.94 1,777.34 29 320,707.78 22,483,560 14 1845 27,528,112.70 3,517.12 29,970,105.80 22,935,827 79 1846 26 712 667.87 2.897.26 29 699 967 74 27 261 182.86 1847 23,747,864.66 375. DO 26,467,403.16 54,920,784.09 1848 31 757,070.96 375.00 35,698,699 21 47 618,220 65 1849 .... 28,346,738.82 80,721 077 60 43 499 078 39 I860 39,668,686.42 43,592,888.88 40,948,383.12 1851 49,017,567.92 52,555,039.33 47,751,478.41 1852 47 339 326 62 49 846 815 60 44 390 252 36 1853 58 ',931 ',865. 52 61,587,031.68 47,743,989.09 1854 64,224,190.27 73,800,341.40 55,038,455.11 1855 53,025,794.21 65,359,574.68 58,630,622.71 1856 64,022,863.50 74,056,699.24 68,726,350 01 1857 1858 63,875,905.05 41,789,620.96 68,965,312.57 46,655,365.96 67,634,408.93 73,982,492.84 1859 49,565,824.38 52,777,107.92 68 993 599 77 1860 53,187,511.87 66,054,299.83 63,200,875.65 1861 39,582,125.64 41,476,299.49 66,650 213 08 1862 49 056 397 62 51 919 261 09 469 570 241 65 34 0% 8 PASSING OF THE GOLD RESERVE TABLE I. ORDINARY RECEIPTS AND DISBURSEMENTS OF THE UNITED STATES. CONTINUED RECAPITULATION OF RECEIPTS BY FISCAL YEAES Year. Customs. Internal revenue. Ordinary receipts. Ordinary disbursements. Pre- mium on gold. 1863 $69,059,642.40 102,316,152.99 84,928,260.60 179,046,651.58 176,417,810.88 164,464,599.56 180,04R,426.63 194,538,374.44 206,270,408.05 216,370,286.77 188,089,522.70 168,103,833.69 157,167,722.35 148,071,984.61 130,956,493.07 130,170,680.20 137,250,047.70 186,522,064.60 198,159,676.02 220,410,730.25 214,706,496.93 195,067,489.76 181,471,939.34 192,905,023.44 217,286,893.23 219,091,173.63 223,832,741.69 229,668,584.57 219,522,205.23 177,452,964.16 203,355,016.73 131,818,530.62 152,158,617.45 160,021,751.67 176,554,126.65 149,675,062.35 206,128,481.75 233,164,871.16 238,585,455.99 254,444,708.19 284,479,581.81 261,274,564.81 261,798,856.91 300,251,877.77 332,233,362.70 286,113,130.29 300,711,933.95 333,683,445.03 314,497,071.24 311,321,672.22 318,891,395.86 292,320,014.51 209,786,672.21 213,185,845.63 225,962,393.38 182,758,988.71 183,428,624.78 $37,640,787.95 109,741,134.10 209,464,115.25 309,226,813.42 266,027,537.43 191,087,589.41 158,356,460.86 184,899,756.49 143,098,153.63 130,642,177.72 113,729,314.14 102,409.784.90 110,007,493.58 116,700,732.03 118,630,407.83 110,581,624.74 113,561,610.58 124,009,373.92 135,264.385.51 146,497,595.45 144,720,368.98 121,586,072.51 112,498,725.54 116,805,936.48 118,823,391.22 124,296,871.98 130,881,513.92 142,606,705.81 145,686,249.44 153,971,072.57 161,027.023.93 147,111,232.81 143,421,672.02 146,762,864.74 146,688,574.29 170,900,641.49 273,437,161.51 295,327,926.76 307,180,663.77 271,880,122.10 230,810,124.17 232,904,119.45 234,095,740.85 249,150,212.91 269,666,772.85 251,711,126.70 246,212,643.59 1 289,988,519.46 2322,529,200.79 3321,612.199.66 *344,416,965.65 8 380,041, 007.30 415,669,646.00 '512,702,028.78 8809,366,207.73 9 3,696,043,484.81 3,840,230,994.85 $112,094,945.51 262,712,865 33 327,283,518.08 557,817,230.34 477,001,523.47 898,369,440.36 369,564,541.47 411,253,971.24 383,323,944.89 374,106,867.56 333,738,204.67 304,978,756.06 288,000,051.10 293,790,130.50 281,250,222.78 257,763,878.70 272,330,241.21 333,526,500.98 360,782,292.57 403,525,250.28 398,287,581.95 348.519,869.92 323,690,706.38 336,439,727.06 371,403,277.66 379,266,074.76 387,050,058.84 403,080,982.63 392,612,447 31 354,937,784.24 385,819,628.78 297,752,019.25 313,390,075.11 326,976,200.38 347,721,705.26 405,321,335.20 515,950,520.18 567,240,851.89 587,685,337.53 562,478,233.21 560,396,674.40 539,716,913.86 544,606,758.62 594,717,942.36 663,125,659.92 601,060,723.27 603,589,489.84 675,511,715.02 701,872,374.99 691,778,465.37 724,111,229.84 734,673,166.71 697,910,827.58 779,664,552.49 1,118,174,126.43 4,174,010,585.74 4,647,603,852.46 $718,734,276.18 864,969,100.83 1,295,099,289.58 519,022,356.34 346,729,325.78 370,339,133.82 321,190,597.75 293,657,005.15 283,160,393.51 270,659,695.91 285,239,325.34 301,238,800.21 274,623,392.84 265,101,084.59 241,334,474.86 236,964,326.80 266,947,883.53 264,847,637.36 259,651,638.81 257,981,439.57 265,408,137.54 244,126,244.34 260,226,935.11 242,483,138.50 267,932,179.97 259,653,958.87 281,996,615.60 297,736,486.60 356,372,684.74 345,023,330.58 383,477,954.49 367,525,279.83 356,195,298.29 352,179,446.08 365,774,159.67 443,368,582.80 605,072,179.85 487,713,791.71 509,967,353.15 471,190,857.64 506,089,022.04 532,287,821.31 563,310,093.62 549,405,425.35 551,705,129.04 621,102,390.64 662,324,444.77 659,705,391.08 654,137,997.89 654,553,963.47 682,770,705.51 700,754,489.71 731,399,759.11 724,492,998.90 1,147,898,991.16 8,966,532,266.03 15,365,362,741.76 72.5% 185.0% 134.4% 67.8% 46.4% 50.0% 62.5% 23.3% 15.4% 15.4% 19.1% 14.4% 17.6% 15.0% 7.9% 2.9% 1864 1865 1866 1867 1868 1869 1870 1871 1872 1873 1874 1875 1876 .... 1877 1878 1879 1880 1881 1882 1883 1884 1885 1886 1887 1888 1889 1890 1891 1892 1893 1894 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 1905 1906 1907 1908 1909 1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1 Includes $20,951,780.97 corporation tax. 2 Includes $33,516,976.59 corporation tax. 8 Includes $28,583,303.73 corporation tax. * Includes $35,006,299.84 corporation tax. 6 Includes $10,671,077.22 corporation excise tax; $32,456,662.27 corporation income tax ; and $28,253,534.85 individual income tax. Includes $52,069,126.29 emergency revenue; $39,155,596.77 corporation income tax; and $41,046,162.09 individual income tax. 'Includes $84,278,302.13 emergency revenue; $56,993,657.98 corporation income tax; and $67,943,594.63 individual income tax. 8 Includes $95,297,553.88 emergency revenue; $179,572,887.86 corporation income tax; and $180,108,340.10 individual income tax. Includes $2,838,999,894.28 income and excess profits tax and $857,043,590.53 miscella- neous internal revenue. "Includes $2,600,762,734.34 income and excess profits tax and $1,239,468,260.01 miscella- neous internal revenue. FINANCING THE GOVERNMENT 9 of July 14, 1870 (16 Stat. 272), for the purpose of redeeming on or after January 1, 1879, in coin, at the office of the Assistant Treasurer of the United States in New York, the outstanding United States legal tender notes when presented in sums of not less than fifty dollars." (Report of the Secretary of the Treasury, 1919, p. 587.) Pursuant to the authority conferred upon the Secretary of the Treasury by this statute legal ten- der notes were redeemed from time to time until it was provided by : " The Act of May 31, 1878 (20 Stat. 87), that no more of the United States legal tender notes shall be canceled or retired, and that when any of said notes are redeemed or received into the Treasury under any law, from any source whatever, and shall belong to the United States, they shall not be retired, canceled, or destroyed, but shall be reissued and paid out again, and kept in circulation." The Secretary of the Treasury having given due notice that he was prepared on and after January 1, 1879, to redeem at New York in coin, outstanding legal tender notes in compliance with the provi- sions of the Act of January 14, 1875, and that he had resolved to receive the United States legal tender notes in payment for customs duties, the premium on gold disappeared. The amount of legal tender notes outstanding at the date of the passage of the Act of May 31, 1878 referred to, and still outstanding June 30, 1919, amount to $346,681,016. (Report of Secretary of the Treasury, 1919, p. 582.) It was further provided by : " The Act of March 14, 1900, that United States notes, when presented to the Treasury for redemption, shall be redeemed in gold coin of the standard fixed in said act, and that in order to secure the prompt and certain redemption of such notes it shall be the duty of the Secretary of the Treasury to set apart in the Treasury a reserve fund of one hundred and fifty million dollars in gold coin and bullion, to be used for such redemption pur- poses only, and that whenever and as often as any of said notes shall be redeemed from said fund it shall be the duty of the Secretary of the Treasury to use said notes so redeemed to 10 PASSING OF THE GOLD RESERVE restore and maintain the reserve fund so < stablished first, by exchanging the notes so redeemed for an/ gold coin in the general fund of the Treasury; second, by accepting deposits of gold coin at the Treasury or at any subtreasury in exchange for such notes; third, by procuring gold coin by the use of said notes in accordance with the provisions of Section 3700 of the Kevised Statutes of the United States. The above-mentioned act also provides that if the Secretary of the Treasury is unable to restore and maintain the gold coin in the reserve fund by the foregoing methods, and the amount of such gold coin and bullion in said fund shall at any time fall below one hundred million dollars, it shall be his duty to restore the same to the maximum sum of one hundred and fifty million dollars by borrowing money on the credit of the United States, and for the debt so incurred to issue and sell coupon or registered bonds of the United States bearing interest at the rate of not exceeding three per centum per annum, payable quarterly, l ;he bonds to be payable at the pleasure of the United States after one year from the date of their issue, and to be payable, principal and interest, in gold coin of the present standard value, the gold coin received from the sale of said bonds to be exchanged for an equal amount of the notes redeemed and held for exchange, and the Secretary of the Treasury may, in his discretion, use said notes in exchange for gold, or purchase or redeem an bonds of the United States, or for any other lawful purpose he public interests may require, except that they shall not be used to meet deficiencies in the current revenues/' The history of this Legislation shows : First: That the legal tender Treasury notes < 1 the time when originally authorized were issued for the purpose of meeting the current run- ning expenses of the Government and were not a legal tender for the payment of duties on imports. Second: That as long as they were not redeemable in gold and were not accepted at the Treas- ury Department in payment of duties on imports they depreciated in value, gold go- ing to a considerable premium which disap- peared when these restrictions were re- moved. FINANCING THE GOVERNMENT 11 Another notable example of the issue of legal tender notes was that of the revolutionary govern- ment of France during the years 1789-1796, when legal tender notes (assignats, secured by confiscated church lands and the public domain) were issued in large quantities, without hope of ultimate re- demption, and finally became worthless. These observations therefore teach us that the issue of legal tender currency has been generally resorted to during times of war or other great pub- lic emergency when the current expenses of the gov- ernment far exceeded the immediate revenues, leading invariably to a depreciation of the legal tender notes and the establishment of a premium on gold with all its unfortunate consequences. By reference to the foregoing table of ordinary receipts and disbursements we find that during the years 1862 and 1863 when the issue of $450,000,000 of legal tender notes was authorized by the United States Government, the ordinary receipts were, for the year 1862, $51,919,261.09 and that this total in- cluded receipts from customs amounting to $49,- 056,397.62 and that the receipts from sources other than customs amounted to only $2,862,863.47 ; also that during the year 1863 the ordinary receipts were $112,094,945.51 of which $69,059,642.40 were received from customs indicating receipts from sources other than customs amounting to $43,035,- 303.11. Bearing in mind that the legal tender notes issued under the Act of February 25, 1862, were not a legal tender in the payment of duties on imports it is obvious that the field within which they could be disposed of by the holder in payment of his obliga- tions to the government was decidedly limited. It is therefore little to be wondered that such notes 12 PASSING OF THE GOLD RESERVE became depreciated, gold going to a premium and remaining at a premium until such time as provi- sions were finally made for the redemption of such notes by the government in gold, and their accep- tance at the United States Treasury in payment of duties on imports. With these experiences before us let us again revert to our modern country, which, as it is living entirely within itself, we may assume is happily at peace. We are therefore in a position to enter upon the consideration of its affairs in a calmer mood. Let us assume therefore that the nation has an ex- tensive civil establishment for the administration of the affairs of government ; that it is maintain- ing an army and a navy of commensurate size to provide for the common defense ; that it is engaged in the deepening of waterways; the building of canals; the construction of railways in outlying territories, and in other useful and necessary pub- lic undertakings, all of which require an average daily expenditure of say $10,000,000 in ready money amounting to approximately $3,650,000,000 for the year. We will assume that according to the annual legislative budget provision is made for the collec- tion of internal revenue taxes from all sources, in- cluding taxes on incomes and excess profits, amounting to a like sum, say $3,650,000,000 and that by far the greater portion of these total estimated revenues will be derived from taxation on incomes and excess profits which taxation we have hereto- fore observed does not flow into the public Treasury day by day, but is usually payable at certain periods of the year. As these daily expenditures must be met let us authorize the Secretary of the Treasury of our modern Government to issue legal tender Treasury FINANCING THE GOVERNMENT 13 notes day ~by day in an amount sufficient to meet the actual daily running expenses of the Government, but no more; providing further that such legal ten- der Treasury notes shall be full legal tender, for all debts, public and private, of whatsoever kind or nature, without reservation, to the full face value thereof, and that such legal tender Treasury notes when received into the Treasury in payment of taxes shall be reissued day by day in payment of the actual daily running expenses as the needs of the Government may require. By this procedure the public Treasury will at all times be able to provide for the payment of the daily running expenses of the Government in ready money without regard to the fact that " the daily collection of taxes at times may proceed more slowly than the daily expenditures/' and as the total amount of legal tender notes issued under this au- thority can at no time exceed the total estimated revenues for the fiscal year it follows that as such legal tender notes are paid back into the Treasury they become self -liquidating, so that by the end of the year all of the legal tender notes issued by the Treasury during the year will have been paid back into the Treasury as taxes and none will be out- standing. Such legal tender Treasury notes being a full legal tender in payment for all debts public and private to the full face value thereof, without lim- itation or reservation of any kind it follows unques- tionably, that they will circulate in the community freely as money, at their full face value, while awaiting return to the Treasury in payment of taxes. By this simple process we have thus discovered three fundamental principles : 14 PASSING OF THE GOLD RESERVE First: That in order to meet the actual daily running expenses of the Government it will not be necessary to borrow money from pri- vate or Governmental banking institutions secured by short term notes, or bonds, and pay interest thereon. Second: That for the purpose of meeting such ac- tual daily running expenses the Government may issue legal tender notes without intrin- sic value other than that of the paper on which it is printed ; provided that the amount so issued and outstanding shall at no time exceed the estimated public revenues for the fiscal year. Third: That it will not be necessary to maintain in the public Treasury a Gold Reserve, to in- sure the redemption of such notes when so issued, as they will be automatically re- deemed when paid back into the Treasury day by day after having performed the func- tion for which they were placed in circu- lation. CHAPTER II FINANCING THE PUBLIC Having thus made provision for financing the government, our next care will be that of financing the public which in the absence of gold, is equally in urgent need of a circulating money medium by the means of which it may be able to conduct the smaller affairs of every-day life. As has been indicated in the procedure outlined for financing the Government the legal tender Treasury notes paid out one day may come back into the Treasury the next day in payment of taxes ; or if the taxes are coming in slowly and at irregular periods such notes may remain out of the Treasury in active circulation in the community for longer periods, and in the meantime serve the public to that extent. To meet the necessities of the Government, and also the convenience of the public, it may therefore be necessary and in fact advisable to make provi- sion for a " minor currency." This may consist of copper or nickel coins of small denominations such as the one-cent and five-cent pieces issued under the existing laws of the United States, and of paper subsidiary currency in the shape of ten-cent, twenty-five-cent and fifty-cent pieces, similar to those issued during the " American Civil War," 1861-1865. Such minor currency may be placed in circula- tion so far as may be necessary in meeting the daily expenditures of the public Treasury and for that 15 16 PASSING OF THE GOLD RESERVE purpose may form part of the total " legal tender issue " heretofore authorized. If issued in reason- able amounts not exceeding the actual needs of the community, such " minor currency " will remain in active circulation and will perform a very impor- tant and essential service in financing the smaller daily transactions of the people at large. While provision has thus far been made for fi- nancing the public Treasury, and incidentally for a partial financing of the public, it may happen that the daily payments of taxes into the Treasury are equal, or approximately equal, to the daily expen- ditures, and that where this condition exists for an extended period very little of the legal tender issues authorized will remain in circulation. Under such circumstances it may therefore become advisable to place and to keep in active circulation, legal tender Treasury notes in an amount equal to, say the total estimated revenues for the next suc- ceeding ninety days or more. This may be accom- plished by depositing such sums as may be deemed expedient with national banking associations simi- lar to those now existing under the laws of the United States, and for which provision will be made in a succeeding chapter. This procedure will be analogous to the tissue of " Short Term Treasury Notes " referred to in the preceding chapter, with the distinction, that such Treasury Notes will be full legal tender and will circulate freely as money and will not therefore bear interest as is now the case when " Short Term Treasury Notes " hav- ing ninety days or more to run are disposed of to the banking associations, to raise temporary funds for the use of the Government. On the contrary such deposits, being public funds, may draw interest under a practice similar to that now pursued by the FINANCING THE PUBLIC 17 United States Treasury as to which the Secretary of the Treasury in his annual report for the fiscal year ended June 30, 1916, p. 7, stated that : " The interest collected on deposits of public funds for the fiscal year 1916 and covered into the Treasury as a miscellaneous receipt amounted to $791,671.45 and that the amount of interest received on public deposits for the past six fiscal years is as follows : 1911 $41,757.53 1912 44,462.26 1913 122,218.89 1914 1,409,426.07 1915 1,222,706.93 1916 791,671.45 " The increase in the amount of interest collected since 1913 is due to the fact that beginning with June of that year interest has been charged upon all public deposits, except those in the Federal Reserve Banks, at the rate of two per cent per annum." As such public deposits are subject to the call of the Treasury if occasion should require this pro- cedure would in no way affect the self -liquidating features of the notes as they could be retired at will at any time within the limits of the fiscal year. This procedure is not only feasible, but has re- ceived the legislative sanction of the British Gov- ernment, which under date of August 6, 1914, authorized an issue of currency notes, in denomina- tions of 1 and 10 shillings as follows : " The Treasury may, subject to the provisions of this act, issue currency notes for one pound and for ten shillings, and these notes shall be current in the United Kingdom in the same manner and to the same extent and as fully as sovereigns and half-sovereigns are current and shall be legal tender in the United Kingdom for the payment of any amount." These notes it appears were issued to the public August 7, 1914, and were deposited with the Bank of England for account of the British Government, as the practical way of getting them into use ; they were issued for various purposes, including ad- 18 PASSING OP THE GOLD RESERVE vances to banks at 5 per cent per annum up to 20 per cent of their deposits; the volume fluctuated with the varying receipts and disbursements ; the amount outstanding December 30, 1914, was 38,- 478,164, and on June 23, 1915, 46,199,705. (A. Barton Hepburn. History of Currency in the United States, p. 451.) CHAPTER III FINANCING THE BANKS Having thus provided for the financing of the Government and the general public the financing of the banks will be next in order. In reporting upon the English Banking System the National Monetary Commission of the United States in its report to Congress, 1910 (61st Con- gress, Senate Document No. 492), stated (paper by Hartley Withers) that : " The most obvious function of the joint stock banks of Eng- land is the business of taking care of money for customers and meeting checks drawn against their balances. Customers place money with them either on current or deposit account. On cur- rent account it can be withdrawn at any time and earns, as a rule, no interest. Out of this function of meeting checks drawn by customers against the sums deposited has grown the banker's chief duty, which is now the provision of check currency for the mercantile and financial community. " Currency in England consists of coins, notes, and checks. The coins are minted by the Government, gold coin being legal tender to any extent, silver to the extent of 2 copper to the extent of Is. The silver and copper coins are mere tokens, pass- ing at a conventional value which is far above that of the metal contained in them. The use of the metallic currency is almost entirely confined to small retail transactions, especially among the poorer classes which cannot afford the luxury of a banking account. The note issues are almost obsolete as currency, the Bank of England's being used chiefly as reserve for the other banks, while the issue of the country banks are so small as to be negligible. " Most of the commercial and financial transactions of Eng- land to-day are settled by checks drawn on the banks by their customers. These checks are not legal tender, since it would obviously be impossible that a check drawn by an individual on a bank could be legally made acceptable by a creditor whether he wished to take it or not. "Nevertheless, the protection which the check affords to its users against fraud has been sufficient to make its use general. And the English community thus conducts exchanges between 19 20 PASSING OF THE GOLD BESERVE itself by means of an enormous number of pieces of paper drawn upon banks which purport to give the holder the right to demand gold or legal tender, but are, as a matter of fact, in an over- whelming proportion crossed off against one another in the bankers' clearing houses. This check currency is provided by the banks without any legal restriction or supervision. It has been, ever since the beginning of banking, the business of the banker to finance trade and commerce by lending it what is called money. Before printed instruments were known, bankers, who were in those days goldsmiths and bullion dealers, lent actual coin to their customers. When bank notes were invented, the bankers lent their own promises to pay, which were circu- lated among the community and took the place of coin currency. When the use of checks drove out the bank note, as happened in England, the bankers lent their customers not their own promises to pay, but the right to draw checks, involving a promise on their part to meet the checks on demand. These checks drawn are paid into the other banks, and the check currency of England thus consists to a great extent of certificates of mutual indebted- ness between the banks and their customers. The loans and dis- counts made by one bank create the deposits of another, and the check currency represents transfers of the credit so created. If the balance sheet of an English bank is examined, it will be found that its liabilities consist to a small extent of its capital and reserve fund, to a very large extent of its current and deposit accounts, which are its liabilities to its customers, and again to a small extent of acceptances. " On the assets side will be found ' cash in hand and at the Bank of England/ which represents the till money and cash reserve the coin and legal tender actually held by the bank and its credit at the Bank of England. The next item is gen- erally cash at call and short notice, which consists chiefly of the bank's loans to discount houses and also in some cases of advances to stockbrokers and others from whom it may expect to be easily able to call them in. Its investments will be a fairly considerable item, but in most cases a large proportion of assets will consist of discounts, loans, and advances. By making these discounts, loans and advances the banks create deposits for themselves and for one another. " A customer who has raised a credit by a discount or advance makes use of this credit to draw a check. He passes the check to his creditor, his creditor pays it into his own bank, and as long as the discount or advance is current there will be a deposit against it in the books of one bank or another. In the rare cases in which the customer uses his credit for the withdrawal of coin or notes, the same process will work, he will pass them on to a creditor who will ultimately pay them into a bank, in the enormous majority of cases. The extent to which banks can create credit by means of loans and discounts is regulated only by their prudence and by the rules which apply to their business- FINANCING THE BANKS 21 " If they advance too much, their credit at the Bank of Eng- land will be diminished, owing to the fact that the claims against them in the clearing house will be heavier than the claims which they have to present against other banks. The result will be that the proportion of their cash to liabilities will be brought down to a point which is lower than they consider prudent. " There is no legal obligation of any sort on them to maintain any regular proportion between cash and liabilities, and as their position in this respect is only subjected to occasional publicity they are not obliged to consider even the effect upon their cus- tomers of any considerable variation in the proportion between cash and liabilities which they keep. The system thus works out with extreme elasticity and banking facilities can be pro- vided in England with extraordinary ease. It has of late years been frequently contended that the ease and elasticity with which it works have carried the English banking machinery to a somewhat extreme length in the matter of economy of gold and legal tenders and the extent of the credit pyramid which it builds upon them. It has been stated by a president of the English Bankers' Institute that the proportion of cash to lia- bilities shown by country banks ranges down to a point as low as 2.2 per cent. " Apart from the over-multiplication of credit on an inade- quate cash basis, the complete absence of any legal or other restrictions on the operations of English banking enables it to work with extraordinary ease and readiness. As long as good unpledged security, whether in the form of bills of ex- change, commodities, or Stock Exchange securities, are available in the hands of customers the banks can advance against them to any extent that they consider prudent. Prudence dictates in the case of the great majority of them that a certain proportion of cash to liabilities shall be maintained. " The chief function of the joint stock banks having thus been shown to be the provision of currency for the English com- munity, it may further be noted that a remarkable development has been the rapidity with which they have covered England with branch establishments. " The result of it is to give the English monetary system the power of easily supplying the needs of the various parts of the community as the requirements of others ebb and flow. " The rapid increase in these various centers at which the public can obtain banking facilities of the modern English kind that is to say, the right to draw checks is certainly one of the influences which have reduced the circulation of bank notes in England in the hands of the public, but it has probably tended slightly to increase or maintain the circulation, or at least issue, of Bank of England notes, since all these widely dispersed branches of the other banks require to have a certain number of Bank of England notes in their tills as reserve against demands on them." 22 PASSING OP THE GOLD BESERVE This brief description of the operations of the Joint Stock Banks of England may be taken as a typical representation of the mechanism of modern commercial banking. In the details the operations may differ somewhat in other countries; thus under the National Banking Laws of the United States various restrictions are imposed as to cap- italization ; the nature and size of the loans to be made ; the amount of the reserve to be kept on hand against deposits; the requirement of publishing at frequent intervals a full statement as to the con- dition of such banking institutions and the pro- vision for periodical examinations of the banks by duly constituted Government officials. In the main, therefore, it may be assumed that it is the function of commercial banking institutions as stated, to supply the mercantile community with banking credit and with a check currency. In making provision therefore for the establish- ment of a commercial banking system the first es- sential will necessarily be that of supplying capi- tal. Having heretofore in the preceding chapters placed in active circulation in the community legal tender Treasury notes this capital may be fur- nished by the organizers of the banking institutions through the deposit of such legal tender Treasury notes for the purpose of forming a working basis. These notes will also form the reserve against de- posits that the banks may deem prudent to keep on hand, or that the banking laws of the country may require them to maintain. Such banks when organized may be permitted to engage in commercial banking in its most modern and approved form; subject however to the one definite and positive prohibition, that under no cir- FINANCING THE BANKS 23 cumstances shall they be authorized to issue for cir- culation bank notes with full, partial, or no legal tender qualities, based upon the credit of such insti- tutions, secured or unsecured. If this course is pursued it follows that no matter how reckless the affairs of such institutions may be conducted, they can never involve the stability of the national currency. They may lose every dollar of their deposits, dissipate their own capital, and fail absolutely; but the credit of the nation as exemplified by the legal tender Treasury notes out- standing will not be impaired. Fortunately it is the most modern trend in nearly all countries to either prohibit absolutely the issue of bank notes by private banking institutions, or to greatly restrict such issues where still authorized, in lieu of which, however, provision is made in vari- ous countries for the establishment of banking insti- tutions of a semi-Governmental nature, operating under Governmental supervision and control, with authority to issue under certain conditions bank notes with full legal tender qualities, and this leads us to the consideration of what is generally known as " Emergency Currency.'' CHAPTER IV EMERGENCY CURRENCY We have thus far witnessed the establishment of a legal tender Treasury note currency to supply the needs of the National Government and incidentally to furnish a circulating medium for the use of the general public, also the formation of commercial banking institutions to provide bank credits and a check currency to meet the demands of commerce, which under ordinary circumstances might be con- sidered ample to supply the needs of all concerned were it not for the fact that the requirements of modern commerce, and the rapidity with which it is conducted, frequently bring about conditions under which an immediate supply of additional cur- rency becomes absolutely necessary. As has been stated, currency in England consists mainly of gold and silver coins, Bank of England Notes, and checks. We have also observed that under the commercial banking system of that coun- try the currency deposited by one depositor may create the bank reserve on which loans of ten or more times in volume are made to ten or more de- positors of the same bank. Experience has shown that during times of or- dinary commercial activity this ratio of cash re- serves to loans has been reasonably safe for the reason that, taken as a whole, the daily deposits and withdrawals approximately counterbalance one another. This relationship, however, is seri- ously interfered with when during periods of pub- 24 EMERGENCY CURRENCY 25 lie unrest, or adverse trade conditions, depositors in considerable numbers withdraw funds from their banks, thereby taking away the bank reserve sup- porting the loans to each of the other ten or more depositors and forcing the banks to call for the repayment of considerable numbers of such loans to restore the reserve. These loans may have been secured by Government bonds, stock exchange se- curities, warehouse certificates representing goods stored to await a market, and notes, drafts, or bills of exchange covering goods actually moving in com- merce. If representing bonds and stock exchange securities, the sudden calling in of the loans may force the immediate sale of such securities in the open market in large quantities thereby creating, as has often been the case, stock exchange panics. If represented by warehouse certificates, covering goods stored, the sudden throwing of such goods on the market, may involve wide-spread commercial ruin and disaster. If such financial panic, and com- mercial ruin and disaster is to be avoided, it is ob- vious that prompt and efficient relief is called for. To afford this relief and to provide means where- by commercial banking institutions may realize promptly upon their assets held as security against loans made by them to private depositors, as here- tofore stated, there have been established under the banking systems of various European countries, semi-governmental banking institutions with a paid-in capital of considerable volume, operating more or less under governmental supervision and control. In times of stress these semi-governmental banking institutions may in some instances advance to commercial banking institutions ready funds from their paid-in capital on the deposit with them of government bonds, or securities, and in other in- 26 PASSING OF THE GOLD EESERVE stances by the deposit with them for rediscount, of commercial bills of exchange, maturing within ninety days or less from the date of issue, endorsed by two or three responsible parties to the transac- tion. It is of course obvious that this transaction con- sidered by itself results merely in creating a ready market for the disposal of the most desirable and liquid assets held by the commercial banking insti- tutions and that by advancing money on such trans- actions from their capital the semi-governmental banking institutions create no new currency. Therefore were the relief that might be afforded under the conditions referred to, restricted solely to advances from the paid-in capital of the semi- governmental banking institutions as stated no "Emergency Currency " would be created. The term "Emergency Currency " is therefore generally understood to refer to new or additional currency, that is, to currency issued in addition to that already existing. In order therefore that such new or additional currency may be provided for to replace the existing regular currency withdrawn from active circulation during times of stress, semi-governmental banking institutions are au- thorized under the laws of their respective coun- tries to issue " bank notes " with full legal tender qualities. The conditions under which such bank notes may be issued differ in the various countries. Thus under the English System (Report of U. S. Monetary Commission, paper by Hartley Withers) , it is the function of the Bank of England to act as : " 1. Banker to the British Government. " 2. Banker to the joint stock and private banks. " 3. (a) Sole possessor of the right to issue notes which are legal tender in England, (b) sole possessor among joint stock banks with an office in London, of the right to issue notes at all. EMERGENCY CURRENCY 27 " 4. Provider of r Emergency Currency/ " 5. Keeper of the gold reserve for British banking. " 6. Keeper of the gold reserve which is most readily available for the purposes of international banking. " These various functions fit into and supplement one another, and though their diversity is sometimes pointed to as throwing too much responsibility onto one institution, it in fact enables the Bank to carry out its duties with extraordinary ease, and with the least possible disturbance to the financial community. By the fact that it keeps the balances of the other banks, the Bank of England is enabled to conduct the payment of the interest on the British debt largely by transfers in its books. By the fact that it keeps the balances of the Government and has the monopoly of the legal-tender note issue, the Bank has a great prestige in the eyes of the general public, which it com- municates to the other banks which bank with it. There is an impression that the Government is always behind the Bank, and that the Bank is always behind the other banks, and this feeling has certainly done much to foster the confidence of the British public in its banking system. " A credit in the books of the Bank of England has come to be regarded as just as good as so much gold; and the other banks, with one exception, habitually state their ' cash in hand and at the Bank of England ' as one item in their balance sheets, as if there were no difference between an actual holding of gold or legal tender and a balance at the Bank of England. It thus follows at times when an increase of currency is desirable, it can be expanded by an increase in the balances of the other banks at the Bank of England, since they thus become possessed of more cash to be used as the basis of credit. For currency in England chiefly consists of checks, and customers who apply to the banks for accommodation, by way of discount or advance, use it by drawing a check which is passed on and so creates a deposit; and expansion of currency thus consists chiefly in ex- pansion of banking deposits. This expansion is only limited by the proportion between deposits and cash which the banks think fit to keep, and as long as they can increase their cash by increas- ing their credit in the Bank of England's books the creation of currency can proceed without let or hindrance. Their balances can be increased by borrowing from the Bank of England, which is generally carried out not by the banks themselves, but by their customers from whom they have called in loans, and the Bank of England is thus enabled to provide emergency currency with great ease, by means of loans and discounts which are used to swell the balances of the other banks, which thus show an increase of the cash at the Bank of England which they use as a basis for credit operations. The elasticity of the system is thus remark- able, and the merchants and bill brokers of London can by taking approved security to the Bank of England, increase the basis of English credit in a few minutes by borrowing. 28 PASSING OF THE GOLD RESERVE " 1. Examining these functions of the Bank of England in closer detail we find that its first and most obvious one, which originally brought it into being, of financing the British Gov- ernment and acting as its banker, is now perhaps its least difficult and important duty. Apart from the prestige which it thus acquires and its close touch with the Government and the officials of the Treasury, the Bank's position as government banker is of little direct material advantage. Its duties as such, besides the normal relation between a bank and a customer, consist chiefly in making advances to the treasury in the shape of ' deficiency advances ' when the government balances are too low to admit of the payment of the quarterly interest on the British debt without replenishment, or against ' ways and means ' advances at times when the revenue is coming in more slowly than government expenditure is proceeding. It also, when the Government has to borrow to a greater extent, manages its issues of treasury bills, or any loan operation that the Government may have to under- take, such as the creation of fresh debt in time of war, or the periodical borrowing recently necessitated by the requirements of the Irish land-purchase scheme. The variations in the amount of the Government's balance at the Bank of England are a ques- tion of great importance to the outside money market, because when this balance is big the result is that a large amount of money is in the control of the Bank of England, and the resources of the outer market are thus curtailed. "It has already been shown that the balances of the other banks at the Bank of England are treated by them as cash and used as the basis of credit. Consequently when the payment of revenue on a large scale transfers large amounts from the other banks to the government account in the Bank of England's books, the outer market's basis of credit is thus reduced and money tends to become scarce and dear. This is especially noticeable in the last quarter of the financial year, January to March, when the payment of the direct taxes (income tax, and house duty) transfers many millions from the tax-paying public, through its bankers, to the national exchequer's credit at the Bank. Between December 28, 1907, and March 27, 1908, public deposits, or government balances, at the Bank of England rose from 5,625,000 to 19,843,000 by the operation of this process. This transfer makes a gap in the basis of credit which has to be filled up by borrowing, and it is usual to find that, according to the phrase current in Lombard Street, 'the market is in the Bank ' that is, the merchants and brokers are borrowing from the Bank of England throughout the greater part of this quarter of the year. When the market is borrowing from the Bank it does so either by discounting bills with it at Bank rate, which is the official minimum rate of discount, or by taking advances on securities, for which advances it usually pays one-half of 1 per cent above Bank rate; and since Bank rate is, except on quite rare occasions, above the rates for loans and discount current in EMERGENCY CURRENCY 29 the outside market, it will be seen that this transfer of revenue funds to the Government's balance normally raises the current value of money during the period in which it is proceeding. " Dealers in credit, who are pinched in pocket by this habitual decrease in the supply of money at this season, cry out against the system, and maintain that the revenue ought to be dis- tributed among the other banks until it is required for govern- ment disbursements at the end of the quarter, in the same man- ner as the United States Treasury deposits, when placed with the American banks, are divided among many. Such a change, however, would obviously strike at the very basis of the English system, which has grown up with all its anomalies into a very practical and trustworthy instrument. If the Bank of England were deprived of its privilege of holding the revenue as paid in, it would have to be remunerated more highly, not only for the other work that it does for the Government, but also for per- forming other functions for the community, which, as will be seen later, throw onto it responsibilities which hamper its earning power as a banker. If any alteration is necessary of an arrange- ment which causes chronic inconvenience to dealers in credit during the greater part of a quarter of the year, it would more naturally be found in a reorganization of the system under which most of the direct taxes are paid in one quarter. It has already been shown that the position of the Bank of England as government bank gives it a prestige in the eyes of the public, which it passes on to the other banks which are its customers; and a banking system is so largely a psychological matter that the most radical reformer would hesitate before making any alteration which would tend to shake the basis of this prestige. "2. The second of the Bank of England's distinctive func- tions its acting as banker to the rest of the English banking community is the one which throws upon it its most serious responsibilities and gives it most of its actual power and ease in working. The Government gives it prestige in the eyes of the multitude, which considers that governments are omnipotent; the other banks give it the power of providing emergency cur- rency by making entries in its books, and so acting as the easily efficient center of a banking system in which elasticity and the economy of gold are carried to a perfection which is almost excessive. Nevertheless, it pays heavily for its apparently privileged position as bankers' bank. At first sight it would appear that these customers, keeping a regular balance of twenty-odd millions, which varies little and on which the Bank of England pays no interest, were a source of comfortable income and no anxiety to it. But in the first place it is obvious that a liability which is regarded as cash by the rest of the bank- ing community requires special treatment by its custodian, and in practice it is so specially treated that the Bank of England maintains a proportion of cash to liabilities which is fully twice as high as that of the strictest of the other banks. This pro- 30 PASSING OF THE GOLD RESERVE portion rarely is allowed to fall below 33 per cent and generally ranges between 40 and 50 per cent, and it need not be said that this high level of cash holding tells heavily on the earning power of the Bank of England. Moreover, it is its position as bankers' bank that exposes the Bank of England to the responsibility of maintaining the gold reserve for English banking and being prepared to meet, in gold, any draft on London that anyone abroad who has acquired or borrowed the right to draw wishes to turn into metal to be shipped to a foreign country. " The amount of the bankers' balances is not separately stated, but is wrapped up in the total of the other deposits in the Bank of England's weekly return. It its believed to average about 22 millions in these days, and it is often contended that valuable light would be thrown on the monetary position if this item were separated from the balances of the other customers of the Bank. Many of the outer bankers are in favor of this change, but there is a serious practical objection to it, in that a dangerous impression might be created in the public mind if at any time it were seen that the Bank's cash reserve was below its liability to its banking customers; and the separate publication of the bankers' balances might thus check the readiness with which the Bank of England creates emergency credit. Another sug- gestion that is sometimes made by the many critics of the exist- ing order of things in English banking is that the banks should keep their cash reserves themselves; but this very revolutionary change would deprive the system of its two great advantages, a centralized organization with a center which specializes on the duties involved by acting as center, and the extreme elasticity with which the present arrangements work. At the same time it must be admitted that the system by which the other banks treat their balances at the Bank of England as cash leads to the existence of a vast amount of ( cash ' in England which on being looked into is found to consist of paper securities or promises to pay. If we assume that the proportion of cash held by the Bank of England is 50 per cent of its liabilities it does not always stand so high the other 50 per cent being represented by securities, this at once shows that only half the bankers' balances are backed by cash. And we shall see when we look into its weekly return that its cash in its banking department, of which the bankers' balances are a liability, consists largely of its own notes; and its own notes are backed, to the extent of about one- third, by securities. So that the actual gold held against these bankers' balances consists roughly of about two-thirds of a half of them, or one-third of their total. And when it is considered that these bankers' balances are treated by the bankers as equal to cash in hand and are made the basis of credit, on which they build liabilities ranging from five to ten or even in extreme cases to fifty times their extent, it becomes evident that the critics who maintain that the multiplication of credit and the economy of gold are carried too far in England have a solid foundation for their contention. EMERGENCY CURRENCY 31 " 3. The Bank of England's monopoly of note issue, which once gave it the monopoly of joint-stock banking in London, is now a matter of comparatively minor importance, owing to the change in English banking habits by which the check has ousted the bank note for the purpose of daily commercial payments, and the regulations which were imposed on the note issue by the bank act of 1844. Its monopoly lay in the provision, which was one of its early privileges, that ' it shall not be lawful for any body politic or corporate whatsoever, or for any other persons whatso- ever, united or to be united, in covenants or partnerships exceed- ing the number of six persons, in that part of Great Britain called England, to borrow, owe, or take up any sum or sums of money on their bills or notes payable at demand.' This monopoly was conferred on the Bank in 1706 and was maintained until 1826, when the implied monopoly in joint-stock banking was restricted to a 65-mile radius around London. In 1833 joint- stock banks were established in London itself, since it had been discovered that the Bank of England's alleged monopoly only reserved to it the privilege of note issue, and the private bankers in London had already found that it was more convenient to banker and customer to work by the system of deposit and check. By this system a customer who took a loan from his banker did not carry it away with him in the form of notes, but was given a deposit or credit in the bank's books and the power of drawing checks against it. The development of this system has made money in England mean, as a rule, a credit in the books of a bank which enables its holder to draw checks, and has made checks the chief currency of the country. " The development of this system was quickened by the pro- visions of Peel's Act of 1844, which, under the influence of banking disasters that had arisen out of reckless note issuing by private banking firms in the counties, laid down an iron rule for the regulation of note issues in England. None of the other note issuers were allowed to increase their issues under any cir- cumstances, and the Bank of England, for every additional note issued beyond 14,000,000, was to hold metal in its vaults. Tinder the terms of Peel's Act one-fifth of this metal might be silver, and in the early returns issued by the Bank under the act a certain amount of silver is found among the assets of the issue department. In the first return issued, for example, which was dated September 7, 1844, the total note issue was 28,- 351,000, which was backed by 14,000,000 in securities, 12,657,- 000 in gold coin and bullion and 1,694,000 in silver. But since 1853, no silver has been held in the issue department of the Bank, and in 1897, when the influence of the bimetallists on the existing Government led to a proposal that the proportion of silver allowed by law should be held by the Bank as backing for its note issue, public opinion expressed itself so vigorously that the suggestion was promptly buried. The Bank's fiduciary note issue, thus fixed at 14,000,000, was only allowed to increase 32 PASSING OF THE GOLD RESERVE by the lapse of the issues of the existing issuers, the Bank being empowered to increase it by two-thirds of the amount lapsed. The lapsing process has proceeded steadily by the amalgamation of country banks with banks which have London offices and so are prohibited by the Bank's monopoly. And the Bank's fiduci- ary issue has thus been raised from the original 14,000,000 to 18,450,000. Above this line it cannot go except by means of the suspension of the bank act, which has been found necessary occasionally in times of panic, the last of such occasions having occurred in 1866. The English currency system is thus, as far as the law can rule it, entirely inelastic, but it has already been shown that even when the law of 1844 was passed, the check cur- rency, over which the law exercises no restriction, was already driving out the note, and banks without any right of note issue had been 11 years established in London. The Bank of Eng- land's note issue is now chiefly used by other banks as ' till money,' or part of the store of legal-tender cash they keep to meet demands on them. It has thus become part of the basis of credit in England, since the other banks roughly base their operations on their holding of cash in hand and at the Bank of England. Their cash at the Bank of England has already been discussed above; their cash in hand consists of coin and notes, and since the latter have thus become part of the foundation on which the deposit liabilities of the other banks are based, there is reasonable ground for the contention often put forward by practical expert critics of the English system, that the fiduciary note issue should be reduced by the repayment by the Govern- ment of the whole or part of a Government debt of 11,000,000 to the Bank, which backs the greater part of it, and its replace- ment by gold. It is evident that the amount of metallic back- ing for a note issue which is intended to circulate as currency is a different matter from that required in the case of a note issue which is held by bankers as a reserve and used by them as a foundation for a pyramid of credit operations. "4. By the ease with which the Bank of England provides emergency currency it gives the English banking system the great advantage of extreme elasticity and adaptability; and it is enabled to do this by the fact that it acts as banker to the other banks, and that every credit which they have in its books is regarded by them and by the rest of the community as f cash ' to be taken as practically equal to so much gold. This cash at the Bank of England in the hands of the rest of the bankers can be multiplied as rapidly as the Bank of England is prepared to make advances, and as the mercantile and financial community can bring it bills for discount or securities to be borrowed on. There is no legal restriction of any sort or kind, and the close relations between the Bank and its borrowing customers enable the necessary operations to be carried through with a celerity which is unrivaled, at any rate in the Eastern Hemisphere. The process works as follows : In every English bank balance sheet EMERGENCY CURRENCY 33 there will be found an item among the assets 'cash at call or short notice/ though in a few cases the slovenly habit is adopted of including this entry along with the cash in hand. This ' cash/ as it is called, really consists chiefly of loans made by the banks to the discount houses, and regarded by the banks as the most liquid of their resources. As such, it is at once made use of when for any reason, such as the many payments which have to be made on quarter days, or the end of the half year when the preparation of balance sheets by firms and companies requires an abnormal amount of cash for more or less ornamental pur- poses, the banks are subjected to extra pressure by their cus- tomers, who both withdraw actual currency from them for smaller payments, and require advances in order to show cash with bank- ers in their balance sheets. " The banks in order to meet this pressure, and at the same time to preserve an adequate amount of cash in their own state- ments, call in their loans from the discount houses ; the discount houses, at a point, can only repay them by borrowing from the Bank of England and transferring the credit raised with it to the bankers, whose cash at the Bank of England is thus increased. This book entry takes place in their balance sheets of the legal- tender cash that their customers have withdrawn, and is used as the basis for the increased deposits that have been created by the loans of the bankers to their customers for ornamental pur- poses. Similarly at the time of year when the transfer of the taxes to the Government's balance reduces the cash at the Bank of England held by the other banks the gap is filled by the loans made by the Bank of England to the customers of the other banks. In short, by discounting and making advances the Bank of England can at any time create book credits, which are regarded as cash by the English banking community, and on which the latter can base the credits which give the right to draw checks, which are the most important part of the English currency. The extent to which the Bank of England can create this credit is a matter for its own discretion, but any creation of it diminishes the proportion that it shows in its own weekly returns between its reserve and liabilities. Consequently when it is applied to for amounts which bring that proportion too low the Bank of England has to take steps to reinforce its cash reserve. "5. It has been shown that the Bank of England keeps the balances of the other banks, and from this it follows that the latter look to it for gold or notes at times when the local com- mercial community requires an extra supply. At the end of every month, especially at the ends of the quarters or at times of national holidays, the Bank's note circulation expands and coin is taken from it. The duty is thus thrown upon it of keep- ing an adequate supply of cash for home purposes, and, as has been already stated, its normal proportion of cash to liabilities is very much higher than that of the other banks. But these 34 PASSING OF THE GOLD RESERVE movements are tidal and regular, and though times of active trade increase slightly the demand for coin and note currency in England, the extensive and ever-growing use of the check reduces the importance of this part of the Bank's duties. " 6. Much more important is the Bank of England's duty as custodian of the gold store for international banking. London is the only European center which is always prepared to honor its drafts in gold immediately and to any extent. The Bank of France has the right to make payments in silver, and uses it by often charging a premium on gold, sufficient to check any de- mand for it; and in other centers measures are taken which make apparently free convertibility of credit instruments optional at the choice of the central bank. Consequently the Bank of England has to be prepared to meet demands on it at any time from abroad, based on credits given to foreigners by the English banking community, and it has thus to observe the signs of financial weather in all parts of the world and to regulate the price of money in London so that the exchanges may not be allowed to become or remain adverse to a dangerous point. The difficulties of this task are increased by the extent to which the English banking community works independently of it, by accepting and discounting finance paper, and giving foreigners credits at rates which encourage their further creation. For the low and wholly unregulated proportion of cash to liabilities on which English banking works, enables the other banks to multi- ply credits ultimately based on the Bank of England's reserve, leaving the responsibility for maintaining the reserve to the Bank. This it does by raising its rate when necessary, and so, if it has control of the market and its rate is ' effective ' a phrase which will be explained later raising the general level of money rates in London. "When its rate is not effective, the Bank of England finds itself obliged to intervene in the outer money market consisting of the other banks and their customers and control the rates current in it. This it does by borrowing some of the floating funds in this market, so lessening their supply and forcing up the price of money. By means of this borrowing it diminishes the balances kept with it by the other banks, either directly or indirectly directly if it borrows from them, indirectly if it borrows from their customers who hand the advance to it in the shape of a check on them. The result is that so much of the 1 cash at the Bank of England/ which the English banking com- munity uses as part of its basis of credit, is wiped out, money which in London generally means the price at which the bankers are prepared to lend for a day or for a short period to the dis- count houses becomes dearer, the market rate of discount con- sequently tends to advance, the foreign exchanges move in favor of London, and the tide of gold sets in the direction of the Bank of England's vaults, and it is enabled to replenish its reserve or check the drain on it. That the Bank of England should have EMEEGENCY CURRENCY 35 to go through this clumsy ceremony of borrowing money that it does not want, in order to deprive the outer market of a surplus which depresses discount rates in a manner that is dangerous owing to its effect on the foreign exchanges, arises from the want of connection between bank rate and market rate. In former days the London money market never had enough money to work with without help from the Bank of England. Bagehot, in his great work on Lombard Street, published in 1873, says that 'at all ordinary moments there is not money enough in Lombard Street to discount all the bills in Lombard Street without taking some money from the Bank of England/ " As long as this was so, Bank rate the price at which the bank would discount bills was at all times an important influ- ence on the market rate. Since then, however, the business of credit making has been so quickly and skillfully extended that Lombard Street is frequently able to ignore Bank rate, knowing that it will easily be able to supply its needs from the other banks, at rates which are normally below it. Currency in Eng- land consists of checks drawn against deposits which are largely created by the loans and discounts of the other banks. There is no legal limit whatever on the extent to which these loans and discounts can be multiplied, and the only limits imposed are those of publicity, which is applied rarely in all cases and in some not at all, and of the prudence with which the banks con- duct their business. Hence it follows that competition between the banks often impels them to continue to make advances or discount bills at low rates when the Bank of England, as cus- todian of the English gold reserve, thinks it advisable in the interests of the foreign exchanges to impose a higher level. This it does by borrowing some of the credit manufactured by the other banks, in order to create artificial scarcity of money, and make its own official rate effective. " It thus appears that the Bank of England's official rate is often through long periods a mere empty symbol, bearing no actual relation to the real price of money in London; and only becomes effective, and a factor in the monetary position (1) when the trade demand for credit is keen enough to tax the credit-making facilities of the other banks to their full extent, (2) when the payment of taxes transfers large sums from the other banks to the Government's account at the Bank of England, so reducing the ' cash at the Bank * on which they build credit operations, and (3) when, owing to foreign demands for gold, the Bank of England takes measures, by borrowing, to restrict credits in the open market and to make its rate effective. In other respects its official rate differs materially from the rates quoted by ordinary dealers in credit. It does not fluctuate according to the supply and demand for bills, but is regularly fixed once a week at the meetings of the Bank of England court on Thursday morning. It is extremely rare for any change to be made in the Bank of England rate on any day except Thurs- 36 PASSING OF THE GOLD RESERVE day. Instances occur rarely when some sudden change of posi- tion makes it essential, as at the end of 1906, when the Bank rate was raised to 6 per cent on a Friday morning. In normal times the rate which is fixed on one Thursday is maintained until the next, though the rate is only a minimum and the Bank of England occasionally takes advantage of this fact and refuses to discount at its minimum, which still remains ostensibly the Bank rate, while the bank actually makes a rather higher charge, which is usually made the official rate on the next Thursday. "But it must not be supposed that when Bank rate is in- effective the Bank of England is doing no business. It discounts bills and makes advances at market rates at its branches, and also at its head office to its private customers. Bank rate may be described as the price at which the Bank is prepared to dis- count in its official capacity as center of the London market, and it is because appeal is only made in exceptional circumstances to the Bank to provide credit in this capacity that Bank rate is often ineffective. " Finally, the position of the Bank of England, and its rela- tion to the English money market, as a local and insular affair, may be summed up by saying that the Bank, by means of the prestige which makes a credit in its books as good as gold enables the banking community to expand credits and make check cur- rency as long as it is prepared to lend credit. And the extent to which -it is prepared to lend credit is only regulated by its own discretion and consideration for the proportion between its cash and liabilities. At the end of the half year it is sometimes applied to for fresh credits to the extent of over twenty millions sterling, chiefly in the form of advances for a few days. On one side of its account its holding of securities is expanded by this amount and on the other its liability on deposits is similarly swollen. At the end of 1902, the last occasion when the Bank's weekly return was made up on December 31, and so showed the full extent of the extra credit provided by it at the end of the year, the other securities 1 rose from 27,647,000 on December 17 to 47,736,000 on December 31. The other deposits 2 at the same time rose from 36,653,000 to 55,259,000, and this in- crease in the basis of credit was perhaps used by the other banks for the provision of five to ten times as much accommodation for their customers. A week later the other securities had de- clined to 29,625,000 and the other deposits to 41,073,000, though reinforced in the meantime by the payment of govern- ment dividends ; the emergency credit had been wiped out, when no longer required, by the simple process of repayment to the 1 Other securities in the Bank of England's return, which is ex- plained in detail later, are securities other than British Government obligations. * Other deposits are deposits other than those of the British Gov- ernment. EMERGENCY CURRENCY 37 Bank of England of the sums borrowed from it ; and the Bank's proportion of cash to liabilities, which had fallen to 28 per cent on December 31, had risen to 38| per cent. " Money in England is thus to a great extent a convention based on the assumption by the community that a credit in the Bank of England's books is as good as gold. This assumption the Bank cultivates by means of the high proportion of cash that it keeps in normal times. At the end of the year it allows it, as has been shown, to run down rapidly, knowing that the de- mand on it at that period is short lived and is chiefly on account of borrowers who will leave the sums borrowed to their credit in its books; but at other times its cash proportion is carefully controlled by movements in its official rate and the measures described above. " The problem of providing emergency credit and currency capable of easy expansion and rapid contraction is thus solved by means of this convention, backed by the use of the check currency which cancels itself day by day, each check existing only for the purpose of the transaction which it completes. "At the same time the Bank of England is obliged by the pressure of external conditions frequently to regulate the price of money in London. This necessity for regulation is a fact which is only dimly grasped by the London money market as a whole, which frequently resents the operations of the Bank of England and contends that the price of money ought to be left to the natural laws of supply and demand. The position of the London money market, however, as the only one in which gold can at all times be obtained, to any extent and without question, clearly makes some regulation of the rates at which it is prepared to work inevitable. None of the various items which compose the market can be expected to conduct their business with a view to the necessities of the market as a whole. If a banker wants to increase his holding of bills, he naturally does so at the market rate, without considering whether his doing so is likely to turn the foreign exchanges against London and so cause a demand on London for gold. Consequently the exigencies of their daily business, and the strong competition between them, impel the banks and discount houses to do business at rates which may sometimes be dangerous to the general interest, and it is thus clearly necessary that some institution with a commanding posi- tion at the head of the machine should occasionally intervene and regulate its operations." Bills of exchange may be of various kinds as will be observed from the following statement (Report of the National Monetary Commission of the United States, paper by Hartley Withers), heretofore re- ferred to : 38 PASSING OF THE GOLD RESERVE The Merchant Bankers and Accepting Houses " The most important function of the merchant bankers is not that of banking, but of accepting. Banking, in the strict sense of the term, they do not engage in that is to say, they are not prepared to meet claims upon them by an immediate pay- ment of cash or legal tender over the counter, but by payment of a check on one of the banks in the stricter sense of the term. Their function is that of bringing into being the interesting and important credit instruments known as bills of exchange. A bill of exchange, originally drawn on a merchant by a corre- spondent, from whom he had bought goods, directing him to pay the consideration for them at sight or at date named, has in recent years widely extended this function and has become an instrument by which credit can be raised against any form of security or collateral, or in some cases against no security at all but the credit of the parties named upon it. " It need hardly be said that there is an immeasurable differ- ence between one bill of exchange and another. Since the bill is an order by one party to another to pay a sum of money, generally at a subsequent date, the ability of the party on whom the bill is drawn to meet it at the due date is a question of over- whelming importance. When the bill arrives the party drawn on ' accepts ' it by signing his name across the front of it, so intimating that he is liable to pay the sum named at the date specified, and becoming the acceptor of the bill. It is clear that a bill accepted by a small tradesman has no value outside his own street, if there, while one accepted by a great merchant house of unquestioned standing is an easily negotiable credit instru- ment and also an ideal form of investment for bankers and others who have to keep their resources liquid, since it can easily be discounted or turned into as much immediate cash as its pros- pective value at the due date makes it fetch, and at maturity it has to be met by its acceptor. The importance of the acceptor's name on a bill thus led merchants of first-rate standing to specialize in this form of business. They gradually left off or reduced the amount of their actual mercantile business and con- fined themselves to accepting bills, for a commission, for others whose credit was less well established. Out of bills of exchange, originally drawn against merchandise actually shipped, grew the finance bill drawn sometimes in anticipation of produce or merchandise to be shipped, sometimes against securities, and sometimes against the credit of the parties to it. " The business of acceptance has thus grown up as an im- portant and separate function which is largely in the hands of the leaders among the old merchant firms, whose acceptance of a bill stamps it at once as a readily negotiable instrument. By the service that they perform in the creation of this great mass of paper, the merchant firms, or accepting houses, as they are gen- erally called, facilitate the trade of the world in a most useful EMERGENCY CURRENCY 39 and in fact indispensable fashion by providing credits against mercantile transactions which have not yet matured. When the wheat of America is harvested, but has not yet reached its market, the ultimate purchaser of it cannot be expected to pay for it in cash, but arrangements can be made by which a bill can be drawn against it on a first-class accepting house, and this bill being readily negotiable and easily discounted in the London market provides the cash, or a considerable proportion of it, which the wheat will ultimately realize when it has been shipped to its destination and passed into the hands of the consumer. The same process can be repeated with many articles of manu- facture which are still in an inchoate condition, and the world's commercial activity, which would be immeasurably lessened if each transaction had to wait maturity before cash could be raised against it, is thus enabled to proceed with the remarkable velocity which modern conditions make possible. Nevertheless the function of the London accepting houses, though of enormous importance, is still to a certain extent subordinate to the judg- ment of the English banks. They finally decide whose paper is most readily negotiable, and, in times when the credit machine is felt to be somewhat out of gear, the bankers occasionally dis- criminate against the paper of firms which they consider to have been giving their acceptance too freely. In this respect, as in so many others, the Bank of England remains the final arbiter, since the paper of an accepting house which is questioned by the other banks can be negotiated at the Bank of England through a discount house, and the Bank of England has before now intervened with effect when it considered that questions raised concerning certain acceptances have been without justification. " This business of acceptance is one into which the other banks have themselves recently intruded with considerable effect, accepting bills for their customers, home and foreign, for a commission; and there is a certain apparent anomaly in the position which makes them guardians of the volume of accept- ance created by the private firms and acceptors themselves on a steadily increasing scale. Nevertheless, this anomaly has little or no untoward effect in practice. The bankers are naturally extremely cautious in raising any question as to the security of general credit in London, and they are in many ways closely connected with the private accepting houses, so that the system, which appears to be full of uncomfortable possibilities on paper, works easily enough in practice. " Other functions of the merchant firms and accepting houses are their activity in general finance and in exchange business. Both these functions arise out of their old business as merchants, which gave them close connection both with the governments and the business communities of foreign countries. Their con- nection with the governments naturally led to their providing credit facilities for them, and to their handling loans and other operations which these governments might have to conduct in 40 PASSING OF THE GOLD RESERVE the London market. Many of them act as regular agents of foreign governments, making issues of bonds on their behalf, paying their coupons, and conducting amortization and other business in connection with their loans; and their connection with the general business community inevitably led to their doing a considerable exchange business with foreign countries, financ- ing drafts on them for the purposes of travel and the innumerable other arrangements which necessitate the transfer of credit from one country to another. It should perhaps be added that the Bank of England's court of directors is largely recruited from the ranks of the accepting firms and finance houses, and the close connection of these firms with the finance, both govern- ment and private, of other countries, equips them especially well to regulate the policy of the Bank of England, one of whose most important functions, as we have already seen, consists in controlling the London money market with a view to foreign demands upon its store of cash/' Under the banking systems of France, Germany and Switzerland provisions similar to those existing in England are made for the issue of bank notes by semi-governmental banking institutions operating under governmental supervision and control. Thus under the French system the Bank of France may issue bank notes against the rediscount of commercial bills of exchange maturing in not more than three months and having at least three responsible endorsers thereto. Under the German System the Imperial Bank of Germany may issue bank notes against discounted commercial bills of exchange, maturing within three months, having three endorsers and in excep- tional cases two solvent endorsers thereto. Under the laws of Switzerland the National Bank of Switzerland may issue bank notes against dis- counted bills of exchange having at least two sig- natures thereto and maturing in not more than three months. A like course is pursued under the Federal Reserve System recently established in the United States. EMERGENCY CURRENCY 41 While we have thus observed that provision has been made in the various countries for the issue of bank notes with full legal tender qualities, it is by no means to be inferred that such issues in all the countries mentioned, constitute in fact an " Emer- gency Currency " in the fullest adaptation of that term to the full extent of such issues. Referring to the foregoing description of the operations of the Bank of England it will be noticed that bank notes may be issued by that institution to the extent of 18,450,000 without requiring the maintenance of a gold reserve to support the same, and that for issues beyond that sum a gold reserve of 100 per cent in volume must be maintained. As the issues up to 18,450,000 constitute therefore new and additional currency they may be properly con- sidered as constituting an "Emergency Currency " and that for issues beyond that sum they do not con- stitute such a currency, for the reason that the bank notes so issued are merely a substitution of one form of currency for another (gold) already existing and of full legal tender value. A similar state of affairs exists under the French, German and Swiss systems. Thus under the French system a gold reserve of 50 per cent to 100 per cent is maintained against note issues by the Bank of France. Under the German system a gold reserve of 334 per cent is required by law to be maintained against bank notes issued by the Im- perial Bank of Germany. Under the Swiss system a reserve of not less than 40 per cent in gold and 60 per cent in bills of exchange is required against note issues by the National Bank of Switzerland. It is therefore evident that to the extent that bank notes are issued under these various systems with- out the requirement of a gold reserve they consti- 42 PASSING OF THE GOLD RESERVE tute an "Emergency Currency " within the meaning of that term as herein defined, and that for issues beyond that amount they do not constitute an " Emergency Currency " in fact, as they are merely the substitution of one form of money for another already existing as heretofore stated. These observations therefore lead us to the con- clusion that there is no well established, uniform rule of action, either governmental or scientific, underlying these various systems. They appear rather to be the outgrowth of the commercial, bank- ing, and political development peculiar to each of the respective countries. Having no gold in our modern country we are unable therefore to adopt any one of the foregoing systems in so far as they provide for the issue of Emergency Currency se- cured either wholly or in part by a " Gold Reserve, ' ' and that very naturally leads us to the consideration of what constitutes the next best security that may be accepted for that purpose. It is an inexorable rule underlying all issues of paper currency, whether in the form of " legal ten- der Treasury notes " issued by the National Gov- ernment, or in the form of " bank notes " issued by banking institutions operating with or without gov- ernmental supervision or control, that the value of such issues must be measured entirely by the facility and certainty with which they may be redeemed. As to legal tender Treasury notes we have ob- served that those issued by the Government of the United States during the Civil War, 1861-1865, failed to command public confidence as they were not a legal tender in payment for customs duties and were receivable by the Government only in payment for internal revenue taxes and other minor obligations forming but a small part of the Gov- EMERGENCY CURRENCY 43 eminent 's revenue; thus leaving outstanding con- siderable quantities of legal tender notes for the redemption of which no provision was made until on and after January 1, 1879. (Chapter I.) As to " bank notes " the experience has been the same, the value of such notes being dependent entirely upon the soundness of the institutions is- suing them and the facility with which they could be redeemed. As to legal tender Treasury notes we have demon- strated that if issued in reasonable amounts, not to exceed the total revenue for the year, and made a full legal tender in payment of all public dues whether customs duties, internal revenue taxes or otherwise, such notes will be automatically retired when paid into the National Treasury and none will be outstanding at the end of the year. ( Chapter I. ) A certain and total redemption of such notes is thus provided for. As to bank notes we have observed that under the laws of the various European countries the prompt redemption of such notes issued by banking insti- tutions operating under Governmental supervi- sion, is provided for by keeping on hand a gold reserve supported, wholly or in part, by commercial bills of exchange maturing within 90 days or less. As has been heretofore indicated in the discussion of the English banking system, " A bill of exchange originally drawn on a merchant by a correspondent, from whom he had bought goods, directing him to pay the consideration for them at sight, or at a date named, has in recent years widely extended this function and has become an instrument by which credit can be raised against any form of security or collateral, or in some cases against no security at all but the credit of the parties named upon it." In view of this great divergence as to the intrinsic nature of bills of exchange, those growing out of 44 PASSING OF THE GOLD RESERVE actual commercial transactions, that is, " those drawn to secure the payment of goods actually mov- ing in commerce/' are considered, next to gold, the most acceptable form of security to be held by banking institutions as security against bank notes outstanding. Bills of exchange of this kind are self -liquidating as they represent commodities passing in commerce somewhere between the origi- nal producer or manufacturer and the final pur- chaser and consumer and are reasonably certain to be taken up and paid at maturity, particularly so if the producer, purchaser and intervening bank- ers have all assumed a responsibility on the paper for its payment by the endorsement thereof. As such bills constitute for banking purposes the next best security to that of gold, we may therefore in the absence of gold consider them as the next best basis for the formation of the reserve against " Emergency Bank Note Currency." With this object in view two methods of pro- cedures suggest themselves : First: To provide for the issue of such Emergency Currency through the National Treasury direct upon the deposit of bills of exchange of the desired quality, without the interven- tion of any central, or semi-Governmental banking institution whatsoever. Second: To provide for the issue of Emergency Currency solely through a central, or semi- governmental banking institution, or system operating as a bank of deposit and discount, along lines similar to those followed by the Bank of England, the Bank of France, the Imperial Bank of Germany, the Bank of Switzerland and the Federal Reserve Sys- tem of the United States. EMERGENCY CURRENCY 45 If the issue is made through the National Treas- ury the Government necessarily becomes sponsor for the soundness of the emergency currency so issued and must see to it that only high-class self- liquidating commercial bills of exchange of the character herein specified are deposited, and that they are promptly taken up at or before maturity and the emergency currency issued thereon retired. If the issue is made through a central, or semi- governmental banking institution, the burden of safeguarding such issues, and providing for the retirement and cancellation of the emergency cur- rency issued thereon necessarily rests upon that institution. In either case this leads us to the consideration of the question. " Can Emergency Currency be so issued without requiring the sup- port of a "Gold Reserve "? CHAPTER V THE GOLD RESERVE It has been shown in the foregoing pages, that under the banking systems of various European countries, bank notes with full legal tender qualities may be issued : First: Against a reserve of an equal amount in gold. As in the case of England for issues beyond 18,450,000. Second: Against a reserve of both gold and com- mercial bills of exchange in varying propor- tions. As in the case of France, Germany and Switzerland, and the United States. Third: Against a reserve of bills of exchange, with- out an additional support of gold. As in the case of England where such notes may be issued to the extent of 18,450,000 without the requirement of a gold reserve. We have heretofore demonstrated in Chapter I of this volume under the heading " Financing the Government " that full " legal tender Treasury Notes " may be safely issued without requiring the support of a Gold Reserve, where such issues do not exceed the prospective public revenues for the fiscal year, for the reason that the total redemption and cancellation of such issues is always in open view and is therefore fully assured. It has also been stated in the preceding chapter that " It is an inex- orable rule underlying all issues of paper currency, whether in the form of " legal tender Treasury Notes " issued by the national government, or in the form of " bank notes " issued by banking insti- tutions operating with, or without governmental 46 THE GOLD EESERVB 47 supervision or control, that the value of such issues must be measured entirely by the facility and cer- tainty with which they may be redeemed. ' ' Applying this rule to the first proposition just mentioned, we find that where bank notes are issued against an equal amount (100 per cent) in gold, absolute certainty of redemption is assured. As to the second proposition we find that where bank notes are issued against a reserve of both gold and commercial bills of exchange in varying pro- portions, that there is a reasonable certainty of re- demption provided the bank notes so issued are supported in fact to the full face value thereof (100 per cent) by commercial bills of exchange of good quality maturing in three months or less, and endorsed by at least two or three responsible parties to the transaction, and that therefore the additional reserve in gold of whatever percentage is merely an additional assurance that any losses growing out of the acceptance and rediscount of bills of ex- change of poor quality will be made good from such " gold reserve " which may in fact constitute a part of the " paid in capital " of the bank issuing such notes. Thus it is stated by French writers that : " The reason why the Bank of France requires capital is that it is impossible to secure an absolutely infallible discount board and to discount only paper that is absolutely safe." (Eeport of the National Monetary Commission of the United States on the operations of the Bank of France.) (Senate Document No. 494, 61st Congress, 2d Session.) As to the third proposition we find that where bank notes are issued against a reserve of com- mercial bills of exchange without the additional support of a fixed gold reserve, that there is like- wise a reasonable certainty of redemption, as the mere absence of a fixed gold reserve does not neces- sarily detract from this reasonable certainty if we 48 PASSING OF THE GOLD RESERVE bear in mind that any losses that may be sustained through the rediscount of poor bills of exchange must in the last analysis be met from the " paid in capital stock and surplus " of the issuing bank, be that gold or paper currency. As our modern country has no gold it follows that there can be no "gold reserve " to support emer- gency bank notes issued by semi-governmental banking institutions on the rediscount of commer- cial bills of exchange, but that additional certainty of redemption can be provided for by the retention of its equivalent, a reserve of " legal tender Treas- ury Notes/' forming part of the paid in capital stock and surplus of such institutions. Should the alternative plan be followed of issu- ing emergency currency only through the National Treasury on the deposit and rediscount of commer- cial bills of exchange of the highest quality, reason- able certainty of redemption may be also assured, if we bear in mind that the several commercial banking institutions in depositing such bills of ex- change with the National Treasury will have as- sumed full responsibility for the soundness thereof, and that in case of default any loss must, as a mat- ter of fact, be made good from the paid in capital and surplus of such institutions. To that extent therefore the paid in capital and surplus of such commercial banking institutions constitutes in fact a reserve against any emergency currency that may have been so issued, from which it is evident that the National Treasury is placed under no necessity for carrying a further and separate reserve of legal tender Treasury notes or of gold for that purpose. It follows therefore that the closing query of the preceding chapter " Can emergency currency be so issued without requiring the support of a gold reserve ' ' must be answered in the affirmative. CHAPTER VI BALANCE OF TRADE Having thus witnessed the gradual development of our modern community into a country of wide agricultural, industrial and commercial activities it is reasonable to assume that it may now be ready to look beyond with a view to opening up commerce with foreign nations. In the ordinary course of events this will undoubtedly lead to the purchase of such goods the product of the soil and industry of foreign countries as may be necessary and desir- able for the use and comfort of the people of our modern nation, and in return to the sale and ship- ment abroad of such of the products of the soil and industry of their country as may be necessary and desirable for the use and comfort of the people of foreign countries. It is of course self-evident that goods purchased abroad must be paid for. This may be accom- plished : First: Through the exchange and shipment abroad of goods the product of the soil and industry of the purchasing country. Second: By the shipment abroad of recognized, marketable bonds and stock exchange se- curities. Third: By the payment of actual money. Assuming therefore that after the fullest interna- tional exchange of commodities in the course of commerce it should develop that the "Balance of 49 50 PASSING OF THE GOLD RESERVE Trade " is in favor of our " modern country " and that the recognized and established money of ac- count and standard of value of the foreign debtor nations is gold, it necessarily follows that the bal- ance so due will be paid in gold. Gold, as is well known, is the recognized standard of value governing foreign exchanges of the leading commercial nations, and although we have not here- tofore, in following the progress and development of our modern nation, made provision for a gold standard, it is self-evident that the legal tender Treasury Notes provided for must be based upon some standard of value. As our modern country forms but one of a number of nations on the face of the globe the usual procedure in such cases would be to adopt the standard of value in use in the mother country, or that of a neighboring, or other country, with which commercial intercourse is to be looked forward to. It is therefore immaterial for our present purpose whether the standard is that of the American gold dollar, the British pound Sterling, the franc of the Latin Union, the mark of Germany, the pesata of Spain, the peso of Ar- gentine, or that of other countries having the gold standard. Should our modern country therefore in conse- quence of a favorable balance of trade become the holder of considerable quantities of gold, the ques- tion immediately arises as to what disposition shall be made thereof. First: Shall it be coined into standard gold coins of the fineness and weight represented by the legal tender Treasury Notes heretofore pro- vided for, and a corresponding amount of legal tender Treasury Notes canceled ? BALANCE OF TRADE 51 Second: Shall it be coined into standard gold coins of the fineness and weight represented by the legal tender Treasury Notes heretofore pro- vided for, without canceling a corresponding amount of legal tender Treasury Notes, with authority to issue against the same gold cer- tificates of a corresponding amount ? Third: Shall it be coined into standard gold coins of the fineness and weight represented by the legal tender Treasury Notes heretofore pro- vided for, without canceling a corresponding amount of legal tender Treasury Notes, with authority to issue against the same gold certificates of a corresponding amount to be held as a gold reserve of not less than 30 or 40 per centum of the amount of legal tender Treasury Notes outstanding ? Fourth: Shall it be treated as a commodity and given no coinage privileges ? Fifth: Shall it be received at the Governmental Treasury and held on deposit in the form of gold bars of standard fineness and suitable weight against the issue of redeemable gold certificates of suitable denominations and full legal tender privileges on an equality with the legal tender Treasury Notes previ- ously placed in circulation ? Sixth: Shall it be received at the Governmental Treasury and held on deposit in the form of gold bars of standard fineness and suitable weight, without the issue against it of re- deemable gold certificates; but that in lieu thereof there be issued against such deposits legal tender Treasury notes of a like amount and of the same design and character as those heretofore mentioned, or : 52 PASSING OF THE GOLD RESEKVE Seventh: Shall the gold bars so deposited in the Governmental Treasury be subject to with- drawal only under the supervision and sanc- tion of designated Governmental authority when actually intended and necessary for export in settlement of balances of Trade due abroad, or when necessary and intended for actual use in the arts and manufactures at home, on the payment of assay, smelting and refining charges incurred, and on the payment of such further withdrawal charge as the then existing conditions of the foreign exchange markets may make desirable, in order that the exchanges may be equalized and that full protection against the unwar- ranted and unnecessary withdrawal of such gold deposits may be afforded ? Having heretofore launched our " modern com- munity " upon a successful career as a progressive, agricultural and industrial country, without a gold coinage in any form, it becomes a matter of the greatest importance to determine how far this in- flux of gold shall be allowed to affect the existing legal tender Treasury Note currency system al- ready in successful operation for all domestic and internal purposes. Before therefore passing upon the merits of the various foregoing propositions it will be of in- terest to examine more closely into the history and development of the gold standard as it exists to-day. CHAPTER VII THE GOLD STANDARD It has been heretofore stated that " The early exchanges were conducted by the direct barter of one commodity for another and that by various tedious stages a system of exchange was finally developed whereby all commodities and labor were measured in terms of some fixed standard called money," also that " by virtue of certain qualities of inherent beauty, serviceability, etc., gold at an early day came to be utilized extensively as that standard of exchange." In its early uses gold was treated as a commodity. Thus in former times goldsmiths were the recognized dealers in gold until finally organized government reserved to itself the right to " coin money and to fix the value thereof." Exercising this reservation gold came to be coined into money, and the value, weight, and fineness thereof fixed by Legislative enactment. The gold coinage so provided for at first circulated freely from hand to hand. Later as paper issues were resorted to, gold was set aside as a reserve for the ultimate redemption of such paper issues and held on deposit at the public Treasury, or at the Governmental Bank of Issue, where one existed. Acting on the theory that all governmental is- sues of paper currency must be convertible into gold at all times on demand in order to have the requisite requirements to constitute sound money, and assuming furthermore that the whole amount of governmental paper issued would not in all prob- ability be presented for redemption at one and the 53 54 PASSING OF THE GOLD RESERVE same time, it soon became the practice to set aside certain proportions of gold as a reserve to provide for the immediate redemption of such governmen- tal paper issues as might be presented. Frequent reference is made to the gold reserves of the Bank of England, the Bank of France, the Bank of Germany, and other institutions of that kind. From the brief reference to the operations of such institutions in the foregoing pages, particu- larly with reference to the issue of emergency cur- rency (Chapter IV) we have incidentally observed that the rise and fall of the gold reserve held by such institutions constitutes a factor of no small im- portance in that it may affect the welfare and im- mediate solvency of the business community. There is not necessarily anything economically wrong in the establishment of the gold standard for the measure of values existing to-day. In fact it is a commercial and economic necessity of modern times. Without it domestic and foreign commerce could not be maintained, and present civilization would be impossible. The gold standard as a meas- ure of values should not therefore be held respon- sible for any of the commercial or financial ills of the present day ; but rather the extreme lengths to which its uses have been extended in forming the basis for modern currency and that leads us to the consideration of the " Tyranny of the Gold Re- serve.' CHAPTER VIII THE TYRANNY OF THE GOLD RESERVE We have in the preceding chapters successfully demonstrated that it is neither essential nor neces- sary that a " gold reserve " be maintained to insure the redemption and cancellation of " Emergency Currency " where such currency is issued solely on the deposit, or rediscount of " commercial bills of exchange " of the highest quality, covering goods actually sold and moving in commerce, whether such currency is issued direct through the National Treasury, or through a semi-governmental bank- ing institution, created for that purpose, with paid in capital and with or without accumulated surplus from earnings. We have also demonstrated that the prime and foremost objective of an " Emergency Currency " is that of affording immediate relief to the banking and commercial community interested in the suc- cessful financing of legitimate commerce. In fact we have demonstrated that by making provision for the issue of " Emergency Currency " as stated, legitimate commerce is at all times able to "finance itself/' That is to say : that by the deposit, or re- discount of commercial bills of exchange of the highest quality, it can at all times secure ready money of full legal tender quality to move merchan- dise while traveling in the ordinary course of trade between the original producer or manufacturer, and the final and ultimate consumer, who must after all eventually pay for the goods through a return of 55 56 PASSING OF THE GOLD RESERVE the " Emergency Currency " issued thereon after it shall have accomplished its purpose. In order therefore that we may the more fully appreciate and understand the great importance of these fundamental principles let us for the mo- ment examine somewhat more closely into the op- erations of the " Gold Reserve " as maintained under the leading banking systems of this day. We find accordingly that under the English sys- tem it is not only one of the functions of the Bank of England to act as the : 4. " Provider of emergency," but to act in addition thereto as the: 5. " Keeper of the gold reserve for British banking," and as the: 6. " Keeper of the gold reserve which is most readily available for the purposes of international banking." Another function of the Bank of England, and that a very important one, is that of earning divi- dends for its shareholders on the capital stock in- vested. To this end its capital stock, and deposits (which include the bank reserve of British bank- ing) are constituted a bank reserve of that insti- tution against the issue of Bank of England Notes of two, three or more times its volume, secured by discounted, or rediscounted bills of exchange, by loans at call, bonds, stock exchange securities, etc., subject to the requirement that for all issues of bank notes beyond the sum of 18,450,000 a gold reserve of 100 per cent must be maintained. If a bank reserve of ten per centum of the amount originally deposited at the local bank is considered an average and reasonable bank reserve, it follows that for every pound sterling originally deposited there are outstanding total credits issued to others of ten times that amount. Should the original de- positor now conclude to withdraw his deposit from TYRANNY OF THE GOLD EESERVE 57 his local bank for the purpose of meeting payments abroad in gold it follows that the local bank will be compelled to withdraw its deposit from the Bank of England, where it was redeposited as its bank reserve against the loans made thereon. By the withdrawal of such deposit the support is thereby withdrawn from loans of two or more times its volume made thereon by the Bank of England and necessitates the calling in of outstanding loans by that institution in order that the established pro- portion of its gold reserve against deposits and against bank notes issued may be maintained, not- withstanding that the loans may have been made on the highest class of commercial bills of exchange and will be fully paid for and satisfied on maturity, by the return to the Bank of England, of the Bank of England notes issued thereon. Where such withdrawals are made on a large scale it may happen that the Bank of England is unable to maintain its gold reserve at the prescribed figure although strenuous efforts may have been resorted to for that purpose by the calling in of outstanding loans and by raising the rate of dis- count to discourage further loans. In fact under such circumstances the gold reserve system of the Bank of England has in the past completely broken down as is evidenced by the fact that at various times in the past during periods of financial strin- gency and panic in 1847, 1857, 1866 and again during the late World War it became necessary by Act of Parliament to suspend the provisions of the Bank Act restricting the issue of uncovered Bank of England Notes, and to permit unlimited issues in excess of 18,450,000 without requiring the main- tenance of a gold reserve thereon. 58 PASSING OF THE GOLD RESERVE It may be suggested, and undoubtedly with con- siderable force, that the conditions bringing about this breakdown may have beeen aggravated by the fact that loans in large volume were made on specu- lative stock securities, the value of which was rapidly fluctuating; but it unquestionably proves that the function of the Bank of England to act as the " Provider of Emergency Currency " ceased to operate until the restrictions as to maintaining a gold reserve had been suspended during the emer- gency. If we bear in mind that the true function of an Emergency Currency is that of providing new or additional currency, to aid and support legitimate commerce, especially so during times of great finan- cial stress, we can realize fully how the maintenance of a gold reserve may seriously impair or totally neutralize that function to the great injury of legiti- mate commerce and the activities dependent thereon. As the maintenance of a gold reserve against the issue of Emergency Currency in fact acts as a bar and deterrent against the free and untrammelled operation of the function of " Providing Emer- gency Currency " on the deposit or rediscount of bills of exchange growing out of bona fide commer- cial transactions maturing within 90 days or less and having two or three responsible endorsers thereto, it is but natural that we should conclude not to incorporate that provision in the " Emer- gency Currency System " as heretofore provided for our modern country herein under consideration. The same resolve applies with equal force to the " Legal tender Treasury Notes " issued by the National Treasury, certain redemption and cancel- TYRANNY OF THE GOLD RESERVE 59 lation of which has been otherwise fully estab- lished and provided for. This resolve to refuse to change to a " gold re- serve system " will be strengthened the more if the reader will pause for a moment to look about, and come to realize, that the great majority of the na- tions on the face of the globe to-day, do not produce gold from mines or other natural deposits within their own territory. It has been the boast of financial and economic writers for many years, that owing to the large production, or holdings, of gold, by this or that country, other countries not so favorably situated, can be held in financial and economic bondage ; and indeed that is true, if we stop for a moment to con- sider, that it requires a problem of but the simplest nature to demonstrate, that all countries cannot have the benefit of a favorable balance of trade at one and the same time. In fact it is self-evident that a balance of trade in favor of one nation must necessarily be offset by an unfavorable balance of some other nation, or nations. Unfavorable balances of trade must be paid for. Where the country affected has no gold it is the usual policy to place a loan abroad with some coun- try being more favorably situated with respect to the holding of gold, with the hope that at some future time the balance of trade may shift in favor of the borrowing country and thus afford means for cancelling the debt. If, on the other hand, in addition to providing for the payment of the debt abroad gold is brought into the country to build up the gold reserve supporting the currency and the adverse balance continues, such gold will again in- evitably flow out of the country thereby throwing 60 PASSING OP THE GOLD EESERVE the country upon a " depreciated paper currency " basis. As this depreciation continues the prices paid for articles imported from abroad will constantly go higher and higher, while those obtained abroad for the products of home industry will go lower and lower, leading to inevitable commercial and indus- trial depression thereby retarding and making impossible the natural growth and internal development, that the fertility of the soil, and the intelligence and industry of the peoples of such countries entitles them to. That this state of affairs exists in many of the non-gold producing countries, especially those of Central and South America as well as those of Europe to-day, cannot be doubted, as will be seen from an examination of the following table of estimates of the " values of foreign coins ' as made by the Director of the United States Mint. (January 1, 1920. Treasury Decision 38231.) (T. D. 38231) Values of Foreign Coins [Circular No. 1] " TREASURY DEPARTMENT, January 1, 1920. " In pursuance of the provisions of Section 25 of the Act of August 27, 1894, I hereby proclaim the following estimate by the Director of the Mint of the values of pure metal contents of foreign coins to be the values of such coins in terms of the money of account of the United States, to be followed in esti- mating the value of all foreign merchandise exported to the United States during the quarter beginning January 1, 1920, expressed in any such metallic currencies. " Entries of merchandise liquidated upon the values pro- claimed herein will be subject to reliquidation upon the order of the Secretary of the Treasury whenever satisfactory evidence shall be produced to him showing that the values in United States currency of the foreign money specified in the invoices were at the date of certification at least 10 per cent more or less than the values herein proclaimed. " CARTER GLASS, Secretary/' TYRANNY OP THE GOLD RESERVE 61 ESTIMATE BY THE DIRECTOR OF THE MINT OF THE VALUES OF FOREIGN COINS Country. Legal standard. Monetary unit. Value in terms of U.S. money. Remarks. 1 Argentine Re- pnblic. Gold Peso . . . MM Currency : Depreciated paper, convertible at 44 per cent of face value ; exchange rate about 10.4325. Austria-Hungary .do Krone . .2026 Exchange rate about $0.0061 = 1 krone. p 1 ft l f i &nd .1930 Member Latin Union ; gold is neigiuiii silver. actual standard. Exchange value $0.098. Bolivia Gold Bolivia) 10 .3893 12} bolivianos equal 1 pound sterling ; exchange rate about $0.3257. Brazil do . . Milreis .5462 Currency i Government paper ; exchange rate about $0.28 to the milreis. British Colonies do 'ound s terlinr ... 4.8666 in Australasia and Africa. 0&nftd& .do Dollar 1.0000 Central American States : Costa Rica... .do Colon.. .4668 Exchff. rate $0.3448=1 colon. British lion* .do Dollar 1.0000 duras. Nicaragua . . . .do Cordobi 1.0000 Exchange rate $0.995. rQuatemala : Currency incon- . *. Guatemala . . Honduras.... Silver Peso . . . .9171 1 vertible payer. | Honduras : Currency, bank I notes. Salvador Gold Colon.. .6000 Exchange rate about $0.6128. .do Peso . . . .3650 Currency: Inconvertible pa- per ; exchange rate about $0.1826. Amoy .6191 Canton .6146 Cheefoo... .4529 ChinKiang .4840 China Silver ...- Tael..- Fuchau . . . Haikwan (customs] Hankow . Kiaochow Nankin .. Niuchwang .4052 .5457 .4213 .4721 .5033 .4246 Thetael is a unit of weight, not a coin. The customs unit is the Haikwan tael. The values of other taels are based on their relation to the value of the Haikwan Ningpo... Peking... Shanghai. Swatow . . Takau.... Tientsin.. .4606 .4810 .3876 .4033 .5287 .4721 tael. The Yuan silver dollar of 100 cents is the monetary unit of the Chinese Republic ; it is equivalent to 0.644 + of the Haikwan tael. [Yuan .... .9955 Dollar-* Hongkong British... .9991 .9991 Mexican . 1.0065 Colombia Gold Dollar .9733 Currency : Government paper and gold ; exchange rate about $1.0152 to 1 gold peso. Cuba ..do Peso. . 1.0000 Denmark ..do Krone .2680 Exchg. rate $0.1925=1 krone. Ecuador ........ ..do . .. .4867 Exchange rate $0.4695. Egypt ..do Pound (100 piasters 4.9431 The actual standard is the British pound sterling, which is legal tender for 97* piasters. 1 The exchange rates shown under this heading are recent New York quotations and are given merely as an indication of the values of currencies which are fluctuating in their relation to legal standards. 62 PASSING OF THE GOLD RESERVE ESTIMATE BY THE DIRECTOR OF THE MINT OF THE VALUES OF FOREIGN COINS. CONTINUED Country. Legal standard. Monetary unit. Value in terms of U.S. money. Remarks. Finland ..do Markka .1930 .1930 .2382 4.8665 .1930 .'2500 .3244 1 0008 .1930 .4985 1.0000 .4985 .4020 1.0000 .2680 1.0000 .9648 .0959 .1706 4.8665 .5000 1.0805 .1930 .5146 1.0000 .1930 .8709 .1930 .5678 .2680 .1930 .0440 1.0332 .1930 Exchg. rate $0.03=1 markka. Member Latin Union ; gold is actual standard ; exchange value $0.0952. Exchange rate about $0.0215=1 mark. Exchange value $3.83. Member Latin Union ; gold is actual standard. Exchange value $0.155. Currency: Inconvertible pa- per, exchange rate approx- imately $0.20. 15 rupees equal 1 pound ster- ling. Exchange rate $0.4525. Member Latin Union ; gold is actual standard. Exchange value $0.0769. Exchange value $0.5025. Currency : Depreciated silver token coins. Customs duties are collected in gold. Exchange value silver peso $1.015; gold peso $0.50. Exchange value $0.3775. Exchg. rate $0.2075=1 krone. Currency: Depreciated Para- guayan paper currency. ["Currency : Silver circulating above its metalic value: j exchange value of silver L kran approximately $0.179. Exchange rate about $4.30. Exchange rate about $0.4925. Currency : Inconvertible pa- per ; exchange rate about $0.364. Exchange rate about $0.031=1 leu. Exchange rate about $0.046=1 dinar. Exchange rate $0.395 = 1 tical. Valuation is for gold peseta ; currency is notes of the bank of Spain, exchange value approximately $0.195. Exchange rate $0.5025. Exchg. rate $0.2175=1 krona. Member Latin Union ; gold is actual standard. Exchange value $0.1812. 100 piasters equal to the Turk- ish . Exchange rate about $1.50=1 Turkish . Exchange rate $1.0504. Exchange rate about $0.1932. Gold and silver. Gold ..do Gold and silver. Gold ..do Silver .... Gold and silver. Gold ..do Germany Great Britain . . . Greece Mark Pound sterling Haiti India [British].. Italy Lira Japan Yen Dollar Mexico ..do Netherlands Newfoundland. . . Norway ..do ..do ..do do Guilder (florin) ... Dollar Balboa Paraguay ..do (Gold 1 Silver ... Gold... ..do ..do ..do ..do ... Peso (Argentine).. Achrefi Peru Philippine Islds. Portugal Roumania Russia Kran Libra Peso Escudo . Leu Ruble Santo Domingo. . Servia Siam Spain ..do ..do ..do Gold and silver. Gold ..do ..do ..do ..do ..do Dollar Dinar Tical Peseta Straits Settle- ments. Sweden Switzerland . . . . Turkey Uruguay Venezuela Dollar Piaster Peso Bolivar TYRANNY OF THE GOLD RESERVE 63 It will thus be observed that where countries have no appreciable gold and nevertheless insist upon keeping up the attempt to maintain a paper currency at par on a gold reserve basis the inevi- table result is a depreciation of that currency and the establishment of a premium on gold, as the gold leaves the country. On the other hand we have also observed that where countries are large holders of gold, but maintain a convertible paper currency on a gold reserve basis, the commerce and industry of such countries is likewise subjected to violent strains, as outstanding loans are called in and new loans are withheld, in order that the gold reserve may be maintained at the desired volume. This very naturally brings us to the conclusion that the burden of financing the whole world is too great for gold alone to bear, and that it is no longer wise to rely on a gold reserve of one part to liquidate an indebtedness of two, three, ten or more times its volume. When these facts shall have been fully appreciated by the nations interested, a long step forward will have been taken, and the " Tyranny of the Gold Reserve " will have become a thing of the past. CHAPTER IX EQUALIZING FOREIGN EXCHANGE Having thus concluded not to transform the es- tablished " Legal tender Treasury Note " and the " Emergency Currency " systems of our " Modern Country " into a " Gold Reserve System" it be- comes necessary to consider only the sixth and seventh propositions regarding the disposition of gold imports outlined in Chapter V dealing with the " Balance of Trade," viz. : Sixth: Shall it be received at the Governmental Treasury and held on deposit in the form of gold bars of standard fineness and suitable weight, without the issue against it of re- deemable gold certificates; but that in lieu thereof there be issued against such deposits legal tender Treasury Notes of a like amount and of the same design and character as those heretofore mentioned ; or Seventh: Shall the gold bars so deposited in the Govermental Treasury be subject to with- drawal only under the supervision and sanc- tion of designated Governmental authority when actually intended and necessary for export in settlement of balances of trade due abroad, or when necessary and intended for actual use in the arts and manufactures at home, on the payment of assay, smelting and refining charges incurred, and on the pay- ment of such further withdrawal charge as the then existing conditions of the foreign 64 EQUALIZING FOREIGN EXCHANGE 65 exchange markets may make advisable, in order that the exchanges may be equalized and that full protection against the unwar- ranted and unnecessary withdrawal of such gold deposits may be afforded ? In the foregoing chapters it has been fully demon- strated that it is a matter of imperative necessity that adverse balances of trade due abroad be paid for in gold. In order that this may be done promptly and effectively in the absence of the free and open coinage of gold, it becomes a matter of the utmost importance that the established Government assume and exercise control and supervision over the import and export of gold in order that com- merce and trade with foreign nations may be facilitated. The sixth and seventh propositions submitted are therefore designed to meet that requirement. Gold bars of recognized fineness with the govern- mental assay stamp affixed thereto, have for many years, and are to-day, considered in international banking and trade, the prime medium of exchange for the settlement of international balances. Pre- vious to the recent war such gold bars could be with- drawn from the Bank of England for export upon the deposit of Bank of England notes of like value. They could also be withdrawn from the United States Treasury upon deposit of a like amount of Gold certificates or of United States Treasury Legal Tender Notes. The same was true under the French system with the exception that certain with- drawal charges to cover costs of assay and the like were added. The term "Balance of Trade " as used in inter- national commerce has reference solely to the differ- 66 PASSING OF THE GOLD RESERVE ence existing between the total amount of exports and imports of any particular country for a par- ticular period as evidenced by official governmen- tal records and statistics, of merchandise imported and exported, under Customs supervision. The gold supply of every country is, however, subject to a further drain through what may be called the " Invisible Balance of Trade " growing out of the bringing in, and the taking out, of gold for which no official record or supervision has heretofore been provided, such as the taking abroad of gold by trav- elers, or the investment in foreign securities or enterprises ; or in the sale of domestic securities for shipment abroad and the subsequent return of such securities from foreign countries. If we stop to consider that the drains upon the gold supplies of a country are equally effective whether the withdrawals are made visibly, or invis- ibly, in that by either method the reserve or foun- dation, upon which credits equal to twelve or more times its volume may have been issued, is taken away, the advisability and necessity of exercising governmental supervision and control over with- drawals will become fully apparent. Thus in con- sequence of conditions growing out of the recent World War various government found it expedient to either absolutely prohibit, or to regulate, the exportation of gold. Accordingly, under various war measures adopted by the United States pro- vision was made for : " 1. The registration of dealers in foreign exchange or in securities for, or through foreign correspondents. " 2. The prohibition of the exportation of gold in settlement of international trade except in pursuance of a license to export first duly obtained. " 3. Limiting the amount of gold and paper currency (re- deemable in gold) that a traveler leaving the United States for foreign territory might carry with him as a part of his baggage. EQUALIZING FOKEIGN EXCHANGE 67 " 4. Regulating the withdrawal of gold from the public Treasury and limiting the uses to which it might be applied in the arts and manufactures at home." This then brings us to the consideration of the next problem, namely, that of " regulating or equal- izing foreign exchanges." While we have not thus far had occasion to discuss foreign exchanges in so far as they might be affected favorably, or unfavor- ably, in consequence of the inflow or outflow of gold, growing out of the rise and fall in the rate of dis- count for commercial paper, the reader will ob- serve, by turning to Chapter IV under the descrip- tion of the operations of the Bank of England that great stress is there laid upon regulating the gold reserve by either raising or lowering the rate of discount; namely, that a raising of the rate of discount discourages loans and causes gold to flow into the Bank of England, and that lowering the rate of discount encourages loans and causes gold to flow out of the Bank's custody. If raising, or lowering, the rate of discount, that is to say, if raising, or lowering, the price at which the use of gold may be obtained at the Bank of England will cause gold to flow in or out of that Bank, as the case may be, it is equally true that by raising or lowering the price at which gold bars may be secured at the public Treasury for export in settlement of Balances of Trade of our Modern Country herein under consideration, gold will like- wise flow in or out, thus increasing or diminishing the available gold supply of the country and regu- lating the exchanges as fully and as effectively as is now done under the Bank of England System. The advantages of this solution of the problem are many : First: It conserves the gold supply of the country for effective work where most needed. 68 PASSING OF THE GOLD RESERVE Second: It entirely removes the necessity for a gold reserve against " Legal Tender Treas- ury Notes " or " Emergency Bank Notes " outstanding. Third: It facilitates commercial and international banking. Fourth: It stabilises commerce and trade in that it removes the danger of the unexpected calling in of loans in consequence of a lowering of the volume of the gold reserve and all the disastrous consequences resulting therefrom. We have thus followed the development of our Modern Country from very small beginnings with no gold and without a gold reserve currency, to a fully developed commercial country engaged in prosperous foreign trade, capable of maintaining its position among other nations of the world in times of peace. In view of the extraordinary strain that has been, in the past, thrown upon all known currency systems in case of war, it becomes there- fore a matter of considerable interest to ascertain whether the currency system herein devised can successfully withstand that strain, which leads us then to the consideration of the next problem: " Financing the War." CHAPTER X FINANCING THE WAR In Chapter I on " Financing the Government ' ; the Secretary of the Treasury was authorized to issue, day by day, full legal tender Treasury Notes in sufficient amounts to defray the actual running expenses of the Government, and in that connection it was pointed out that it might so happen that the legal tender Treasury Notes issued one day might flow back into the Governmental Treasury the next day, in payment of taxes, and that under such cir- cumstances very few legal tender Treasury notes would remain outstanding and would therefore be of but limited service as a circulating medium of exchange to the public generally, and it was there- fore suggested that the Secretary of the Treasury might avail himself of the privilege of issuing such notes in larger quantities in anticipation of the col- lection of governmental revenues for a period of 90 days next ensuing in analogy to the present prac- tice of selling short-term notes or Treasury Certifi- cates of indebtedness to the banks, and to keep the notes so issued on deposit with governmental de- positary banking institutions where they might draw a small interest in accord with the prevailing practice in the United States. If at the outbreak of the war the Secretary of the Treasury has availed himself of this privilege he may at once utilize these funds to help defray the initial costs of purchasing equipment and supplies for the army and navy. When these funds are ex- 69 70 PASSING OF THE GOLD KESEKVE hausted he may issue further sums of legal tender Treasury Notes as found necessary ; provided, how- ever, that there shall not be outstanding at any one time, legal tender Treasury notes in an amount greater than the total estimated revenue for the fiscal year, or say rather for the next ensuing 365 days. Having planned for an estimated revenue of $10,000,000 per day, or $3,650,000,000 for the year, legal tender Treasury notes to that amount may therefore continually remain in circulation and form the basic medium of exchange of the country. Money, in whatever form, in all countries, is the prime medium of exchange, whether it be used to compensate for labor, materials, or otherwise. The greater the quantity of labor and materials to be compensated, the greater must necessarily be the supply of ready money to accomplish that object expeditiously and successfully. Nor must sight be lost of the fact that the money so issued should be of value in the community and pass freely from hand to hand at its full face value. This latter object has been accomplished in the foregoing chap- ters by limiting the amount of the legal tender Treasury notes that might be issued and outstand- ing at any one time to a sum not to exceed the esti- mated revenues for the fiscal year, or say rather for the next ensuing 365 days. By limiting the total issue to that sum, certainty of redemption is always in open view. Should the volume of the legal tender Treasury note currency in circulation at this stage still prove insufficient to meet the increased daily running ex- penses incurred by the prosecution of the war, the Government may increase its yearly income by raising its tax budget, whereupon additional legal FINANCING THE WAR 71 tender notes to a like amount may be issued in an- ticipation of these increased collections as hereto- fore. It is of course self-evident that there is a limit to the amount of immediate taxation that the re- sources and industry of any country in time of war can bear. When this limit has been reached it will no longer be practicable to defray the increasing expenditures of the Government, in financing the war, by the issue of legal tender Treasury note cur- rency. If the Government therefore is still in need of ready funds to finance the war, after having an- ticipated the current receipts from the revenue for the next ensuing year, the future must be drawn upon by the sale of Government bonds to the public, to be redeemed and paid for from the prospective revenues of future years, after the termination of the war, when the heavy expenditures necessary to the prosecution of the war shall have ceased. These bonds may run for more or less definite periods, and may draw interest at varying rates as the credit of the country at the time of issue may warrant and should be made payable in the legal tender Treasury notes of the country. It is through the sale of such bonds that the National Treasury is again replenished with funds for the conduct of the war. Bonds should be paid for from the indi- vidual or accumulated savings of the public and it is upon the facility with which this may be accom- plished that the success of the operation will largely depend. These methods would therefore no doubt consti- tute a direct and conservative means of financing a war of short duration and might in all probability prove ample for that purpose. However should the war be prolonged and more and more difficulty be 72 PASSING OF THE GOLD RESERVE encountered in disposing of the successive bond issues to the public, it becomes a matter of interest to consider what measures have been taken by lead- ing nations in the past in such emergency and that then presents the next problem, " Inflation of the Currency." CHAPTER XI INFLATION OF THE CURRENCY Under the " Gold Reserve Currency Systems ' of the present day, depending so largely upon the maintenance of a fixed gold reserve, we find that it has been the general policy of most nations in time of war : First: To prohibit the export of gold. Second: To call upon all citizens of their respec- tive countries to turn into the public Treas- ury articles of gold and jewelry that can readily be spared for melting in the public melting pot, in order that the available gold supply may be increased to that extent, and to receive in payment therefor paper cur- rency of their respective countries. Third: To call upon all the citizens of their respec- tive countries to turn into the public Treas- ury, or to other duly constituted authority, foreign securities held by them in order that they may be disposed of abroad for gold and to receive in exchange, or payment, there- for bonds of their home countries. Fourth: To regulate foreign commerce and the exchanges so as to guard against unfavorable balances of trade and to avoid the necessity of shipping gold abroad in settlement thereof. Fifth: To prohibit the dealing in gold at a pre- mium. Sixth: To prohibit the setting aside, or ear- marking, of deposits of gold due to domestic or foreign correspondents and to force such 73 74 PASSING OF THE GOLD KESERVE deposits into the general funds of the banks, so that they may thereby form a part of the gold reserve and become the basis for the issue of currency thereon, whether by one or more institutions, or countries. Seventh: To suspend the operations of the banking laws of the country requiring the redemp- tion of legal tender bank notes in gold and to authorize the further issue of legal tender bank notes without requiring the mainte- nance of a gold reserve thereon. Eighth: To place in circulation emergency currency through the central governmental bank on the rediscount of notes secured by the deposit of short-term Treasury notes previously issued by the Government in anticipation of a coming issue and sale of Government bonds. Ninth: To place in circulation emergency currency through the central governmental bank on the rediscount of notes secured by the de- posit of governmental bonds previously issued. Tenth: To place in circulation emergency currency through the central governmental bank on the rediscount of bills of exchange, accep- tances, etc., not growing out of actual com- mercial transactions and not covered by merchandise actually sold and in course of distribution to the ultimate consumer. Eleventh: To place in circulation emergency cur- rency through the central governmental bank on the rediscount of notes secured by the deposit of stock exchange securities and by warehouse certificates covering agricul- tural products, such as cotton and the like, INFLATION OF THE CURRENCY 75 stored in warehouse awaiting a market, speculative, or otherwise. Twelfth: Finally, where all other credits fail to is- sue direct from the Governmental Treasury, or through the central bank, legal tender cur- rency based on no other security than the ultimate outcome of the war and the pros- pective revenues that may thereafter be derived. It is of course obvious that this great volume of emergency currency, so issued, no longer bears the quality of absolute certainty of redemption under- lying the issue of legal tender Treasury notes and emergency currency provided for in the preceding chapters. In fact by a departure from those prin- ciples a wide field of uncertainty and inflation of the currency is entered upon and if carried to extreme limits will inevitably result in a depreciation of the currency below its gold standard, as is conclusively shown by the table of depreciation of European currencies during the late World War as estimated by the Director of the United States Mint. (Treas- ury Decision 38231, Jan. I, 1920, Chapter VIII) and by the falling exchanges of the present day. These are necessarily extreme measures and it may be possible that even the best of governments may be compelled to resort to some, or all, of them when driven to extremities in time of war. That they should not however be resorted to longer than can be possibly avoided after the close of the war is self-evident and that then leads us to the con- sideration of "The Deflation of the Currency " and "The Passing of the Gold Reserve." CHAPTER XII THE DEFLATION OF THE CURRENCY AND THE PASSING OF THE GOLD RESERVE A prolonged war unavoidably leaves the coun- tries involved in a more or less exhausted condition and the recuperation of such countries will also be more or less slow depending again upon the degree of exhaustion. If the exhaustion is complete and the country has been driven to the last resort of issuing legal tender paper currency in unlimited quantities without im- mediate hope of redeeming the same and such cur- rency has become depreciated in the open markets of the country to a considerable extent, the first re- course will of course be, to call in and cancel so much of such currency as the resources of the coun- try will permit, by exchanging such currency for Governmental interest bearing long term bonds, on a basis of valuation for the currency somewhere near its then existing depreciated market value, and finally where such depreciation continues to near the vanishing point, to repudiate the currency abso- lutely, as was done by the Continental Congress of the American Colonies after the close of the Revo- lutionary War of 1776-1783 when " on the 31st day of May, 1781, by Act of Congress, Continen- tal bills ceased to circulate as money, and provision was made for refunding the same, but they were bought for speculation thereafter at from 400 for 1 up to 1000 for 1 " (A. Barton Hepburn, History of Currency in the U. S.), and again by France after the French Revolution, when " assignats " 76 DEFLATION OF THE CURRENCY 77 issued in large quantities depreciated rapidly and finally became worthless. The inflated depreciated legal tender currency having been thus disposed of the next step is that of placing the new currency system of the country on a stronger financial basis ; that is to say, to provide a currency that can be maintained at par and will form a sound basis for the commercial and financial transactions of the nation. In the past this has been done, or attempted to be done, by getting back to a gold reserve basis by providing for the issue of a new national legal ten- der currency secured by a gold reserve of 30 or 40 per cent of its volume, either through the National Treasury direct, or through a Central Governmen- tal Bank. Of course the prime and essential requirement of this proposition is, to obtain the gold. This has usually been attempted by providing for the issue and sale of Governmental gold bonds, principal and interest payable in gold, and offering the same in home and foreign markets with the view of replen- ishing the gold reserve with gold obtained from those sources. However, the building up of a gold reserve by these methods is a slow and tedious affair and is fraught with more or less considerable diffi- culties. In the first place there may be no available gold supplies left in the home country and the pub- lic may therefore not be in a position to subscribe for the bonds, however willing, and in the second place, the home country may have already ex- hausted its foreign credit through the issue of pre- vious bonds and the further sale of Governmental bonds in foreign markets may become accordingly more difficult and in many cases possible only after the allowance of ruinous discounts, the payment of 78 PASSING OF THE GOLD EBSEEVE exorbitant interest charges and the making of ex- traordinary commercial concessions; then again in the third place a prolonged war may have left all the leading gold producing, or gold holding nations in a more or less equally exhausted condition and none will have any available gold supplies that may be loaned to the other through the purchase of foreign bonds. In fact self-interest may compel them all to hold on to their own available gold sup- plies in order that their own over-expanded gold reserve currency systems may not be further weak- ened. That this state of affairs exists in many of the leading countries to-day as the result of the " World War " is well known. Having no available gold supplies of their own and being unable to obtain such supplies from abroad many nations to-day, as the result of the " World War," no doubt find themselves in a posi- tion similar to that surrounding our " Modern country " outlined in Chapter I of this book. To look for gold is therefore a hopeless task. Other means of beginning anew and placing the country upon a sound financial and commercial basis must therefore be resorted to, if the nations are to survive and prosper. That this may be effectively done although the nation may be compelled for the time being to live more or less within itself, has been fully and clearly demonstrated in the earlier chapters of this volume. In order that this end may be accomplished it becomes essential that the country first build up its commerce and industry from within and import from abroad as little as possible, at least not in excess of what can be paid for by compensating exports abroad, so that the balance of trade will not be adverse to the home country. If this is ac- PASSING OF THE GOLD RESERVE 79 complished and in addition to a Governmental legal tender currency, based on ample taxation, a check currency, and an emergency currency are also pro- vided for through the establishment of sound bank- ing methods as outlined in Chapters I to IV there can be no question but that such nation will recuper- ate rapidly, although it may have no gold. In countries where the exhaustion is not so com- plete and where there has been no recourse to the last resort of issuing legal tender paper currency in unlimited quantities without immediate hope of redemption and where the inflation of the cur- rency does not extend beyond an inflation of the " emergency currency " of the country through the various banking methods described in the pre- ceding chapter, resulting in an over issue of such emergency currency and an ever dwindling gold reserve, the remedy is closer at hand and the de- flation may be proceeded with in a quiet and orderly manner so that there may be no sudden or violent upheaval of the commercial and financial conditions existing in such countries. This should be accomplished by a gradual dis- continuance of the practice of issuing " Emergency Currency " through the central Governmental banking institution on the rediscount of notes se- cured by the deposit of stock exchange securities ; warehouse certificates of all kinds; bills of ex- change, acceptances and the like not growing out of actual commercial transactions and not covered by merchandise actually sold and in course of dis- tribution to the ultimate consumers; Government bonds; and short term interest-bearing Treasury notes heretofore mentioned. It is by no means to be inferred, that by this proc- ess the various classes of securities just mentioned 80 PASSING OF THE GOLD RESERVE are to lose in any way their high standing in the banking community; on the contrary on account of their extremely liquid nature in being as a general rule readily convertible into cash in the open mar- kets, they will continue to form banking collateral of the highest quality and as such form the basis for the issue of a " Bank Check Currency" to such an extent and in such volume, as the banking usages, or the laws of the particular country may permit, as was fully set out in Chapter III of this book. In fact what is sought to be accomplished and what will be accomplished by this process is merely a deflation of the over-expanded emergency cur- rency. That this deflation will of necessity react somewhat upon the commercial banking system of the country in that it will require the drawing in of banking credits extended on such classes of securi- ties, in order that a safe and proper ratio of bank reserves to bank deposits may be maintained, can- not be doubted. This will however necessarily be- come a private banking problem and cannot further affect the stability of the national currency ; bearing in mind also that the Governmental central bank remains and is open for the further issue of ' i Emer- gency Currency ' based on commercial bills of exchange of high quality covering goods actually moving in commerce; thus affording every oppor- tunity for legitimate commerce to " Finance " it- self at all times. We have thus demonstrated that a country totally exhausted by the War, without credit abroad and without gold at home, is as a matter of necessity compelled to begin anew by establishing industry and credit at home on a full legal tender Govern- mental currency basis, not supported by a " Gold Reserve." DEFLATION OF THE CURRENCY 81 As to countries not totally exhausted by the war, having issued large volumes of inflated emergency currency, supported by an ever dwindling gold re- serve, we will observe if we look about to-day that the general tendency is to restrict, or to absolutely prohibit the exportation of gold for fear of further reducing the ratio of the gold reserve supporting the emergency currency outstanding. This, as is well known, is the primary cause of the falling ex- changes of European currencies to-day. As was demonstrated in Chapter VIII of this work a long continued falling exchange and an ad- verse balance of trade can result only in making the country so affected poorer and poorer in that it compels it continually to pay higher prices for mer- chandise imported and to receive lower prices for home products exported, as measured in gold. The question of the hour is therefore, how can this fall- ing exchange be remedied f We have just observed that an emergency cur- rency over-inflated through the issue of such cur- rency on the rediscount of notes secured by the deposit of stock exchange securities; warehouse certificates ; and bills of exchange and acceptances not growing out of actual commercial transactions may be deflated by discontinuing the issue of the emergency currency on such collateral security and the burden will fall upon the banking and com- mercial interests of the country, which must adjust themselves accordingly. When it comes to deflating the emergency currency however by discontinuing the practice of issuing such currency on the deposit of Governmental bonds and short term Treasury notes an entirely different state of affairs arises in that such action will result in throwing large quan- 82 PASSING OF THE GOLD RESERVE titles of such bonds and short term notes on the market, causing undoubtedly a fall in the market prices thereof below par and a weakening of the Government credit to that extent. The natural remedy in such cases would therefore be to deflate the currency by converting a considerable volume thereof into Government interest bearing gold bonds which of course becomes difficult as the home gold supplies are already tied up in the existing gold reserve of the country and the impossibility of obtaining further supplies of gold through the sale of bonds abroad. In view of these circumstances, we already hear it openly discussed in European countries as to whether after all it would not be advisable to cut the " Gordian knot " by withdrawing the embargo on the export of gold entirely and to let that go where it will, in the ordinary course of settlement for adverse balances of trade. That such course would immediately remedy the adverse falling ex- changes of the country and restore them to par can- not be doubted. If this is done and if we bear in mind that most European countries as a result of the " World War " are no longer in fact on a gold reserve basis in that the legal tender Governmental bank notes of those countries, although a full legal tender, are no longer redeemable in gold at the option of the holder at home, and are only reluctantly convertible into gold for export abroad, we will begin to realize, that the " Passing of the Gold Reserve" is closer at hand. If they will now readjust their home affairs by providing for ample taxation to defray the daily running expenses of the government and include PASSING OP THE GOLD RESERVE 83 therein a sinking fund for the curtailment of the governmental bonded debt ; provide for and issue a governmental Treasury legal tender currency not to exceed the amount repayable to the Treasury as taxes for the ensuing year ; provide for and foster in every way the establishment of a sound commer- cial banking system that will at all times have the confidence of the public so as to assure ample de- posits to form a " banking reserve " for the issue thereon of a " bank check currency "; provide for the issue of an " Emergency Currency " in times of peace on the rediscount only of bills of exchange of the highest commercial quality as heretofore out- lined; and provide for a " Gold Fund " available only for use in the arts at home and for settlement of adverse balances of trade abroad, a long step for- ward will have been taken towards an early recuper- ation from the disastrous effects of this greatest of " World Wars " and the gold reserve and the sys- tem of currency based thereon will have become a thing of the past. Should this course be pursued it may follow that the gold reserve may largely if not entirely leave the country in settlement of adverse balances of trade abroad and the question then naturally arises would not the foreign exchanges again fall to a consider- able extent, or to wiiere they were before the em- bargo was lifted. The anwer to that is, that as long as the country is buying goods from abroad in ex- cess of what can be paid for by exports from the home country, the exchanges may again be un- favorable. This should not however affect the feasi- bility of this course, for if we bear in mind that the quickest way to restore credit abroad is to pay ad- verse balances of trade in gold when that is avail- 84 PASSING OF THE GOLD KESEKVE able, and as the gold reserve is no longer available for the redemption of either legal tender or emer- gency currency at home it is obvious that no useful purpose can be served in longer refusing to let it go abroad where it will. While this no doubt will have a direct tendency towards remedying the adverse falling exchanges of the home country a far greater benefit will be con- ferred upon the internal industry and commerce of such country in that it removes entirely the ever present menace of a curtailment, or disturbance of home industry and commerce, through the ever rising and falling of the volume of the gold reserve and the resultant violent expansion and contraction of banking credit based thereon. As a sound and stable commercial banking sys- tem is the greatest promoter of modern industry and commerce everything possible should be done to strengthen and support that system, for it is by this method only that domestic industry and com- merce can be restored. There is no other way. When this is done foreign commerce and the bal- ances of trade will adjust themselves accordingly. While we have thus far in pursuing our studies developed certain well defined principles as under- lying the currency system of the future for all coun- tries, it may be of interest in closing to apply those principles to the conditions as they exist in our own country to-day, in order that we may apply a prac- tical test. We find according to the " Daily State- ment of the United States Treasury " of February 28, 1920, the following state of facts : DEFLATION OF THE CURRENCY 85 PAPER CURRENCY ISSUED SECURED BY U. S. Gold Certificates, Gold in Treasury, $619,952,254.00 $619,952,254.00 U. S. Legal Tender Notes, $346,681,016.00 U. S. Treasury Notes, (1890) $1,686,292.00 U. S. Silver Certificates, Gold Reserve in Treasury, $152,979,025.63 Silver Dollars in Treasury, $128,571,523.00 $128,571,523.00 Federal Reserve Notes se- cured by Government War Obligations (Short Term Notes & Bonds), $1,572,980,000.00 Federal Reserve Bank Notes secured by Gov- ernment Bonds, $237,834,400.00 National Bank Notes se- cured by U. S. Bonds, $722,641,255.00 Total.. $3,630,346,740.00 Total ...$901,502,802.63 According to the annual report of the Secretary of the Treasury for the fiscal year ended June 30, 1919, the estimated revenues for the fiscal year end- ing June 30, 1920, are as follows : Internal Revenue $4,940,000,000 Customs 260,000,000 Sale of Public Lands 3,000,000 Miscellaneous 300,000,000 Total $5,503,000,000 Comparing the estimated yearly revenue with the amount of paper currency outstanding we find that the amount of such currency is well below the estimated receipts and certainty of redemption is therefore assured. We may now authorize the Secretary of the Treasury to call in : First: National Bank Notes secured by U. S. Bonds $722,641,255 Second: Federal Reserve Bank Notes secured by m U. S. Bonds 237,834,000 Third: Federal Reserve Notes secured by Gov- ernment War Obligations, Short Term Notes and Bonds 1,572,980,000 Total $2,533,455,655 86 PASSING OP THE GOLD RESERVE and to issue therefor United States Legal Tender Treasury Notes to the full face value thereof, retir- ing the bonds and short term notes as the National Bank and Federal Reserve Notes are canceled. This being done we may then authorize the Secre- tary of the Treasury to call in : Fourth: U. S. Silver Certificates secured by Silver Dollars in the U. S. Treasury ....... $128,571,523 Fifth: U. S. Legal Tender Notes and U. S." Treasury Notes (1890) secured by Gold Re serve in the Treasury $152,979,025.63 Sixth: U. S. Gold Certificates secured by Gold in the Treasury to full face value thereof ..... 619,952,254 ."") - ^ J Total ............................ $1,096,891,085 and to issue therefor United States Legal Ten- der Treasury Notes to the full face value thereof, canceling the silver certificates ; U. S. Legal Ten- der Notes; U. S. Treasury Notes (1890) and U. S. Gold Certificates as they are paid into the Treasury and transfer the gold held in the Treasurv f$619,952,254.00 iry ...................... i 152,979,025.63 and the silver dollars ........... 128,571,523.00 Total $901,502,802.63 into the " Treasury Gold Fund " to be there held available for export abroad in payment of adverse balances of trade, or for use in the arts at home, as previously outlined. If Congress will then discontinue the free coinage of gold and authorize the issue in payment there- for of full Legal Tender Treasury Notes of the existing gold standard value; placing the gold so obtained in the " Gold Fund " and made available for export abroad in payment for adverse balances PASSING OF THE GOLD RESERVE 87 of trade; repeal so much of the " National Bank Act " and the the amendments thereto; and of the existing " Federal Reserve Act" as are in conflict with this plan, the reorganization of the United States currency upon a sound and uniform basis will have been accomplished and the " Gold Re- serve," will have in fact become a thing of the past. THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW AN INITIAL FINE OF 25 CENTS WILL BE ASSESSED FOR FAILURE TO RETURN THIS BOOK ON THE DATE DUE. THE PENALTY WILL INCREASE TO SO CENTS ON THE FOURTH DAY AND TO $1.OO ON THE SEVENTH DAY OVERDUE. APfi I41S36 *iA>* 20 1948 "' ^my