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strain that induced nations to adopt very stringent measures as regards the issues of bank notes. The issues have been limited in all sorts of ways; and special provisions have been made for securing an adequate reserve against any emergency. Curiously enough, the legal restrictions on the issues of notes by the Bank of England are more severe than those of any other great Bank. After a certain amount has been issued (now 18,450,0001.), for every other note an equal amount of gold must be kept in the issue department.

The consequence was that, in the week before the outbreak of war, against an issue of notes of 55,121,4051. the Bank held gold coin and bullion to the extent of 36,671,4051. After six months of war the Bank of England held in the last week of January gold coin and bullion in the Issue Department 68,352,3051. against an issue of notes 86,802,605l. There was also a sum of 813,5121. of gold and silver coin in the Banking Department. It would seem from the figures of the Issue Department that the Bank of England notes were secured to a ridiculous point of safety, namely, with about 80 per cent. of gold.

But it is most important to observe that all the other forms of credit, just like bank notes, are ostensibly convertible into gold on demand. Even if the date of payment is deferred, as in bills of exchange, by the method of discounting, the present value is convertible into gold on demand. For the week quoted above the account of the Banking Department of the Bank of England shows a reserve against liabilities of 32 per cent. as against a proportion of 51 per cent. a year before.* As shown by Sir H. Inglis Palgrave, in his standard work on the Bank Rate and the Money Market, it is not the absolute amount of the reserve but the proportion that counts. The great argument of Bagehot's Lombard Street'is that the Bank of England ought to keep a far larger proportional reserve than other banks, mainly owing to the uncertainty as regards the magnitude and the times of

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* It is true that on Feb. 10, 1915, the Bank of England held 24,049,1831. in coin and bullion more than on Feb. 11, 1914; but the proportion was 31% compared with 531. The Imperial Bank of Germany for the corresponding weeks showed an increase of 44,286,0001.-yet the German currency was depreciated.

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foreign demands. This argument has been strengthened by the course of events since that work was published.

Before the outbreak of the war London was more than ever the centre of the financial world. The fact has been repeatedly forced on public notice since the war began, but it is doubtful if its importance has been adequately realised by the public. So long as every promise to pay means in the last resort a power given to the holder of the promise to get gold from his bank, his bank is obliged to have the command of gold. If his bank finds it convenient, instead of keeping gold, to have a credit with the Bank of England, then the Bank of England, the bankers' bank,' must keep a stock of gold equal to any probable demands not only of this particular banker but of all the holders of similar promises to pay gold. In this way the reserve of the Bank of England imposes, or ought to impose, stringent limits on the expansion of credit. The essence of the system by which London became the central money market of the world was the immediate convertibility of all credits into gold. In other countries, especially after the depreciation of silver, this convertibility of credit into gold became imperfect, which is only another way of saying that credit was unduly expanded.

The effects of this laxity in the interpretation of convertibility into gold were shown in the great crisis in the United States in the autumn of 1907. There had been an undue inflation of credit and prices-overbanking and over-trading. When the demand for real convertibility set in, it could not be met. For a time the United States had really an inconvertible currency, consisting mainly of cheques that could not be cashed. The effects of this crisis were world-wide. Everywhere

there was a great contraction of credit for the time being, and a great fall in the prices of securities. It might have been expected that the crisis of 1907 would have given the banking world a lesson, but the only immediate effect in the country of origin seems to have been the evolution of a new scheme for emergency currency in case of another crisis. To save trouble the emergency notes were at once printed and stored ready

Such was the foresight of the United States; and it is now made a matter of complaint that this

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country was not equally provident. "Stuff a fever' instead of starve a fever' bas now become the maxim of the financial medicine-man. In spite of our unpreparedness we have certainly stuffed our fever pretty well. But this is anticipating the course of events.

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The general position of the commercial and financial world before the outbreak of the war may be expressed in two propositions. Firstly, gold had been nominally adopted as the universal standard of value. In the countries in which silver coins were still unlimited legal tender (e.g. France, India, etc.), they were supposed to be in the position of bank notes convertible into goldthey were 'bank notes printed on silver.' Secondly, this nominal adoption of the gold standard had only be imperfectly realised in practice, because the different kinds of representative money-not only the silver and the bank notes, but all the various forms of bankers' credits—were only imperfectly convertible into gold. In normal times, within customary narrow limits, they were convertible into gold ; but on the slightest strain some kind of difficulty was put in the way of getting the gold immediately. The only exception was London. London was acknowledged to be the only free market for gold—the only market that was likely to be open in times of stress. It is no doubt quite true that in the other great banking centres the greatest respect was shown to gold. The other central banks piled up far larger reserves than the Bank of England. But, for all the good it did, the greater part of this gold might as well have been molten into great golden calves, to be worshipped by the customers of the banks. Of course, the gold might be useful as an emergency war-fund (e.g. in bribing Turkey), but that is another question.

The principal effect of this system of imperfect convertibility was that credit was unduly extended, and that the limit on its expansion, properly imposed by effective convertibility into gold in even exceptional circumstances, was broken down by the use of all kinds of 'soft' substitutes—the time and place of the actual convertibility being apparently a matter of no moment so long as the promise to pay was not definitely repudiated.

This economy in the use of gold in practice was

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supported by a corresponding development of theory. As generally happens in economics, the theory was invented to explain and justify the practice. We were told that paper was much more convenient than gold for internal currency, and that the actual circulation of gold was wasteful. It would be quite sufficient to keep a reserve in bullion; and the bullion itself would only be required for an occasional balance in international payments. If a country held enough gold for this occasional emergency, then the rest of its gold could be left to fructify in Egypt or South America, instead of being subjected to useless wear and tear in the pockets of the people. Even as regards these fitful international payments, every effort was made to minimise the useless transmission of gold. Bullion, as it circulates among different commercial countries, in the same manner as the national coin circulates in every country, may be considered as the money of the great mercantile republic.' So wrote Adam Smith; and he also observed that naturally' a merchant exerts his invention to find out a way of paying his foreign debts rather than by sending gold and silver. Too much invention and economy in the great mercantile republic as in others leads to inconvertibility in times of stress.

The natural consequence of this economy of gold was that the outbreak of the greatest war in history found the financial world with inflated credit and inflated prices, and with an ordinary commercial crisis like that of 1907 looming in the near future. The only difference was that in some cases the emergency currency was ready; and, if in other cases the emergency measures to be taken had not been regularised by far-seeing legislation, the minds of all men were fully prepared for the suspension of any inconvenient laws and the substitution of practical measures (and paper) worthy of the occasion.

The consequence of this development of easy finance and the substitution of a system of great elasticity for the old cast-iron system was, as shown by the most extraordinary results, almost too good to be true. All over the world under the old system of credit the Bank of England rate had been regarded as the best measure of the stability of the world's credit system. In the great crises of the 19th century the bank rate rose to

10 per cent., and in one year (1866) remained at 10 per cent. for 96 days and over 7 per cent. for other 96 days. This great crisis arose simply out of the failure of one great firm. But within a week of the declaration of war by England last August the bank rate was reduced to 5 per cent.; and at 5 per cent. it has remained down to the time of writing, although a kind of arithmetical deference was shown to old tradition by the adoption of a 10 per cent. rate during a five days' Bank Holiday. It is remarkable that a year before, in the midst of profound peace, the bank rate had also been 5 per cent. ; so that it looked as if the Great War had had no real effect on the world's financial system. The newspapers were full of congratulations on the ease and the speed with which the crisis had been suppressed. The Chancellor of the Exchequer became the most popular man in the City. At the Lord Mayor's banquet it was announced that a peerage was to be conferred on the Governor of the Bank of England. All seemed going well.

It is true that, even when we look only at the surface of things, the situation does not seem quite so cheerful as is suggested by the glut of money in the London money market. The Stock Exchange was closed to the end of the year; and the premier security, the old Consols, which used to be considered as good as gold and as the barometer of public credit, was unsaleable at an official minimum price too high to attract buyers, and higher (value for value) than the price of issue of the new War Loan. One of the most amazing things about the present war is the effect it has had on people's memories. They have quite forgotten all they said about Consols and public credit. When, with the new year, the Stock Exchange was opened, it was under severe restrictions both as regards dealings in old securities and the creation of new.

It was remarked by the chairman at the annual meeting of one of the great Joint Stock banks that the primary object of a gold reserve was to inspire confidence, and that it must above all things be visible. But the Bank of England has put itself in line with the new theories on the gold standard by keeping an unknown part of its gold reserve in Canada, South Africa, or Australia, and ear-marking other parts. It is true that the Bank Act of 1844 has not been

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