John Maynard Keynes

“ The only alternative would be the holding of a much larger reserve of gold, the expense of which would be nearly intolerable. The new method combines safety with economy. Just as individuals have learnt that it is cheaper and not less safe to keep their ultimate reserves on deposit at their bankers than to keep them at home in cash, so the second stage of monetary evolution is now entered on, and nations are learning that some part of the cash reserves of their banks (we cannot go further than this at present) may be properly kept on deposit in the international money market. ”

“ The proper solution for each country must be governed by the nature of its position in the international money market and of its relations to the chief financial centres, and by those national customs in matters of currency which it may be unwise to disturb. It is as an attempt to solve this problem that the Gold-Exchange Standard ought to be judged. ”

“ Much nonsense is talked about a gold standard's properly carrying a gold currency with it. If we mean by a gold currency a state of affairs in which gold is the principal or even, in the aggregate, a very important medium of exchange, no country in the world has such a thing.1 Gold is an international, but not a local currency. ”

“ The Japanese system is virtually the same in practice. In China, as is well known, currency reform has not yet been carried through. The Gold-Exchange Standard is the only possible means of bringing China on to a gold basis, and the alternative policy (the policy of our own Foreign Office) is to be content at first with a standard, as well as a currency, of silver. A powerful body of opinion, led by the United States, favours the immediate introduction of a gold standard on the Indian model. ”

“ The Gold-Exchange Standard arises out of the discovery that, so long as gold is available for payments of international indebtedness at an approximately constant rate in terms of the national currency, it is a matter of comparative indifference whether it actually forms the national currency. ”

“ A drain of gold can only come about if foreigners choose to turn into gold claims, which they have against us for immediate payment, and we have no counterbalancing claims against them for equally immediate payment. The drain can only be stopped if we can rapidly bring to bear our counterbalancing claims. When we come to consider how this can best be done, it is to be noticed that the position of a country which is preponderantly a creditor in the international short-loan market is quite different from that of a country which is preponderantly a debtor. ”

“ In Austria-Hungary the system is less automatic, and the Bank is allowed a wide discretion. In detail, of course, there are a number of differences. India keeps a somewhat higher proportion of her reserves in foreign credits, and keeps some part of these credits in a less liquid form. She also keeps a portion of her gold reserve in London-a practice made possible by the fact that for India London is not strictly a foreign centre. On the other hand, India is probably more willing than the Bank of Austria-Hungary to supply gold on demand. ”

“ In countries where the Money Market is neither so highly developed nor, in relation to foreign countries, so self-supporting, the Central Bank, if it is to be secure, must take the matter in hand itself and, by itself entering the international money market as a lender at short notice, place itself in funds, at foreign centres, which can be rapidly withdrawn when they are required. ”

“ But, confining ourselves to European countries, whether we consider, for example, France, Austria-Hungary, Russia, Italy, Sweden, or Holland, while most of these countries have a gold currency and an official Bank Rate, n none of them is gold the principal medium of exchange, and in none of them is the bank rate their only habitual support against an outward drain of gold. ”

“ In such countries a rise in the bank rate cannot be relied on to produce the desired effect with due rapidity. A direct policy on the part of the Central Bank, therefore, must be employed. If the Money Market is not a lender in the international market, the Bank itself must be at pains to become to some extent one. ”

“ A machinery which is adapted for action of the first kind may be ill suited for action of the second. Partly as a consequence of this, partly as a consequence of the peculiar organisation of the London Money Market, the "bank rate" policy for regulating the outflow of gold has been admirably successful in this country, and yet cannot stand elsewhere unaided by other devices. ”

“ With the use of substitutes for gold I will deal in Chapter IV. in treating of the proper position of gold in the Indian system. But what props are commonly brought to the support of an "ineffective" Bank Rate in countries other than Great Britain? Roughly speaking, there are three. A very large gold reserve may be maintained so that a substantial drain on it may be faced with equanimity; free payments in gold may be partially suspended; or foreign credits and bills may be kept which can be drawn upon when necessary. ”

“ This is not the expedient of second-rate or impoverished countries; it is the expedient of all those who have not attained a high degree of financial supremacy-of all those, in fact, who are not themselves international bankers. ”

“ In the same year (1892) the Austro-Hungarian system, referred to above, was established. As in India their exchange policy was evolved gradually. The present arrangements, which date
1In the course of the last twenty years, however, the Bank of Holland, having got rid of the greater part of her redundant stock of silver coins, has gradually come to rely more on her holding of gold and less on her holding of foreign bills than formerly. In 1892-93 foreign bills at £1,801,409 were about 16 per cent of her resources (excluding silver coin) ”