But if the country shares with its neighbours a common metallic standard, this is not so. If the currency of any country is convertible into gold, and the gold is convertible into the cur rency of any other, all the currencies are convertible into one another at no greater cost than is involved in sending gold from country to country. Now gold is a foreign trade product, and one very easily transportable. In time of peace the cost of send ing it (in considerable quantities at a time), even to the greatest distances, never much exceeds r % of its value (including insurance and loss of interest). Between London and New York it is about i%. If the consumers' outlay expands, the prices of foreign currencies cannot rise beyond the point at which they can be acquired by sending gold (called the "export gold point" or "ex port specie point"). The price level of foreign trade products is prevented from rising beyond the corresponding level. The excess consumption of foreign trade products is therefore not checked, and equilibrium is not regained. The exchanges remain at the export gold point, and gold continues to be exported. The gold in fact pays for the excess of imports. The only way in which the outflow of gold can be stopped is by correcting the undue ex pansion of the consumers' outlay by which the excess imports are attracted. In a country with no more than a primitive credit system and no paper money, where the greater part of the unspent margin is in the form of coin, gold movements will themselves affect the unspent margin, and consequential changes in the con sumers' outlay will follow. The path to equilibrium may be complicated by changes in the circuit velocity of money, but sooner or later the gold movements must be decisive.
A highly developed banking system modifies this process. In the first instance an inflow or outflow of gold takes effect in an increase or decrease in the gold holdings of the banks. If the banks are content to see their reserves modified without altering the total amount of bank money, the effect of the gold movements on the consumers' outlay is suspended. In general, however, banks aim at keeping a nearly constant proportion between their deposit liabilities and their reserves. With that object in view they expand credit when they receive gold, and contract credit when they lose gold, and these credit movements bring about an in crease or a decrease, as the case may be, in the consumers' outlay. The influx or efflux of gold then has much the same effects as if there were no banks, but this depends upon the banks taking the appropriate action.
Central Banks.—Under modern conditions a highly organized system of banking has been evolved. The tendency is to concen trate the responsibility for the regulation of credit and money in a central bank. The central bank is the channel through which paper money is issued, and is responsible for maintaining adequate gold reserves to ensure the convertibility of the paper money. It
is also the basis of the bankers' clearing system ; that is to say, the other banks (the "competitive banks") pay their liabilities to one another by cheques on the central bank. And when the com petitive banks run short of money, the central bank supplies their requirements by lending (by way of rediscounts or advances). The paper money of ten takes the form of the central bank's own notes, with the privilege of being legal tender. In practice it is not even necessary that they should be legal tender. In the United States the Federal Reserve notes are not legal tender, but are re garded by the public as absolutely on the same footing as money. In some countries the central bank is given a monopoly of the issue of notes, and in some others, where it has no monopoly, the rights of issue of other banks are no more than a survival and are restricted. In these ways the whole responsibility for the paper currency has come into the hands of the central bank. And where gold coin circulates (as in England, Germany and France before 1914) it is on the central bank that the competitive banks and therefore the whole community rely for supplies of coin. People do not take gold to the Mint to be coined, they sell the gold to the central bank for credit, and if they need gold coin they draw upon the credit for it. The price of gold in the market is regulated not directly by the coinage price but by the central bank's buying price. The buying price is fixed close enough to the coinage price to ensure that this practice shall prevail. For example in England the Bank of England is required by the Bank Charter Act of 1844 to buy gold at £3.17s.9d. per standard ounce (11/12 fine), while the coinage price is £3.17s.1 old. The difference—(1.6 per mille) is no more (and usually less) than equivalent to the loss of interest incurred in the interval between delivery of gold to the Mint and the completion of the process of coinage.
If the central bank issues notes which are legal tender, and so can pay its liabilities with paper, some special provision is needed to make the notes convertible into gold. For example the notes may not be legal tender in payments by the central bank itself, so that the bank must pay in coin if so required. Or an express obligation may be imposed on the central bank to convert the notes into coin. Or, yet another alternative, the central bank may simply be required to sell gold bullion at a fixed price.
This last method was first suggested by Ricardo, and embodied in the Act of 1819 for the resumption of cash payments by the Bank of England. At that time it never became operative. But the plan was revived in the Gold Standard Act, 1925, and has now become recognised under the name of the Gold Bullion Standard.