France is the only great nation which resorts to the expedient of charging a premium on gold. This in convenience to business is offset by the steady and low rate of discount which is maintained by the bank. The raising of the discount rate is a most effective check upon inflation and gold exports when the bank chooses to employ it.
11. Selling securities.—Sometimes the Bank of France, and the other great central banks of Europe, find that the desired result cannot be attained by merely raising the discount rate. Suppose the coun try is in the midst of a period of prosperity. Re serves are plentiful in all the banks. The market rate of interest is low and the various banks are well able to take care of all the demands made by custom ers from their own resources without having to redis count at the central bank. Under these circum stances they may pay no attention to a rise in the rate at the central bank but may go on loaning at low rates. The rise in the rate does not affect them so long as they are not compelled to rediscount. It may have some moral effect as it indicates what the banks will have to pay in case they are forced to re discount. Moreover, it is well known that the central bank would not raise its rate unless it foresaw danger of inflation or of gold export, which would mean re discounting if it came.
Suppose the banks do not heed the warning. They must be made to see the light before it is too late. In order to bring this about, the central banks are always accustomed to keep on hand a large supply of securi ties, especially of foreign bills, which can be thrown into the market. The selling of these securities acts as a sponge in soaking up the surplus of loanable funds. A banker who has a million to loan buys se curities instead, because he gets a good bargain. Now, if he wants to loan, he must rediscount. He will charge a rate higher than he has to pay at the cen tral bank. This is the result desired. Inflation is checked, a certain amount of liquidation is forced and the threatened tide of outflowing gold is stemmed. If necessary, the central bank may sell its securities abroad so as to build up foreign credits and thus lessen the need for gold exportation. Of course, the cen tral bank may sell its securities at a pride below that which it originally paid for them and it may suffer a considerable loss. It does all this with full knowledge
for the purpose of forestalling a crisis and so aiding the general business of the country at its own expense. A central bank is more than a money-making affair. It is a patriotic institution.
American bankers have been equally desirous of rendering service to the nation under similar circum stances but they have never had the machinery which was necessary to make their efforts effective. We have the Federal Reserve system now. It must be borne in mind, however, that bank cannot begin to collect securities on the eve of a crisis. The opera tion of buying has an effect, the exact opposite to that of selling. A large supply must be accumulated in ordinary times and kept ready for an emergency. Buying at a late hour will only aggravate the situa tion, for it will set free additional funds to swell the already redundant supply.
12. Suspension of specie Bank of France has twice been forced to suspend specie pay ment. In the revolution of 1848, the bank suspended payment and its notes were made legal tender, but it was ready to resume at the end of three months. The government, however, forbade resumption until 1850, when the legal tender provision was repealed.
The bank suspended payment again in 1870, at the , beginning of the Franco-Prussian War, and its notes were again made legal tender. The bank at that time held specie nearly equal in amount to its outstanding notes, and equal to about seventy-five per cent of all demand liabilities. It was in a position to meet a run, in addition to making the usual loans to the commu nity and the necessary loans to the government. The people thought, however, that specie was flowing into Prussia and so they demanded suspension. Even after suspension the notes never fell more than four per cent below par. Specie payments were resumed in 1878.
The Bank of France guaranteed the Morgan loan of 250,000,000 francs in 1870 and later made it pos sible for the government to pay the $1,000,000,000 indemnity to Germany at a time when the country was still smoking from the fires of a disastrous war. Thru her excellent credit system, France, tho defeated in war, kept her commerce moving in 1873 when victorious Germany was suffering from a severe panic.