These factors were previously discussed

In connection with the maintenance of a proper relation between ultimate reserves and the credit superimposed upon them over the country as a whole, not much can be expected of international rearrangements of credit. The importance of an open discount market to the individual bank desiring to strengthen its position, or of facilities for rediscounting some of the paper in its portfolio, was previously discussed. Such agencies are equally important to the banks of a whole community as elements in a wider national system. But international rediscounting, while possible and important, as will be seen subsequently, can, for the benefit of the banking of the country as a whole, at best operate only within narrow limits. There is no international centralization of reserves that permits an easy shifting of balances between nations, and the volume of internationally discountable paper in any one country is not likely to be large enough, or distributed with sufficient uniformity, to assure the possibility of adequate credit readjustments. Consequently, serious readjustments in the international market usually require shipments of bullion.

Direct additions to the reserves themselves are also practically out of the question. In times of credit inflation gold tends to move out of rather than into a country. It is only when the bubble has been pricked that any stimulus to gold imports is given. Moreover, even though a country have gold mines of its own, fluctuations in the output of the mines will have no necessary relation to changes in credit needs. Similarly, the general circulation, however heavy the proportion of gold in it may be, cannot be reliably depended upon as a source of gold for reserves. If the credit situation is such that banks have to retrench, and feel the need of strengthening their reserves, the general public will be inclined to withdraw gold from, rather than bring it to, the banks.1 On the whole, therefore, it may be said that the proper control of credit requires the adjustment of credit to reserves rather than the adjustment of reserves to credit.

International readjustment of credit -not a reliance in the control of the domestic situation

Direct additions to money reserves unreliable

Taking the country as a whole, however, final limitation of credit is possible only with arbitrary control. Internally, as was seen, if a country has a well organized system of local and intercommunity clearings, expansion of credit tends to be automatically controlled. But internationally the process of clearing acts as an automatic check only clumsily and expensively. Hence to prevent the national expansion of credit up to the point where the clumsy international check begins to operate some authority must be provided which can effectively control the situation. What is involved in such control may be more fully set forth subsequently.

Considering simply the domestic factors involved in the safeguarding of reserves no more desirable means of attaining that end can be devised than thoroughgoing centralization. The economy of centralized reserves was discussed in a previous chapter. Only through centralization of reserves can an effective readjustment of credit be made in response to the varying changes in demand from place to place and from time to time, and in the shifting of demand from one form to another. But the point that it is desired to emphasize here is that under a system of centralized reserves the total expansion of credit can be duly controlled. Where reserves are centralized the agency in control of reserves dictates in last analysis the terms on which credit may be extended. Hence, under any general policy of domestic expansion the central reserve authority can through an increase of its own rates discourage the movement before it assumes dangerous proportions.

Arbitrary control of credit is needed in last analysis

Thoroughgoing centralization supplies the best means of control

1 The European banks during the Great War succeeded in obtaining from private hoards large quantities of gold. The issue of one-pound and of ten-shilling notes in England helped greatly there. In the other countries appeals to patriotism were made. These incidents are obviously abnormal, however, and offer no support for the view that to meet normal exigencies withdrawals of gold from general circulation can be relied upon.

The restraining influence that the reserve-holding authority can bring to bear upon the general market depends, of course, upon a number of things. Reserves must be sufficiently centralized so that the outside market can never get very far in its expansion of credit without having recourse to the central authority. In other words, to employ the term that is usually relied upon in this connection, the official discount or loan rate of the central authority must be "effective." It may at times be just as important to have the official rate effective when the general market rate remains at too high a level, but ordinarily the significance of the effectiveness of the official rate is to be found in connection with the forcing up of the market rate when it is believed that this rate is at a level that encourages a relatively loose use of credit. When its rate either is or can be made "effective", the central reserve agency can nip in the bud any undesired credit expansion.

An effective official rate follows almost as a matter of course from highly centralized reserves, but there tend to be differences of degree between different countries according to the relative emphasis placed in practice upon notes and upon deposits, and according to the legal limitations that may be placed upon the extension of credit in the several forms. Under a monopolistic system of note issue in a country where chief dependence is placed upon notes as against deposits no serious movement of credit expansion can get under way without the cooperation of the central bank of issue. The central bank can in such cases, therefore, quickly stifle untoward inflation. On the other hand, if notes are relatively unimportant, and if there be no special reserve requirements for deposits, as is the case in England, then there can be considerable fluctuations of outstanding credit with the central bank unable to interfere. There are times when the Bank of England wishes to make its rate effective that the bank finds it necessary to employ a broker to borrow in the market, thus absorbing credit until the "bank rate" prevails.