Control of credit by central reserve agency depends upon certain conditions

Circumstances cause difference in the degree of effective control

Finally, it must be mentioned that under centralized reserves the position of the reserve agency is such as to enable it to exercise a strong moral influence in the credit market. The prestige that naturally attaches to the control of a country's bank reserves makes the reserve-holding agency the natural leader of the money market. This prestige is normally heightened by the fact that the great reserve-holding banks of the world are more or less closely associated with their respective national governments. They are not only the government bankers, but their whole business is more or less under government supervision. The result is that mere suggestions of the responsible officers of the big central banks take on the color of authority, and it is thus often possible for them to control credit development without active interference in the market.

The international factors alluded to above as involved in the protection of the reserves have to do in the main with gold movements.1 Exports of gold must, if necessary, be discouraged while at times a positive stimulus must be given to gold imports.

The possibility of restraining or of preventing gold exports depends naturally upon the way in which the gold reserves are managed. In the chapter dealing with international clearings the circumstances giving rise to gold movements were fully set forth. The normal movements of gold in international exchange result from the desire of exchange dealers to earn a profit. Variations in the exchange rates from mint par imply differences in the money-purchasing power of gold bullion in the countries concerned. If these differences are great enough to cover all the charges involved gold tends to move. Hence under a system of decentralized reserves, with the gold directly or indirectly in the hands of numerous banks, each bank will pursue a policy that is dictated almost exclusively by its own individual interests. Comparatively little consideration will or can be given by individual banks to the needs of the general situation. In times of serious emergency, when each bank is likely to fear the effect on itself of a general unsettlement of confidence, common action through clearing houses or through special associations may present the only means of salvation. But such cooperative action is only remedial. What is needed is a preventive control so that the necessity for remedies and palliatives rarely arises. It may therefore be said, that, since under a system of scattered reserves no uniform policy with respect to gold movements can in normal times be expected from disconnected banks, because of the more or less regular conflict of interests between them, and, since such uniformity of action that may be imposed in times of strain is at best only remedial rather than preventive in nature, an adequate control of gold exports is to be expected only under a system involving a high degree of reserve centralization.

Moral influence important

The international factors largely concern gold movements

1 The money in general circulation within a country may be silver or even paper, and all such money may be lawful money for reserve purposes for the banks. But under a gold-standard system this money must be kept at a parity with gold and in the international exchange market this means that gold or a satisfactory equivalent must be freely supplied whenever the situation demands it. The readjustments of the relative values of the money of several countries, when these values vary by an amount exceeding the cost of shipping bullion, come, as was seen in the chapter on "International Clearing" only as a result of sending that which is supposed to be the connecting medium between the different moneys, namely gold bullion itself. That which is legal money in one country enjoys in most cases no legal status in another country.

Experience has taught that there are several ways of checking gold exports.1 The applicability of the different means depends, of course, upon favorable collateral circumstances, but in general it may be said that they relate in first instance to the movement of the metal itself, while in the second place they have to do with the circumstances underlying the movement.

Restriction of gold exports depends upon management of gold reserves

Scattered reserves permit but little regard for the general situation

Adequate control possible only with centralized reserves

Available expedients for checking exports

1 The discussion assumes the gold standard for the monetary systems.

Since gold that is wanted for export must normally be obtained through the redemption of other forms of currency it may be possible to charge a premium for gold sufficiently large to add materially to the cost of exportation, but, on the other hand, not large enough seriously to raise the question of the maintenance of the gold basis of the currency system. The rigid maintenance of the gold basis requires in last analysis unobstructed redemption in gold of all the different kinds of money or currency supposed to be circulating at par with gold, but slight compromises may occasionally be made with the strict requirements of theory when practical exigencies seem to demand them. Redemption of the domestic currency in gold is important chiefly in the field of international exchange, but the maintenance of adequate gold reserves at home is essential to the maintenance of confidence in the domestic money and banking system. Hence in the interest of greater monetary security at home it may be wise to sacrifice to some extent in international affairs the advantage to be derived from a uniformly maintained value in gold of the money unit. Thus England, France, and Germany have all interfered with the normal flow of gold during the Great War in order to protect the money and credit structure at home.