The charging of a premium on redemption in gold assumes, however, the possibility of an alternative means of redemption freely available to the redeeming agency. If gold alone could be legally used for redemption then any attempt to charge a premium for it would involve the open abandonment of the gold basis of the currency. But if, for example, both gold and silver coin may be used in redeeming credit or currency, then when gold is desired for export the redeeming agency may elect to pay in silver coin, and may consent to pay gold only when a premium for gold is offered. In France and in the United States the silver coins that are issued in terms of the standard unit are full legal tender and are not themselves further redeemable. Bank of France notes are redeemable in both silver and gold. In the United States the national bank notes are redeemable in "lawful money" which includes all the money issued by the government. The federal reserve notes, although issued in the name of the government, are issued through the federal reserve banks and these notes are specifically redeemable in gold. In the United States gold for export is normally obtained through the redemption of gold certificates, but in France the bank notes are relied upon. Moreover, in the United States our banking system has hitherto not been organized in a way to provide for any centralized responsibility with respect to gold reserves. But in France the Bank of France has at times chosen to redeem its notes in silver, and has either charged a premium for gold or refused it altogether. Obviously, the administration of such an expedient must be handled with the greatest care, but when so handled it may at times prove serviceable.

Charging a premium for gold

Implication of the premium expedient

In the absence of the possibility of charging a premium on gold a somewhat cruder realization of the same end may be attained through the throwing of obstacles of one form or another in the way of those desiring to obtain gold for export. Thus it has been authoritatively pointed out that the Bank of England maintains a "gold export corner" into which are gathered all the light-weight sovereigns that come within the legal limit of tolerance. When there is a demand for gold for export the gold is supplied from this corner, and, as in international shipments the coins are rated only on the basis of their actual bullion content, the difference between bullion value and money value may be sufficiently great to act as a check to exportation. In Germany the notes of the Reichsbank are normally freely redeemed at its branches, but there have been times when the Reichsbank has availed itself of its legal privilege to redeem at par only at Berlin, requiring the exporter to pay the cost of shipping the bullion from Berlin to Hamburg or Bremen as the case might be. Finally, where reserves are centralized under the control of a big central bank of issue, such a bank may through its natural position of leadership bring effective moral pressure to bear on the market. Thus it is said that a hint from the Reichsbank is all that is needed at times to check the exporters from seeking profit through gold exportation. But in the utilization of means of the character here suggested, just as in the case of a possible premium on gold in redemption, the most conservative practice must obtain lest the whole system come into disrepute.

Obstacles may be thrown in the way of getting gold

Much more satisfactory than the methods already referred to for the checking of gold exports is the wholesome economic expedient of making it relatively unprofitable to export gold. This object may be attained by increasing the relative value of gold bullion in the home country through the effective enhancement of the value of home funds. This requires a further word of elucidation.

When a country has gold as the standard of its money system, with the necessary free coinage of gold under this system, gold has always in that country a fixed purchasing power in terms of money. Thus in the United States the money-price of 23.22 grains of gold is always one dollar. Hence, as explained in a previous chapter, when in the international market the relative value of money funds, as expressed in the exchange rate, varies by an amount exceeding the cost of transporting bullion, gold moves from the market where the money is relatively less valuable to that where it is more valuable. The value of money, simply as money, in a country may be expressed in terms of percentages of money itself or in terms of goods. There would of course be no point in offering presently available money-funds against other such funds, but we have as a regular thing in the "money market" the offering of future money-funds against those presently available.1 The rate at which the future funds are offered for the present funds is an indication of the value of the present funds. In other words, eliminating the question of risk, the rate of discount in a market reflects the value of present money funds in that market as compared with the value of future funds. The higher the discount rate the greater the return in the future that one can get for the surrender of his money in the present. On the other hand the lower the prices of goods the higher is the value of money. Hence the discount rate and the price level tend to vary in opposite directions.

Gold exports may be made unprofitable

Domestic funds may be enhanced in value

1 W. D. McLeod, Theory and Practice of Banking, Chap. I, p. 50.

A difference in the discount rates obtaining in two countries indicates, therefore, a difference in the value of presently available money-funds in such countries. This difference in value may or may not be reflected in the general price level, but this need not concern us here. Suffice it to say that with two countries on a gold standard, with full freedom of coinage of gold on the one hand, and free redemption in gold on the other, any difference in their respective discount rates tends to give a relatively higher value for gold as a means of purchasing money in the country with the higher rate than it has in the country with the lower rate. Of course, there may be offsetting circumstances, as was seen in the chapter dealing with international clearings, but, with other factors determining the exchange rates equal, the movement of the effective discount rates may itself suffice to carry the exchange rates outside of the limits indicated by the "gold points." The influence of the discount rate on the exchange rate grows out of the desire of international bankers to get the highest possible return on the funds that they advance. Their purchases of bills by means of which they effect the transfer of their funds to the markets where rates are high may lead, in the market where the discount rate is low, to the advance of the ex-change rate to the gold export point. On the other hand, the raising of the discount rate in the market from which gold exports are threatened may serve to prevent exchange rates from moving to the gold export point.1