The advantages of keeping a part of the reserves in gold are that by such means it would be possible to steady the price of silver and that the existence of the gold reserve in London would enhance the credit of China. There is, however, the disadvantage of fluctuations: it might be argued that a reserve that fluctuates in value cannot rightly maintain the character of a reserve. In principle, no doubt, the argument is sound; but in practice, there is no country in the world whose reserves remain unchanged in value at all times. Even gold bullion varies in value from time to time; and in most countries the total of the reserves is not kept always in bullion or coin. The keeping of a portion of the reserves in gold for a silver standard country has a parallel in France, Germany or Austria which, while remaining gold standard countries, have a portion of their reserves in silver. International trade is a more important factor in the economics of China than in the case of France or Germany; hence a slight deviation from the principle is not to be condemned or opposed.
While the regulation of exchange would be the principal function of the gold reserve in London, the fundamental object of the reserve should not be lost sight of. The Government and the district banks in China should be prepared to redeem on demand every dollar worth of paper money, that is offered to them, in silver coins. The arrangement with regard to the gold reserve should be such as not to interfere with this primary object. So long as the amount kept in gold is not large, there is no reason to believe that there would be any interference with the primary function of holding sufficient silver to cash paper money. Should it happen, at any time, that there is an abnormal demand for silver, the Treasury could always sell the gold in London and receive silver from the foreign banks operating in China. If the scheme proposed so far is properly worked, such an eventuality is out of the range of probability.