A detail of the manner in which, with such reserves in London and in China, foreign exchange would be regulated, is necessary to help us understand the advantages. The proposed plan is not altogether a novelty, as already the Bank of Japan has been following a somewhat similar course. The difference between China and Japan would be that, while in this country the Treasury would have to do such operations, in Japan the Central Bank, i.e., the Bank of Japan is operating. There is even a better parallel in the Treasury and the Federal Reserve Board of the United States which, along with the Treasury, act for the Federal Reserves Banks in that country. In the crisis following the European war, the very first act which the Federal Reserve Board had to do was to regulate the exchange between the United States and England, which had become unfavourable owing to the dislocation caused by the war. In this country also, an advisory or executive board of the representatives of the several district banks might profitably act in conjunction with the treasury. Such a board would certainly be advantageous in that the Government would not be allowed to manipulate exchange to suit other purposes than that of the general well-being of the people. But this and other details could easily be arranged and adjusted, while the reform is being carried out.

The process by which exchange would have to be regulated will, in practice, be very complicated, and I shall only give the principle of such operations. Supposing that, on a certain date, the foreign banks in China are inundated with demand, and exchange is falling; at present there is no other remedy but the counter-rush of bills or some special demand for all the silver offered in London by the China banks. Under my scheme, the moment exchange is falling unduly, the Treasury would sell sterling on London for an amount sufficient to counteract the drop in exchange. While the Chinese Government would have to part with a portion of its gold reserve in London, the foreign banks in China would have to pay an equivalent amount in silver to the district banks. There would thus ensue a double advantage. When the foreign banks are inundated with demand, it is generally the case that there is a scarcity of capital among the Chinese, because they pay in coin or bullion into the foreign banks. If by the action of the Treasury, the foreign banks have to return half of the money they received from Chinese dealers to Chinese banks, the market would be saved from the effects of a scarcity of capital. Another advantage would be that, by stopping the sale of silver by foreign banks in London, the Chinese Government would be able to keep up exchange or the gold value of silver. Or let us take another example. Supposing bills for very large amounts are offering in China and exchange is rising heavily; the result would be an accumulation of too much of unusable capital with the Chinese, and owing to high exchange the export trade would be hindered. If, on such an occasion, the Chinese Government offered to buy gold in London by paying the bullion or coin to foreign banks in China, the rise in exchange would be checked and the market saved from a plethora of money. At the same time, the Treasury would receive in London the gold it lost by the previous transaction, i.e., the sale of gold to check the effects of excessive demand. These arrangements would also prevent the unnecessary and heavy losses incurred at present by the Government in meeting its obligations to the European countries and markets. If, for instance, exchange was high on account of heavy bills, on a date when the Government payment was due, the Government might continue to pay silver as it does at present; or, otherwise, if exchange should be low the Government could set apart a portion of its gold reserves in London to meet such payment.