If the Government or Treasury in China takes upon itself the task of regulating foreign exchange, the next point for consideration is the manner in which it could do it successfully. In India the Secretary of State is the largest dealer in foreign exchange. "By regulating the amount of bills he offers for tender, he is able to regulate the level of exchange. When exchange is falling below par he can support it by greatly restricting his offers; and if he cannot get at least Is. 3-29/32d. for his bills he withdraws from the market. In the meantime, he has payments to make in England, while on the other hand rupees accumulate in India, as the revenue flows in and no Council Bills are presented for payment. If the cash balances in London are not sufficient to stand the drain on them, gold at the Bank of England may be "un-earmarked" and placed to the Secretary of State's current account, rupees in India being transferred at the same time from the Government balances to the silver portion of the paper currency reserve -the reserve process from that which has been described already as the result of exceptionally large sales of Council Bills."* The Indian authorities must be prepared to supply rupees in payment for Council Bills or in exchange for sovereigns. And on the other hand they must be prepared also to supply sterling or sterling drafts in exchange for rupees. The maintenance of the Indian system depends on their ability to fulfil this double obligation to whatever extent may be required of them. This is briefly the position of India; and I think that this is the best example that China could follow. Of course, there are differences; but, nothing fundamental, so far as the process of regulation of exchange is concerned. As in India, the aim should be towards bringing about a steadiness in exchange, without any advantage for a considerable period to one side or the other. For instance, if on one occasion there should be heavy demand and rates are tumbling down, the Government could sell gold for the time being and steady the exchange; and, if on another occasion very large amounts of bills are offering, the Government again could come to the help of the market by buying drafts on London or New York. The mechanism by which the Government could put through such transactions, the processes necessary for such business, the accounts that the Government could settle in that manner, and, lastly, the capital with which the Government could do this business are all points of serious consideration. The Government of India tenders its bills one way or the other, and the exchange banks buy; in China also, the exchange banks should do the business and it would be the cheapest way to do business through them. Not only foreign exchange, but also local currency, would have to be regulated by such means, because the free circulation of the new currency would depend very much on the course of the foreign trade. The capital with which the Government could undertake this business is its reserve, which it leaves with the district banks for the circulation of its paper currency. The process which the Government should adopt can only be understood, after one has a clear grasp of the meaning and purpose of reserves.

* "Indian Currency and Finance," by J. M. Keynes, pp. 119-20.