The monetary system under which silver and minor coins form the chief part of the circulation, but are kept at a fixed value in gold by government control of their quantity and by the sale of drafts on a gold exchange fund at par, subject to the usual charges for gold exchange.1
The Philippine Islands and Mexico are examples of the adoption of this monetary system.
1 Read "Gold Export Point," by which it will be seen that what conditions make for such a point in one country as against another, will naturally result in the " import point " in the other. When the price of London exchange, for example, falls to about $4,833 this point is considered to be reached. As it tends in this direction it is called "favourable." Nevertheless, on Dec. 29, 1906, " sight exchange" on London fell to the extremely low price of $4.8265.75; but no gold was imported. This was due to the fact that the Bank of England discount rate was ruling 6%, and the bankers did not wish to force an increase in the rate, which would have been the natural result of exporting gold from that country to America.
There is a theory that a relation exists between the supply of gold and the prices of commodities. Prof. Cairnes claimed that the rise in prices was the gradual result of the gold discoveries in Australia and California.
The space at the author's disposal will not permit of a covering of the ground here. Those desiring to thoroughly cover the subject cannot do better than to refer to Conant's " rinciples of Money and Banking," in which he treats most exhaustively upon the matter.
See " International Movement of Gold."
In order that the paper money of a nation may pass among its people at its face value, the belief must prevail that the government will, upon request, redeem the paper in full in coin. By an act of the Congress of the United States in the year 1900, the duty was imposed upon the Secretary of the Treasury of main taining at an equal value all forms of governmental money and redeeming the Government's legal-tender notes at par. In order to do this he shall keep a " gold reserve " of $150,000,000 for the only purpose of redeeming, on presentation, the United States notes and Sherman notes. Upon the reserve falling below $100,000,000 he shall sell United States Government bonds to replenish it.