market, and with it the stability of British trade, were supposed to be dependent on the maintenance of the gold standard in the strictest and most absolute form. The adoption of the gold standard by Germany confirmed this view. Now the banker who made a wry mouth at a silver spoon will eat paper like an ostrich.

This strict maintenance, before the present war, of the gold standard in the United Kingdom, where it had been effectively established since the conclusion of the Napoleonic wars, was an easy matter; it was only necessary to observe the old maxim-'quieta non movere.' But in other countries, where silver had been standard money, the real establishment of gold as the sole standard was a matter of great difficulty. In France, for example, silver was still full legal tender, though the mintage was restricted; and in that country the double standard had given way to what was known as the limping standard (étalon boiteux). In India, although the dominant metallic money is still silver, silver is not the standard; nor on the other hand has the gold standard been effectively adopted, but only that modification of it which in these latter days has come to be called the gold-exchange standard. Its opponents call it the gold standard without gold. The essence of this standard is that, by the limitation of the coinage of rupees and by other devices, fifteen silver rupees in India are interchangeable with a gold sovereign in London (within narrow limits). This is no doubt, in normal times, a convenient arrangement for the Governments of India and of England, though whether it is advantageous to the people of India is another question. The present point is that, although India is supposed to have a gold standard, its principal metallic money is only imperfectly convertible into gold. It is a case of suspended convertibility.*

The plan adopted by India in 1893 with the closure of the mints to silver was not new. The Report of the Committee on which action was taken, after a comprehensive survey of monetary systems, concludes:

* The great rise in prices in India since 1900 is never officially ascribed to the enormous issues of token rupees, and the difficulty in the management of the exchange since August is set down to the war 'simpliciter.'

'It would thus appear that it has been found possible to introduce a gold standard without a gold circulation, without a large stock of gold currency, even without legal convertibility of an existing silver currency into gold.'

This method of imperfect convertibility had also been adopted long before the war in different forms by the principal countries of Europe. There was an appearance of monetary strength in the masses of gold held in the central banks, but any exceptional demand for this gold, especially for foreign remittance, was met by making a special charge, or in some cases by actual limitation. The gold was in effect hoarded by the central banks; and provision for foreign remittances was met by foreign credits in various forms.

In normal times this imperfect convertibility of credit into gold was not even noticed, and certainly caused no apparent difficulties. In normal times most monetary transactions are concluded without the actual passing of gold. But the real meaning of effective absolute immediate convertibility (no single word can convey the full meaning of the old system) was not simply that people could always get as much gold as they found convenient (e.g. for making ornaments or for payments abroad), but that very real effective limitations were imposed on the undue expansion of credit.

The simplest credit substitute for gold is a bank note, which in essence is a promise to pay on demand the metallic money that it is supposed to represent. Notes based on gold are strictly convertible only so long as the demand for conversion can be met under any conditions within the range of practical possibility, as shown by the financial experience of nations over long periods. The demand for conversion into gold in ordinary times is one thing; it is a demand that is only exercised within very narrow and customary limits. But the demand for conversion in extraordinary times is quite another thing; and it is only in extraordinary times that the real stability of a monetary system is tested.

It was the necessity for being ready for exceptional

* Cf. 'Money and Monetary Problems' (Essay on the Indian Currency Experiment), by the present writer; and 'Indian Currency and Finance' by J. M. Keynes, ch. ii.

strain that induced nations to adopt very stringent measures as regards the issues of bank notes. The issues have been limited in all sorts of ways; and special provisions have been made for securing an adequate reserve against any emergency. Curiously enough, the legal restrictions on the issues of notes by the Bank of England are more severe than those of any other great Bank. After a certain amount has been issued (now 18,450,000l.), for every other note an equal amount of gold must be kept in the issue department. The consequence was that, in the week before the outbreak of war, against an issue of notes of 55,121,4057. the Bank held gold coin and bullion to the extent of 36,671,4057. After six months of war the Bank of England held in the last week of January gold coin and bullion in the Issue Department 68,352,305l. against an issue of notes 86,802,6057. There was also a sum of 813,5127. of gold and silver coin in the Banking Department. It would seem from the figures of the Issue Department that the Bank of England notes were secured to a ridiculous point of safety, namely, with about 80 per cent. of gold.

But it is most important to observe that all the other forms of credit, just like bank notes, are ostensibly convertible into gold on demand. Even if the date of payment is deferred, as in bills of exchange, by the method of discounting, the present value is convertible into gold on demand. For the week quoted above the account of the Banking Department of the Bank of England shows a reserve against liabilities of 32 per cent. as against a proportion of 51 per cent. a year before. As shown by Sir H. Inglis Palgrave, in his standard work on the Bank Rate and the Money Market, it is not the absolute amount of the reserve but the proportion that counts. The great argument of Bagehot's Lombard Street' is that the Bank of England ought to keep a far larger proportional reserve than other banks, mainly owing to the uncertainty as regards the magnitude and the times of

* It is true that on Feb. 10, 1915, the Bank of England held 24,049,1837. in coin and bullion more than on Feb. 11, 1914; but the proportion was 31 compared with 53. The Imperial Bank of Germany for the corresponding weeks showed an increase of 44,286,000l.-yet the German currency was depreciated.

foreign demands. This argument has been strengthened by the course of events since that work was published.

6

Before the outbreak of the war London was more than ever the centre of the financial world. The fact has been repeatedly forced on public notice since the war began, but it is doubtful if its importance has been adequately realised by the public. So long as every promise to pay means in the last resort a power given to the holder of the promise to get gold from his bank, his bank is obliged to have the command of gold. If his bank finds it convenient, instead of keeping gold, to have a credit with the Bank of England, then the Bank of England, the bankers' bank,' must keep a stock of gold equal to any probable demands not only of this particular banker but of all the holders of similar promises to pay gold. In this way the reserve of the Bank of England imposes, or ought to impose, stringent limits on the expansion of credit. The essence of the system by which London became the central money market of the world was the immediate convertibility of all credits into gold. In other countries, especially after the depreciation of silver, this convertibility of credit into gold became imperfect, which is only another way of saying that credit was unduly expanded.

The effects of this laxity in the interpretation of convertibility into gold were shown in the great crisis in the United States in the autumn of 1907. There had been an undue inflation of credit and prices-overbanking and over-trading. When the demand for real convertibility set in, it could not be met. For a time the United States had really an inconvertible currency, consisting mainly of cheques that could not be cashed. The effects of this crisis were world-wide. Everywhere there was a great contraction of credit for the time being, and a great fall in the prices of securities. It might have been expected that the crisis of 1907 would have given the banking world a lesson, but the only immediate effect in the country of origin seems to have been the evolution of a new scheme for emergency currency in case of another crisis. To save trouble the emergency notes were at once printed and stored ready for use. Such was the foresight of the United States; and it is now made a matter of complaint that this

country was not equally provident. 'Stuff a fever' instead of 'starve a fever' has now become the maxim of the financial medicine-man. In spite of our unpreparedness we have certainly stuffed our fever pretty well. But this is anticipating the course of events.

The general position of the commercial and financial world before the outbreak of the war may be expressed in two propositions. Firstly, gold had been nominally adopted as the universal standard of value. In the countries in which silver coins were still unlimited legal tender (e.g. France, India, etc.), they were supposed to be in the position of bank notes convertible into goldthey were 'bank notes printed on silver.' Secondly, this nominal adoption of the gold standard had only been imperfectly realised in practice, because the different kinds of representative money-not only the silver and the bank notes, but all the various forms of bankers' credits were only imperfectly convertible into gold. In normal times, within customary narrow limits, they were convertible into gold; but on the slightest strain some kind of difficulty was put in the way of getting the gold immediately. The only exception was London. London was acknowledged to be the only free market for gold-the only market that was likely to be open in times of stress. It is no doubt quite true that in the other great banking centres the greatest respect was shown to gold. The other central banks piled up far larger reserves than the Bank of England. But, for all the good it did, the greater part of this gold might as well have been molten into great golden calves, to be worshipped by the customers of the banks. Of course, the gold might be useful as an emergency war-fund (e.g. in bribing Turkey), but that is another question.

The principal effect of this system of imperfect convertibility was that credit was unduly extended, and that the limit on its expansion, properly imposed by effective convertibility into gold in even exceptional circumstances, was broken down by the use of all kinds of 'soft' substitutes-the time and place of the actual convertibility being apparently a matter of no moment so long as the promise to pay was not definitely repudiated. This economy in the use of gold in practice was