The Working of the Pre-War Gold Standard .sx I .sx FOLLOWING the general abandonment of the gold standard in the last three or four years , there has been considerable discussion of the merits of that international monetary system .sx Much of the body of monetary theory has been built up in similar circumstances in the past .sx Concrete problems of policy and administration have stimulated the economist to seek to establish principles for future guidance , and nowhere is this more true than in the field of currency and finance ; the contributions of Locke , Newton , Thornton , Ricardo , Overstone and Wilson were all provoked by the problems of their day .sx It is yet too early to appraise the writings occasioned by recent events , but it is possible broadly to observe the character of the arguments put forward .sx In this paper an attempt will be made to compare the treatment of the gold standard mechanism in contemporary literature with its treatment by pre-war writers .sx Only incidentally shall we be concerned with the merits of particular monetary policies ; our interest is more in the machinery by which those policies are realised .sx The gold standard has been subjected to two kinds of criticism , deriving from the two senses in which the term is used .sx In the first place , there is the institution , the legal obligation to maintain the equality in purchasing power of a unit of the local currency with a defined weight of gold ; in the second place , there is a body of principles which must be subserved if the gold standard as an institution is to exist .sx Some writers criticise the principles , arguing that a new doctrine and new precepts of monetary policy are needed to take account of the changed character of the post-war world .sx Others consider that the orthodox theory is correct , and our troubles are due to failure to observe the rules .sx Both classes of writers , however , are agreed in looking back to the pre-war gold standard as a perfect mechanism ; as Professor J. H. Jones has put it , " The world that disappeared in 1914 appeared , in retrospect , something like our picture of paradise .sx " The strength of this feeling may be judged from many Governmental publications , British and foreign ; the " Macmillan " Committee , for instance , refer to " the nineteenth-century philosophy of the gold standard .sx " The precise content of the " philosophy " is , in fact , however , somewhat difficult to discover , and more so to interpret .sx The simplicity which now characterises most statements of it is , to a large extent , new .sx So long as the machine worked satisfactorily there was no occasion to inspect it , or to doubtits future efficiency ; so we have no very clear contemporary description of the machine just before the war .sx In earlier periods there had been some discussion of the mechanism of the exchanges and gold movements , but little was added from the time of Goschen's book , which appeared as early as 1861 .sx Gold standard questions which have seemed important since the war , like the so-called " mal-distribution " of gold , and the disequilibrium of exchange rates and price structures , were given little attention when there were no practical difficulties in the way of maintaining the system .sx II .sx It would be outside the scope of this paper to trace in detail the history of the " specie flow analysis .sx " The Ricardian exposition was in terms of the actual withdrawal of coin from circulation in one country and the addition of so much coin to the circulation in other countries .sx The transition from this idea to the idea of buying gold from the central bank , and so inducing credit contraction , is almost the whole story of banking policy in the first eighty years of last century .sx On the practical side , the Bank of England was , by experience , finding its way in the money market , passing from the accepted position of responsibility built up under J. Horsley Palmer , to the position of " permissible competitor " in the market after 1844 , and finally to the status of " the lender of last resort , " strengthened in 1878 by the rule to lend only in times of stress .sx On the side of theory , the Banking v. Currency controversy and the attempts to separate the concepts of Currency , Credit and Capital , were notable features in the development of the " theory " or " philosophy " of the gold standard in this country .sx Nobody , however , troubled to examine very carefully the operation of the system that finally emerged .sx Mr. Inglis Palgrave made , of course , an invaluable study of the relationship between the central bank and the money market in .sx England , France , Germany , Holland and Belgium ; but he was more concerned .sx with a comparison of the different countries' institutions than with their .sx relationships and the association of their policies through the rate of exchange .sx and gold movements .sx His use of annual averages unfortunately conceals the .sx data relevant to such an inquiry .sx One part of the subject , nevertheless , received more attention .sx Following Jevon's celebrated paper in 1866 , the " autumnal .sx drain " was usually commented on in text-books and better-informed treatises .sx So it is that the student who seeks to go beyond the simple terms of textbook explanations of the " orthodox " gold standard is baffled by the dearth of information .sx Most of the text-books link together the Ricardian idea of a .sx change in the circulation and a crude quantity theory of money ; then , supplementing these with an assumption of considerable elasticity in the demand for exports , they conclude that an excess of imports over exports immediately .sx and easily corrects itself .sx Fuller treatment includes , beyond this , some mention of temporary adjustment through capital movements , the importance of which was stressed by Goschen .sx Probably no better statement of the complete doctrine can be found than in the First Interim Report of the " Cunliffe " Committee , 1918 .sx The doctrine is described in some detail , and summarised thus :sx " Whenever before the war the Bank's reserves were being depleted , the rate of discount was raised .sx This .sx .. , by reacting upon the rates for money generally , acted as a check which operated in two ways .sx On the one hand , raised money rates tended to attract gold to this country or to keep here gold that might have left .sx On the other hand , by lessening the demands for loans for business purposes , they tended to check expenditure and so to lower prices in this country , with the result that imports were discouraged and exports encouraged , and the exchanges thereby turned in our favour .sx " III .sx It is when we come to test such descriptions that we encounter difficulties .sx The paragraph quoted is a statement of fact , but not necessarily an accurate reflection of every change in the reserve of the Bank of England , though many writers imply that it is .sx Seasonal movements , for example , at first occupied no special place in the routine of the Bank .sx Generally speaking , the reduction of the reserve which occurred regularly in the autumn ( when our imports were heaviest and when there was a demand for hand-to-hand currency for holiday expenditure ) was treated in just the same way as any other drain .sx Jevons , it may be remembered , contrasted the elasticity of the Scottish system with the inelasticity of the English system in dealing with this matter .sx By the end of the century , however , this defect had to some extent been made good , in so far as concerned the internal drain .sx For a comparison of the combined note and coin circulation and Bank rate shows little association in their seasonal movements .sx The independence may be due , in some measure , to the increase of Government borrowings in the autumn ( when the Government's expenditure normally exceeds its revenue ) ; in this way , securities would be substituted for gold in the accounts of the Bank .sx Irregular internal movements , occasioned by the state of trade and the like , were normally followed by changing discount rates , as one would expect .sx The identity of treatment accorded to internal and external drains was emphasised in 1848 by James Morris , Governor of the Bank :sx " as far as the banking department of the Bank is concerned it is immaterial to them whether the demand upon the reserve arises from an internal or an external drain .sx " Another slight modification of the simple form of explaining the doctrine may also be suggested .sx Before the war , a number of devices were used to " protect " the supply of gold .sx Briefly , they were methods of changing the specie points to delay or avoid the outflow of gold , or to encourage its inflow .sx These methods were brought to light by the U.S. National Monetary Commission , in 1910 , to whom the Governor of the Bank of England replied that , when gold was leaving the country , " facilities for bringing in gold have been given in the shape of free advances during transit , " and that " when there is a demand for either gold bullion or foreign coin for export to another country the Bank follows the same rule as the seller of any ordinary commodity .sx " Lord Swaythling added to the evidence of the Governor of the Bank by pointing out that the Bank had an export corner , and would sift out minimum legal weight coins for sale to exporters .sx These methods were not peculiar to this country , for French and German bankers gave very similar answers .sx Even before the war , in the heyday of the gold standard , a loss of bullion was apparently considered an evil and a gain a blessing .sx That the deliberate fostering of an export of gold was never thought of is suggested by the asymmetry of this answer :sx " Bank-rate is raised with the object either of preventing gold from leaving the country or of attracting gold to the country , and lowered when it is completely out of touch with the market rate and circumstances do not render it necessary to induce the import of gold .sx " It must be remembered that although many countries had imitated Britain by establishing a central bank and and adopting the gold standard , in few instances was the mechanism allowed to work in the same way as in England .sx In Germany , for instance , the control of the Reichsbank was more through pressure on the commercial banks ( similar to the policy of moral suasion tried by the Federal Reserve Banks early in 1929 and , to some extent , by the Bank of England throughout the post-war period ) , and the widening of the gold points by the devices mentioned above .sx Similarly in France , redemption of notes in legal tender silver avoided the frequent use of Bank-rate .sx Consequently Mr. Palgrave found that whereas the Bank of England rate was changed 400 times between 1844 and 1900 , the rate of the Banque de France was changed only 111 times , and that of the Reichsbank only 116 times .sx The difference was probably due also to the tradition of the three countries .sx British Bank-rate policy developed pari passu with British foreign investments in the nineteenth century ; raising the Bank-rate operated as much by decreasing foreign short-term borrowing from Britain as by increasing foreign short-term lending to the London market ( i.e. holding sterling bills) .sx It is probable , for instance , that the effect of raising Bank-rate in inducing foreigners to hold sterling bills referred particularly to the proceeds of foreign loans floated here ; funds borrowed at long-term from London would be left there ( invested in bills , etc. ) during the stringency in the market .sx Other countries had no such long history of foreign .sx lending , and , if used , their Bank-rate had to attract foreign supplies of funds instead of discouraging foreign demands for loans .sx The elasticity of demand for loans from one country was probably greater than the elasticity of supply of loans to any one country .sx An exception from this analysis must be made for the custom of certain central banks of holding a supply of foreign exchange ( i.e. sterling bills ) for meeting a foreign drain .sx This practice also affected London's position , for we could experience a foreign drain when another central bank chose to alter the composition of her reserves .sx With all these substitutes ( or subterfuges , as you wish ) , Bank-rate was recognised as the strongest weapon , or as M. Pallain put it , " the supreme means of defence for an issue bank , to protect its metallic reserve .sx "