Items involved in shipment of bullion

at a fixed value in gold. Such a parity can be maintained through freedom of coinage and through the melting pot if the standard bullion is itself coined, or through free exchange at the fixed rate of bullion for money and vice versa if the bullion is not coined. But given fixed mint prices for gold bullion in two countries, discrepancy between the market ratio of such moneys and the established mint ratio obviously carries with it the implication of a difference in the money-purchasing power of bullion in the two countries. For example: when the rate of sterling exchange in New York is $4.76 that implies that that which is current as a pound sterling in London can be purchased for $4.76 in New York. But the mint par between dollars and pounds sterling is $4.8665 £1. In other words, the gold necessary to purchase the equivalent of a pound sterling in the United States is less than the gold required to purchase a pound sterling at the English mint. Gold thus being "worth more" in the United States than in England would, like any other commodity, tend to move from the market of relatively low value to that of relatively high value provided that the difference in value were great enough to cover all the costs of obtaining and of shipping it.

The items of cost involved in the shipping of bullion are familiar. A satisfactory discussion of this topic can be found in almost every textbook dealing with the subject of foreign exchange. Here only brief reference will be made to it. First may be mentioned the item of freight. This naturally varies with all the circumstances that normally affect such a charge. Next is insurance. This too varies with all factors affecting risk. Then there may be mentioned the loss of interest. Gold in the hold of a ship is withdrawn from use unless special provision is made for advances of credit against the importation of gold. There may, however, be no loss of interest to the banker shipping gold because at the moment of shipment bills may be sold against the credit which the gold is expected

to establish.1 But in cases where there is loss of interest this loss will naturally vary with the rate prevailing in the market from which the gold is withdrawn. Lastly may be mentioned the incidental costs involved in packing, carting, etc.

All these items taken together fix the so-called "gold- The points" which under normal conditions establish the limits 'gold points' within which the foreign exchange rates fluctuate. In general, owing to the improvements in ocean transportation freight rates have diminished, and, with the reduction of risk, insurance rates have declined. The margin between the gold points has therefore on the whole been narrowed. But it is apparent that any interference with any of the factors involved in shipments will upset the automatic limitations of rate fluctuation. Should gold be not freely obtainable, should it be difficult or impossible to secure adequate shipping facilities, or should the insurance system break down the exchange rates might move far beyond the usual "gold points.'

99

movements have a

serious bearing on

Gold movements in international exchange transactions Gold are of course of great importance to the credit situation in the countries concerned. While careful economic analysis has demonstrated to the modern student the fallacy of the a country's crude "bullionism" of early days and of the more refined banking "mercantilism” of a later period, and while the statement system that the gold supply of the world tends to adjust itself without arbitrary control among the various nations according to their several needs is now regarded as almost a truism, the fact remains that gold movements are watched as carefully as ever, and they are at times interfered with

1 At the outbreak of the Great War some New York banks sold bills against gold that had been sent on the steamship Kronprinzessin Cecelie. As the steamer returned to America without delivering her cargo, the bills sold against the gold she carried had subsequently to be covered at a loss. The banks brought suit against the steamship company to try to recover their losses, and having obtained judgment they libeled the ship. Subsequently, however, the case went against the bankers before the Supreme Court of the United States.

Unnecessary gold movements should be avoided

and controlled much more effectively than was ever dared hoped for by the benighted bullionists. Because gold today constitutes the foundation of money and credit, gold movements are more important than they ever were.

Bearing in mind the importance of the gold reserves to modern credit, the satisfaction that bankers manifest over gold imports, and the apprehension that they usually exhibit over gold exports, need cause no surprise. Where the reserves of a country are centralized and the nation's gold supply is largely in the hands of the central institution, movements of gold may react instantly upon the whole domestic credit structure. Under decentralized reserves gold movements may affect in first instance the main financial center, but the necessities of domestic trade and exchange assure such intimate connection between the financial center and the outlying markets that nothing can seriously affect the financial center without reacting to a large degree upon the country's credit system as a whole. In some cases balances maintained in gold standard countries abroad or bills payable in such countries may be included in domestic reserves. Hence it might be supposed that shipments of gold to strengthen such balances involve simply the re-location of reserves. But foreign balances are after all usually "ear-marked" for special needs and in times of emergency they are likely to be utterly useless in supporting credit at home.

Consequently, whatever the system of reserves that a country may have supporting its bank credit, gold movements to and from such a country are bound to react forcefully on such credit. Some movement in either direction may at times be normal and desirable, but movements which imply a weakening of necessary reserves on the one hand, or a swelling of redundant reserves on the other, are always to be deprecated. Restraining measures ought, if possible, to be applied to prevent them.

SELECTED REFERENCES

H. G. BROWN, International Trade and Exchange (1914), Chapters III-VI inclusive.

FRANKLIN ESCHER, Foreign Exchange Explained (1917).

G. J. GOSCHEN, The Theory of the Foreign Exchanges (1898). N. A. NICHOLSON, The Science of Exchanges (1873), Chapter VI. C. A. PHILLIPS, Readings in Money and Banking (1916), Chapter XVIII.

HARTLEY WITHERS, Money Changing (1913); The Meaning of Money (1909), Chapters VI and X.

Elasticity of bank

credit over country as a whole involves question of

reserves

Mobility of reserves is necessary

CHAPTER VIII

RESERVE ORGANIZATION AND

UTILIZATION

Elasticity of bank credit involves something more than the powers intrusted to individual banks. It involves also the question of the organization of banks into a system. Sufficient emphasis has already been placed on the circumstance that the demand for bank credit varies absolutely and relatively from place to place and from time to time in the same place. The causes of this variation have also been discussed. Attention may be directed, therefore, to the means that may be provided for meeting such variation. As the extension of credit depends primarily upon the reserves available for the purpose, the ultimate factor in elasticity over the country as a whole is that of the system of reserves.

The bank reserves of a country may be fully centralized, partially centralized, or thoroughly decentralized. When there is a variation in place demand for bank credit the necessary adjustment can be made only when directly or indirectly the reserves on which credit is based flow from the place of small demand to the place of relatively larger demand. Variations in demand are reflected, of course, in the rates that are paid for credit advances, and the result of an easy flow of credit from the place of relatively small demand to a place of larger demand is a tendency toward uniformity in rates. The greater the mobility of reserves, or of the credit based on the reserves, the more closely will money rates over a country approximate uniformity.

The freest flow of bank credit would seem to be assured