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By Root 1231 0

banks of the second group, it is sufficient if they keep in readiness for the redemption of those money substitutes which are returned to them a certain sum of such assets as will enable them to command on demand the credit of the central bank. They extend the circulation of their fiduciary media as far as possible. If in so doing they exceed the issue that their customers can absorb, so that some of their fiduciary media are presented for redemption, then they procure from the central bank the necessary resources for this by rediscounting bills from their portfolio, or by pledging securities. Thus the essence of the policy that they must pursue to maintain their position as credit-issuing banks consists in always maintaining a sufficiently large quantity of such assets as the central bank regards as an adequate basis for granting credit.

The central banks have no such support from a more powerful and distinguished institution. They are thrown entirely upon their own resources, and must shape their policy accordingly. If they have put too many money substitutes into circulation so that holders apply for their redemption, then they have no other way out than that provided by their redemption fund. Consequently, it is nec essary for them to see that there are never more of their fiduciary media in circulation than will meet the requirements of their customers. As has already been said, it is not possible to make a direct evaluation of these requirements. Only an indirect evaluation is practicable. The proportion of the total demand for money in the broader sense that cannot be satisfied by fiduciary media must be determined. This will be the quantity of money that is necessary for doing business with the persons who are not customers of the central bank; that is, the quantity required for purposes of foreign trade.

The demand for money for international trade is composed of two different elements. It consists, first, of the demand for those sums of money which, as a result of variations in the relative extent and intensity of the demand for money in different countries, are transported from one country to another until that position of equilibrium is reestablished in which the objective exchange value of money has the same level everywhere. It is impossible to avoid the transfers of money that are necessary on this account. It is true that we might imagine the establishment of an international deposit bank in which large sums of money were deposited, perhaps even all the money in the world, and made the basis of an issue of money certificates, that is, of notes or balances completely backed by money. This well might put a stop to the physical use of coins, and might in certain circumstances tend to a considerable reduction of costs; instead of coins being used, notes would be sent or transfers made in the books of the bank. But such external differences would not affect the nature of the process.

The other motive for international transfers of money is provided by those balances that arise in the international exchange of commodities and services. These have to be settled by transfers in opposite directions, and it is therefore theoretically possible to eliminate them completely by developing the clearing process.

In foreign-exchange dealings and the related transactions that in recent times have been united with them, there is a fine mechanism which cancels out nearly all such transfers of money. It is only exceptionally nowadays that two ships meet at sea, one of them taking gold from London to New York and the other bringing gold from New York to London. International transfers of money are controlled as a rule merely by variations in the ratio between the de mand for money and the stock of money. Among these variations, those with the greatest practical importance are those which distribute the newly mined precious metals throughout the world, a process in which London often plays the part of a middleman. Apart from this, and provided that no extraordinary cause suddenly alters the relative demand for money in different