The Theory of Money and Credit - Ludwig von Mises [185]
Further explanation is unnecessary. Nevertheless, it may not be supererogatory to examine one by one the measures that are recommended by those who favor a low rate of interest and to show how incapable they would prove of leading to the expected result.
4 The Gold-Premium Policy[11]
Let us first review the systems which are supposed to be able to maintain the level of the rate of discount in the national money market by making it more difficult or more expensive to procure gold at a rate below that determined by the circumstances of the international market. The most important and most well known of these is the gold-premium policy, as it was carried out by the Bank of France.
In view of the circumstances that nowadays the silver five-franc piece is still legally current coin, the Bank of France is authorized to redeem its notes at its own choice either in gold or in these pieces. It sometimes used to make use of this authority for the purpose of increasing the difficulty of procuring gold for export purposes. As a rule it made no difficulty about surrendering gold in exchange for notes. And it exchanged five-franc pieces in the same way for gold coins, although it was not obliged to do so, and by so doing it endowed the latter with the property of being money substitutes. Naturally, these facilities were not requisitioned to a great extent for purposes of domestic business. Notes and five-franc pieces enjoyed unlimited public confidence so that their employability as money substitutes was not in the least in question. But if the bank was asked to surrender gold for export, it did not necessarily do so. It is true that it used to hand over gold unhesitatingly for the requirements of what was called "legitimate" trade, that is, when it was needed to pay for imported commodities, especially corn and cotton. But if gold was demanded for the purpose of speculating on the difference between home and foreign interest rates, it was not handed over as a matter of course. For this purpose, the bank did not issue Napoleons, the French gold coins, at all; and it issued ingots and foreign gold coins only at an additional charge, varying from four to eight percent of the 3,437 francs at which it was legally bound to purchase a kilogram of fine gold. It is impossible to state the exact amount of this "gold premium," because the rate has never been published officially. [12]
The purpose of the gold-premium policy was to postpone as long as ever possible the moment when the condition of the international money market would force the bank to raise the discount rate in order to prevent an efflux of gold. The lowness of the rate of discount is of extraordinary importance in French financial policy. In the interest of those classes of the community by which it is supported, the government of the Third Republic is obliged to avoid anything that might injure the high standing of the rentes which constitute the chief investment of those classes. Even a merely temporary high rate of discount is always dangerous to the rentes market, for it might induce some holders of rentes to dispose of their bonds in order to reinvest their capital more fruitfully, and the disturbance of the market that might result