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By Root 1239 0

In such a case, it is admittedly possible for the bank to follow a completely independent discount policy; it may now reduce to any desired extent the rate of interest it charges without running the risk of insolvency. But this brings to light the consequences that must follow a banking policy that endeavors by extending the issue of fiduciary media to depress the rate of interest on loans below the natural rate of interest. This point has already been discussed in detail; in the present connection there is a second point that is of importance. If the intervention of the bank leads to the artificial retention of the rate of interest on loans at a level below that of the rate given by international conditions, then the capitalists will be all the more anxious to invest their capital abroad as the gap between the domestic and foreign rates of interest increases. The demand for foreign common media of exchange will increase, because foreign capital goods will be desired more and home capital goods less. And there is no way in which the fall in the rate of exchange could automatically set forces in motion to reestablish between the bank money and gold, the world money, that exchange ratio which had previously existed when the notes and deposits of the bank were not credit money but still money substitutes. The mechanism of the monetary system tends to bring the exchange value of the two kinds of money to that "natural" level determined by the exchange ratio between each of them and the remaining goods. But in the present case it is the natural exchange ratio itself which has moved against the country that refuses to pay out gold. An "autonomous" interest policy must necessarily lead to progressive depredation.

There are many advocates of the gold-premium policy who make no attempt to deny that its employment in the way in which they intend must infallibly lead to a credit-money or fiat-money standard with a rapidly falling objective exchange value of the unit. In fact, they are inclined to regard this very fact as a special advantage; for they are, more or less, inflationists. [16]

Nevertheless, this was by no means the way in which the Bank of France carried out its premium policy. It observed a fixed limit, above which it never allowed the premium to rise in any circumstances whatever. Eight per mill is probably the highest premium that it has ever demanded. And this was certainly not an error on the part of the bank; it was founded on the nature of the case. In the eyes of the French government and of the administration of the bank controlled by it, the amount of depreciation consequent upon a gold premium of eight percent was not intolerable; but, in view of the unpredictable reactions throughout the whole community it was thought better to avoid further depreciation. Thus the French gold-premium policy was not able to prevent the export of gold altogether, but could only postpone it for a short time. Now this fact alone, and not only when the difference between the rates of interest was so inconsiderable and transient that the rate of discount did not need to be raised at all, meant a cheapening of the rate of interest on loans. But this was offset by the increase in the rate of interest during those periods when the rate of interest abroad was relatively low. Whenever the loan rate abroad sank so low that it might have seemed advantageous to capitalists to transfer capital to France for investment, they nevertheless refrained from doing so if a long continuance of the situation could not be reckoned with or if the difference between the rates was not very great, because they had reason to fear that a subsequent repatriation of the capital when the situation was reversed would be possible only at an increased cost. Thus the gold-premium policy did not merely constitute a hindrance to the efflux of gold from France; it also hindered an influx. It reduced the rate of interest on loans at certain times, but raised it at other times. It is true that it did not altogether exclude the country from international dealings in