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By Root 1278 0

of these devices was that of buying certain kinds of gold coin at a price in excess of their bullion value. If the bank issued to a gold exporter, instead of ingots or coins of the country, coins of the country to which he intended to send the gold, it could get a higher price for them than that corresponding to their gold content. For the exporter would save the expense of melting and recoinage and avoid the loss in which he would be involved by the fact that the domestic coins would be worn down to some extent. So the bank would be able to agree to pay a higher price than that corresponding to their metal content for the current gold coins of the states into which a future export of gold was probable. [26]

All of these measures can best be described as weapons against the premium policies and related devices employed by foreign banks. If the central bank in a country A endeavored to raise the upper gold point for export from A to country B, then the bank in B took steps to lower it. If only used coins were issued for export purposes in A, this procedure was rendered nugatory when a price in excess of the gold content was paid in B for coins of country A. It is very probable that the devices and counterdevices were largely compensatory, so that the extension of the gap between the gold points, which otherwise would necessarily have resulted from the intervention of the banks, did not in fact occur.

8 The Promotion of Check and Clearing Transactions as a Means of Reducing the Rate of Discount

In Germany, where before the war relatively very much gold was in circulation, there was a constantly growing endeavor to withdraw it from circulation by an extension of check and clearing transactions and to divert it into the vaults of the Reichsbank. The aim of this propaganda is set forth in a circular of the elders of the Kaufmannschaft of Berlin, s.d. May 2, 1907, to the following effect: "The causes to which the high rate of interest in Germany are to be traced are rooted to a large extent in the circumstance that the German people make greater use than those in other countries of cash media of circulation (gold and silver) for payments arising in and out of the course of business, but have not yet sufficiently accustomed themselves to the procedure which might replace the use of gold and silver, and also of banknotes and Treasury notes, as media of circulation, namely, the use of checks and the clearing system. If a considerable proportion of payments could be settled by means of transfers from one account to another or by checks, then this would save large sums of currency, in gold and silver as well as in banknotes and this saved currency would then accumulate in the reserves of the banks-of-issue, especially of the central bank-of-issue, the Reichsbank. The more this happened, the smaller would be the demand for currency that had to be satisfied by the Reichsbank, and the stronger would be the cash reserve of the Reichsbank, which circumstances would contribute considerably toward a reduction of the rate of interest at the Reichsbank and in the whole country." [27]

In this is a very clear demonstration of the weakness of the theoretical views that underlie modern banking policy. The level of the rate of interest is said to depend on the demand for currency. A strengthening of the cash reserve of the central bank-of-issue is credited with the effect of reducing the rate of interest in the whole country, and of reducing it appreciably. And this is not just the opinion of some private person or other, but that of the highly respected corporation of the Berlin Kaufmannschaft, and also, as everybody knows, that of the leaders of German economic policy in general. On this one point, all parties seem to be agreed, however much their views on the nature of economic phenomena may otherwise diverge. But even if this fundamental error is for a moment disregarded it is impossible to overlook the weakness of the doctrines expounded, and, above all, their contradictoriness. The proportion of cover for the Reichsbank notes provided