For a time the banks were commanded by the Treasury not to pay out gold. The order of the day was disguised inconvertibility.

The abandonment of the gold standard by the respective nations, each within its own borders, was still more marked as regards foreign payments. England was a large creditor; and, failing other modes of remittance, large sums of gold were due in London on the outbreak of the war. But the foreign debtors with one consent hoarded their gold. The essential idea of a banking reserve was lost sight of. A reserve is intended to meet an exceptional strain. In ordinary times it is useless; it is never drawn upon to any marked extent; there is always an apparent over-abundance. But on the outbreak of the war the great banks refused to part with gold, especially for foreign payments. Six months after the outbreak of the war the banks of France, Germany and Russia had actually increased * their enormous stocks of gold. Such a general abandonment of the gold standard could not have taken place unless the monetary evolution had long since been tending in that direction. A short historical survey seems the best way to explain both the nature and the extent of this abandonment and the promptitude with which it was effected.

Down to the conclusion of the Franco-German war of 1870-71, gold and silver were, generally speaking, on an equal footing as standard money. In India and the Far East silver was the sole standard and the principal metallic money. In some of the most important Western countries (e.g. France and the countries forming the Latin Union and the United States) the double standard prevailed; gold and silver were legal tender to any extent at a ratio fixed by law, and the mints were equally open to both metals. In the United Kingdom gold was the standard, and silver was only used for token coins.

At the end of January 1915 the holdings of gold, compared with January 1914, showed for the Bank of France an increase of 28,034,000l.; for the Imperial Bank of Germany 44,879,9007.; and for the Bank of Russia 4,002,000l. But, per contra, the note circulation of France had increased by 183,184,000l.; that of Germany by 130,290,000l.; and that of Russia by 136,995,000l. All these notes are legally inconvertible.

So long as this state of things lasted, although there were no formal international agreements, practically a certain amount of silver all the world over would always command a certain amount of gold (within very narrow limits), so that for ordinary purposes and for banking and international trade the two metals were interchangeable to any extent.

This system, which de facto had great stability* and great advantages, was upset by the action of Germany on the conclusion of the Franco-German war. This action of Germany was due, like all the main lines of her recent economic policy, to the imitation of Britain. Germany thought that British commercial supremacy and the predominant position of the London money market were largely due to the gold standard. Therefore Germany determined to have a gold standard, and set about what was called the demonetisation of silver. This action of Germany upset the balance of the two metals, and they were no longer interchangeable in the same way. A given amount of silver would not obtain the usual amount of gold but a less amount. Silver was depreciated, and the depreciation increased. The consequence was that other nations found it necessary or desirable to make gold the only standard. In order to do this they put the silver (which they held in large quantities as standard money) in some kind of dependent relation to gold, the nature of the relation varying in the different countries.

This process of readjustment took a very long time; and during that time there was a continuous fall in prices and a great depression of trade, the fall in prices reaching its lowest depth in 1896. The difficulties in the general adoption of the single gold standard were greatly increased by the falling-off in the supply of gold. In course of time, however, practically all the nations of the world put themselves on the gold basis; and all the great financial and commercial transactions of the world came to be conducted on this standard. The actual monetary contracts were no doubt expressed in terms of

* The normal ratio of silver to gold (15 to 1) was practically unaffected by the great wars of the century and the great changes in the relative production of gold and silver.

the various national currencies, but all of these were ostensibly linked up with the gold standard. As it happened, since 1896 this universal adoption of the gold standard was greatly facilitated by the largely increased production from the mines. Before the outbreak of the present war it seemed as if the new gold was sufficient not only to provide for this universal adoption of the gold standard, but also to cause a general rise in prices. Certainly the common opinion in financial circles is that, just as the fall in prices before 1896 was due to a decrease in the gold supplies, so after that date the rise in prices has been due to their increase.

Unfortunately, however, during the process of getting rid of silver as an alternative standard and making gold he sole standard, there grew up very hazy ideas on the nature and the uses of a monetary standard. These hazy ideas were made the basis of important changes in financial practice. The ultimate effect was that, even before the outbreak of the war, gold had in reality become less effective as a monetary standard than it was in the days when its dominion was supposed to be shared equally with silver. The reason is that in various forms and to various degrees the pernicious principle has been adopted of deferred or suspended or delocalised or denationalised convertibility. Ostensibly, with the adoption of the gold standard all monetary obligations were to be met in gold; but practically all sorts of expedients have been invented to economise' (as it is euphemistically called) the use of gold. This 'economy' has now reached its limit with the introduction of legal inconvertibility in three of the great nations concerned; in the fourth the inconvertibility is disguised.

The degree of the change in opinion and practice may be realised by reference to the bimetallic controversy. Then the great argument of the gold standard purists was that in the natural course of things silver would depreciate. Therefore it was said that, if debtors (governmental or private) could discharge their debts in silver, they would do so, and the British gold creditors would suffer. Bankers in particular were horrified at the idea that promises to pay in gold could be made good by payments in silver, or in currency or credit based on silver. The stability of the London money

market, and with it the stability of British trade, were supposed to be dependent on the maintenance of the gold standard in the strictest and most absolute form. The adoption of the gold standard by Germany confirmed this view. Now the banker who made a wry mouth at a silver spoon will eat paper like an ostrich.

This strict maintenance, before the present war, of the gold standard in the United Kingdom, where it had been effectively established since the conclusion of the Napoleonic wars, was an easy matter; it was only necessary to observe the old maxim-'quieta non movere.' But in other countries, where silver had been standard money, the real establishment of gold as the sole standard was a matter of great difficulty. In France, for example, silver was still full legal tender, though the mintage was restricted; and in that country the double standard had given way to what was known as the limping standard (étalon boiteux). In India, although the dominant metallic money is still silver, silver is not the standard; nor on the other hand has the gold standard been effectively adopted, but only that modification of it which in these latter days has come to be called the gold-exchange standard. Its opponents call it the gold standard without gold. The essence of this standard is that, by the limitation of the coinage of rupees and by other devices, fifteen silver rupees in India are interchangeable with a gold sovereign in London (within narrow limits). This is no doubt, in normal times, a convenient arrangement for the Governments of India and of England, though whether it is advantageous to the people of India is another question. The present point is that, although India is supposed to have a gold standard, its principal metallic money is only imperfectly convertible into gold. It is a case of suspended convertibility.*

The plan adopted by India in 1893 with the closure of the mints to silver was not new. The Report of the Committee on which action was taken, after a comprehensive survey of monetary systems, concludes:

* The great rise in prices in India since 1900 is never officially ascribed to the enormous issues of token rupees, and the difficulty in the management of the exchange since August is set down to the war 'simpliciter.'

'It would thus appear that it has been found possible to introduce a gold standard without a gold circulation, without a large stock of gold currency, even without legal convertibility of an existing silver currency into gold.'

This method of imperfect convertibility had also been adopted long before the war in different forms by the principal countries of Europe. There was an appearance of monetary strength in the masses of gold held in the central banks, but any exceptional demand for this gold, especially for foreign remittance, was met by making a special charge, or in some cases by actual limitation. The gold was in effect hoarded by the central banks; and provision for foreign remittances was met by foreign credits in various forms.

In normal times this imperfect convertibility of credit into gold was not even noticed, and certainly caused no apparent difficulties. In normal times most monetary transactions are concluded without the actual passing of gold. But the real meaning of effective absolute immediate convertibility (no single word can convey the full meaning of the old system) was not simply that people could always get as much gold as they found convenient (e.g. for making ornaments or for payments abroad), but that very real effective limitations were imposed on the undue expansion of credit.

The simplest credit substitute for gold is a bank note, which in essence is a promise to pay on demand the metallic money that it is supposed to represent. Notes based on gold are strictly convertible only so long as the demand for conversion can be met under any conditions within the range of practical possibility, as shown by the financial experience of nations over long periods. The demand for conversion into gold in ordinary times is one thing; it is a demand that is only exercised within very narrow and customary limits. But the demand for conversion in extraordinary times is quite another thing; and it is only in extraordinary times that the real stability of a monetary system is tested.

It was the necessity for being ready for exceptional

* Cf. Money and Monetary Problems' (Essay on the Indian Currency Experiment), by the present writer; and 'Indian Currency and Finance' by J. M. Keynes, ch. ii.