THE GOLD EXCHANGE STANDARD
It is an essential feature of the gold exchange standard as
it exists in the Philippines, for example, that premiums
charged by the Government in Manila for exchange on New
York, and in New York for exchange on Manila are fixed at a
point somewhat below the gold export points in each case.
Thus the would-be exporter of gold in the Philippines never
finds it profitable to ship gold to New York. On the other
hand, international bankers in New York never find it
profitable to ship gold or currency to the Philippines,
because the authorised agent of the Philippine government in
New York always stands ready to sell in exchange for United
States currency, drafts drawn upon Manila at a premium less
than the cost of shipping gold or currency. Through a
regulation of the supply of silver pesos in actual
circulation in the Philippines they are maintained at a
definite ratio to--not gold in the Philippines, but--gold,
or its equivalent, in New York. The way in which the supply
of local currency in the gold-exchange country is regulated
will be made clear in what follows.
The gold exchange standard has not entirely escaped
criticism. Professor J. Shield Nicholson has recently
attacked this standard in India. (_Economic Journal_, June,
1914.) It is his contention that inflation may occur in
India, if it has not already occurred, on account of the
"impeded convertibility of rupees into gold." After a
certain point is reached in the inflation the decline in the
general purchasing power of the rupee must be followed, he
affirms, by a specific depreciation as regards gold; and
then the main object of the plan would be defeated. He
offers no evidence, however, that prices have risen faster
in India than in gold standard countries. With the exception
of Mexico, where currency conditions have become extremely
chaotic, the historical material here reprinted is in accord
with the recent monetary history of the countries under
discussion.
[80]When the Government of British India sought, in 1893, to give a
fixed gold value to about L120,000,000 in rupee silver, it undertook an
experiment of great importance to the financial world, and one which was
naturally viewed in many quarters with grave misgivings. The experience
of fifteen years which have followed that experiment has taught many
lessons in monetary science. It may, indeed, be said to have blazed a
new path in the principles of money--at least, in their practical
application. The effort to raise the coins to a fixed gold value by
scarcity alone was not successful, but it led to other devices, which,
imitated or improved upon in Mexico, the Philippines, and the Straits
Settlements, as well as in India, have created a new type of monetary
system which has come to bear the title of the gold exchange standard.
The gold exchange standard differs in several respects from the limping
standard. It has been the product of definite purpose and plan in the
Philippines and in Mexico and to a certain extent in India. While in
British India it has been, like the limping standard, a compromise with
existing conditions, it has there, as elsewhere, received a definite
form and substance which separated it from the limping standard as
evolved in France and in other countries which found themselves with a
large amount of legal-tender silver on their hands when the metal had
fallen below the official parity. There are two other essential
differences between the limping standard and the gold exchange standard.
One is that the gold exchange standard contemplates a circulation of
token coins of silver without any necessary concurrent circulation of
gold or paper. The other is that the gold exchange standard contemplates
definite and comprehensive measures to maintain the value of token coins
at par with gold instead of relying purely upon custom and scarcity to
give them value.
The essential principle upon which the exchange standard has been
established is that the value of money is governed by the law of supply
and demand. So long as supply was indefinite and excessive, as under the
system of the free coinage of silver, there was no way of preventing
safely and effectively the decline in the gold value of the coins to the
bullion value of their silver contents. The moment, however, that
Government undertook to limit the supply of coins to the demand for
them, it took an important step to separate their value from that of
their bullion contents and to give them a value based upon the demand
for them as money signs required for carrying on exchanges. Strangely
enough, while this principle had been in operation for many years in the
case of subsidiary coins, its bearing upon the use of silver in
countries where the standard had been depreciating was not clearly
comprehended until within recent years. Those who understood the
principle doubted its sufficiency to give a fixed value to silver coins
as the sole medium of exchange, or they distrusted the ability of any
government to judge accurately the number of coins required.
Upon the latter point they would have been correct if dependence had
been placed upon guesswork or any empirical method of determining the
amount needed. It remained to find the true solution of the problem by
so regulating the quantity of the coins that it would respond
automatically to the demands of trade. The correct method of doing this
is through the system of exchange funds. As this system is operated in
the Philippines, it is not possible to obtain gold coin for silver
certificates in small quantities; but it is possible always to obtain
drafts upon New York at par, plus the usual charges for exchange between
gold standard countries. These drafts have to be purchased with actual
silver coin or coin certificates. In either case the coins and
certificates are, by the requirements of the coinage law, held in the
Philippine Treasury. The law does not permit their deposit by the
Treasury in current account at a bank, which would turn them back into
the general circulation.
For practical purposes the volume of currency in circulation is
contracted to the same extent as if a corresponding amount of gold were
taken from the circulation for export. When the current turns and rates
for money become high in the Philippines, Philippine currency can be
released for local circulation by the purchase in New York from the gold
standard fund of bills upon the Philippine Treasury. This rule of
locking up the proceeds of the sale of bills is not rigidly applied to
the funds in New York, because the influence of the Philippine purchases
upon the local circulation there would be insignificant. On the
contrary, the Government obtains a generous interest rate, which has at
times been as high as 4 per cent., upon the deposit of Philippine funds
with New York bankers. During the stress of the autumn of 1907
considerable transfers of capital were made from Manila to New York by
means of the purchase of New York drafts from the Philippine Treasury.
The process, often repeated even under less serious pressure, clearly
shows that the monetary system of the Philippines is linked to gold, and
that capital can be freely transferred upon a gold basis between Manila
and other markets.
The experience of fifteen years since the free coinage of rupees was
first suspended in British India, of five years since the new system was
established in the Philippines, and of nearly four years since it was in
operation in Mexico, have settled most of the doubts which were felt
when the experiment was undertaken in India. In the first place, it has
been made clear that the value of the coins in exchange, as fixed by
law, has not been influenced by variations in the price of silver
bullion. This statement, of course, applies only to one side of the
problem--the fall of the gold value of the silver in the coin below its
face value. It would not be possible under any system yet discovered,
except such uneconomic devices as prohibiting exportation, to prevent
the disappearance of silver coins when the [bullion] value of their
contents rises above the legal value in exchange. Both the Philippines
and Mexico have faced this menace to their monetary circulation since
their systems were inaugurated, but both have succeeded in removing it.
In the Philippines the contents of the silver unit--the peso--was
reduced in 1906 from about 371 grains to 247 grains in pure silver. The
amount fixed by the law of 1903 was practically the same as the contents
of the old Mexican dollar. The adoption of a coin of this weight was
caused partly by the desire to avoid the distrust which some feared
might arise from reducing the weight. At the time of the passage of the
law, moreover, the price of silver was nearly at the lowest point in its
history, having touched the minimum of 21-11/16 pence in January, 1903,
and being at an average price of 22-1/2 pence in March. The adoption of
so heavy a coin, however, was not in accordance with the original
recommendation made by the present writer to the War Department in
November, 1901. The weight then recommended was 385 grains, nine-tenths
fine, or about 347 grains of pure silver.
In Mexico the rise of the silver coins above the legal gold value proved
a blessing in disguise. It enabled Mexico to go almost to an absolute
gold standard by selling her silver at a premium. From May 1st, 1905, to
October 22nd, 1907, the old silver piasters were exported to the amount
of $85,956,202, while gold coinage was executed to the amount of
$71,646,500 (about L7,200,000).[81] The gold has gone chiefly into the
reserves of the banks, which have in circulation about $95,000,000 in
notes. Gold holdings of the banks, which were only $15,832,840 in
January, 1906, were $54,165,483 in October, 1907, while silver holdings
declined over the same period from $49,781,155 to $14,399,924.[82] This
influx of gold came about because silver at 33 pence was above the
Mexican coinage ratio of about 32 to 1, and much of it was sold by the
Commission on Money and Exchange at a direct profit to the Mexican
Treasury. In view of the subsequent fall in silver below 23 pence, at
which rate Mexico is in a position to replenish her supply of subsidiary
coinage, her statesmen may claim the credit of following the great rule
of profit in the commercial world as well as on the stock exchange--to
sell when things are dear and to buy when things are cheap.
The coincidence in the rise of silver and the adoption of the Mexican
monetary reform in 1905 was in some degree accidental. It facilitated
the reform, not only by introducing gold, but by removing the objections
which would otherwise have been heard from the miners of silver to the
rise in gold wages which would have accompanied a fixing of the exchange
at a point above the value of silver bullion. It was the intention of
the Mexican Government, however, to proceed resolutely, though
deliberately, to a fixed exchange, and they would undoubtedly have
accomplished this result, even if they had not been aided by the rise in
the value of silver. Its subsequent fall has in no wise impaired the
stability of the gold standard.
Some fears were expressed in the Philippines as to the willingness of
the natives and of Chinese traders to accept a silver coin at a gold
value fixed by law which was obviously above its value as bullion. This
difficulty has proved almost negligible. Silver within less than three
years has been above 33 pence per ounce and below 23 pence. It is
doubtful if the Government officials in India or the Philippines have so
much as taken note of the daily fluctuations since the price dropped
below the legal parity of the coins, and it is certain that the exchange
value of the coins has been in no wise impaired by their fall in bullion
value. When the last reduction was made in the weight and fineness of
the Philippine coins, lowering by almost 30 per cent. their silver
contents, the precaution was taken of advising the public by means of an
official circular, translated into the various languages and dialects of
the Islands, why the change had been made, and that it would not affect
the exchange value of the coins. Provincial and municipal treasurers
were also directed to carry on a campaign of education among the people
by way of explaining the character and effect of the change. The
greatest menace to the value of the new coins lay with the Chinese, for
in China for many hundreds of years local bankers and merchants have
adhered to the rule that a coin derived no value from the stamp, but was
worth just what it would fetch on the scales. The Chinese traders at
first undertook to discriminate in this manner against the new coins of
the Philippines. In some cases they refused to receive them except at a
discount varying from 20 to 40 per cent. They also offered 105 in the
new coins for 100 in the old, evidently in the hope of exporting the old
at a profit while they continued to be worth as bullion more than their
legal gold value. The success of this discrimination was local and
extremely short-lived. The first consignment of the new coins reached
Manila on May 4, 1907, and when the Treasurer of the Islands prepared
his annual report on October 15th, 1907, he was able to make the
following statement of conditions:
At this time, October 15, the new coin is accepted without
question in every part of the Islands, and no reports or
complaints have been received for the past two months as to
discounting it, and, so far as can be ascertained, no
premium is now paid for the old coin. In fact, the demand
for the new coin for exchange purposes has so far exceeded
the supply that it became necessary to withdraw nearly half
a million of the new pesos from the banks to meet the
requisitions therefor from the provinces.
The hesitation which prevailed, therefore, in many quarters in regard to
the ability of a government to overcome the conservatism of the East in
its preference for coins of full bullion value has not been warranted by
events. This demonstration is of importance if the exchange standard is
to be considered for China. At present the Government of China is not
perhaps strong enough and sufficiently centralised to assure its
subjects that it can give a definite gold value to a token coin and
maintain it honestly and efficiently. The trial of the system, however,
in the Philippines, in British India, and in the Straits Settlements, in
all of which there are many Chinese, has probably so far cleared the air
upon this point that the Chinese Imperial Government would be able to
establish the gold exchange system if it did so under sufficient
guarantees to the financial world that it would be honestly and
intelligently maintained.
Next in importance to the settlement of this question of native
willingness to accept the new system may be considered the degree of
difficulty in maintaining it. It is not surprising, perhaps, that when
it was proposed in an incomplete form for British India, it should have
been denounced as a "fair weather" device--"a leap in the dark," which
would not stand the test of business depression, deficient crops, and an
unfavourable balance of trade.[83]
The most serious difficulty which has been foreseen by critics of the
gold exchange system relates to the sufficiency of the exchange funds.
Up to the period of the general panic of 1907 and the crop failure in
India in the spring of 1908, it might fairly be said, perhaps, that the
system had not been subjected to any but "fair weather" conditions. The
experience of India, however, has thrown striking light upon the
possibilities and limitations of the system in time of stress. The test
in India has been of such magnitude, moreover, that its results are much
more conclusive than any test which might have been afforded in a
smaller country dealing with a less enormous mass of token coins. If the
test had come before the exchange funds had acquired a respectable size,
the system might have been allowed to break down, through timidity and
delay in taking proper measures of protection, and discredit have thus
been cast upon it before it had been fairly tried.
What happened in India was that the failure of the crops deprived the
country of the usual means of compensating by exports the heavy imports
of foreign goods which had been contracted for. It became necessary,
under the settled principles of exchange, to find gold to fill the gap.
Usually the exchange account substantially balanced itself by the sale
in London of Council drafts upon the Indian Government to obtain gold to
pay the interest on the debt held in England. These drafts were
purchased by importers in London, and used to pay for the Indian crops;
but all through the spring of 1908 purchasers for drafts failed to
appear, because there had been no considerable exports of Indian crops
to be paid for. Hence Council drafts were without a market, and for a
moment it seemed that the link which bound the Indian monetary system to
the gold market of London had been severed, and that the silver rupee
might drop as disastrously as the Mexican dollar before its free coinage
was suspended. This would have added the influence of an appalling
disaster to the burden already imposed upon Indian finance by the
failure of the crops, for it would have compelled the Indian importer of
English goods to find a greatly increased number of rupees to meet his
gold obligations in London. Obviously, it was a disaster which, if it
had occurred, would have invited the bankruptcy of the country,
reflected lasting disgrace upon English financial foresight, and perhaps
even have led to organised revolt.
The Indian Government had available for meeting the crisis about
L18,500,000, principally invested in securities in London. This fund,
known as the gold standard reserve, was distinct from the currency
reserve, consisting of gold received for currency notes, which amounted
in the spring of 1908 to about L12,000,000. It was against the former
fund that the Indian Government felt compelled to offer to sell exchange
in India. Such offers were made for a time in limited amounts of
L500,000 each, but they proved substantially adequate for meeting the
demand, and by early summer the demand fell below the supply. The offer
of exchange in this form for rupees maintained the value of the rupee
coinage, contracted the amount of rupees in circulation in India, and
enabled the Indian merchants to meet their obligations without the loss
which they must have suffered if the currency had been allowed to
depreciate in gold value. The actual sales of bills upon the exchange
funds in London reached, between March 26th and August 13th, 1908, the
considerable total of L8,058,000. Of this amount about L2,000,000 was
taken from the currency reserve in gold, which was "earmarked" at the
Bank of England, incidentally affording relief to the London money
market which was keenly appreciated. Most of the remainder was obtained
by the sale of securities to an amount which reduced such holdings from
L14,019,676 on March 31st to L9,415,708 on July 31st.
The test to which the Indian system, as the most important example of
the gold exchange standard, was thus subjected was perhaps of a higher
importance than was realised by those in the thick of the conflict. It
was plainly intimated, however, in the annual report on financial
conditions for 1908 that, if necessary, the Indian Government would have
issued short-dated securities in order to still further replenish the
exchange funds in London. This would have been the true means of meeting
the situation if the existing fund had been unduly impaired. The
argument against it would have been that the demand was indefinite, and
might become so large as to be unmanageable. The fact that the demand
for exchange was met without the issue of new securities and without
trenching upon the reserve funds beyond the amount of L8,000,000 out of
L18,500,000 affords pretty strong evidence that there is a natural limit
to such demands.
It is in this principle, that there is a natural limit to the possible
drain upon the exchange funds, that the security of the new system
lies.... It is only the supply of local currency on the margin of
possible export demands which needs to be safeguarded. The substratum,
which can never leave the country unless under the influence of an
almost inconceivable economic cataclysm, is analogous in some respects
to the "authorised" circulation of the Bank of England. It represents
the irreducible minimum below which the local need for currency can
never fall. If the supply on the margin of the international exchange
movement is adequately guarded, then the whole system is secure. If it
were conceivable that the demand for exchange would equal the whole
amount of the local currency, or even the half of it, then it would be
necessary to maintain exchange funds equal to the whole amount of token
coins or the half of them in order to insure safety. But obviously this
could never be the case.
This argument against the exchange standard is only a repetition of the
dilemma sometimes presented by untrained minds in regard to bank-notes:
what would happen if all the notes should be presented at one time for
redemption? That question has been answered by banking experience; the
question in regard to the gold exchange system has been and must be
answered by experience in substantially the same manner. No country can
be subjected to such stress as to consent to part with its entire
monetary circulation, or even the half of it. On the contrary, every
influence which tends to contract the circulation tends to create a
condition which makes further contraction more difficult. Rates for the
loan of money are affected, prices of imported goods are influenced,
imports fall off and exports increase, and inevitably in the modern
money market local equilibrium is restored, often with considerable
strain, but none the less without pulling down the pillars of the
financial temple.
The experience of last spring in India proves the adequacy of a reserve
of 15 or 20 per cent. of the circulation to maintain the steady parity
of a token coinage. There is apparently no evidence that serious
distrust of the rupee arose, even when the Government was hesitating as
to just what steps should be taken to meet the demand for exchange. Even
if such distrust had arisen, however, it could have expressed itself
through financial channels only by the demand for drafts on London.
These would not have been very valuable to the average local tradesman
except as he was able to sell them back again to the banks for the very
rupees which had aroused his distrust. In this respect the gold exchange
standard may be said to put a brake upon the disposition to export
currency from fear alone, when the exportation is not demanded by the
balance of trade.
If any mistake was made in the management of the Indian currency, it was
in the investment of too large a proportion of the gold standard reserve
in securities. While investment in securities is naturally attractive
because of the income earned, and while it is not subject to just
criticism while kept within certain limits, the possession of actual
gold to a considerable amount is highly desirable. It would not be
necessary, perhaps, that such gold should be "earmarked." If the Indian
Government had a large deposit account in such an institution as the
Union of London and Smith's Bank, or the London City and Midland, it
would possess for the purposes of the Indian Government the character of
gold. Drafts against such a deposit could be sold without the discount
or delay which might be required in disposing of securities. It seems
highly desirable, therefore, in spite of the prudence with which the
recent pressure was met, that at least 30 or 40 per cent. of the gold
standard reserve should in the future be kept either in "earmarked" gold
or in the form of demand deposits.
In the case of the Philippine Islands the reserve is not "earmarked,"
but is at present entirely in the form of deposits with New York
bankers. The problem in the Philippines is really child's play compared
to that in British India. The entire circulation of the Philippine
Islands is about 40,000,000 pesos (L4,000,000), against which a large
reserve has accumulated as the result of the recoinage at a reduced rate
as well as by the profits on the original coinage. It is hardly
conceivable that an emergency would arise which would impair this
reserve; but if this should occur, the scratch of a pen in Washington
would remedy the situation. This would be accomplished by depositing
gold or its equivalent in the exchange fund in New York to the credit of
the war and navy, and placing an equivalent amount of local currency at
the command of the military forces in the Philippines. Such a deposit
would operate to increase the resources at the command of military
disbursing officers in the Islands without increasing the amount
actually in circulation until the occasion arose to disburse it. The
Panama currency has been steadily maintained at par by friendly
interchanges of this sort, even with a very insignificant official
exchange fund. No Governor of the Philippines, therefore, need have any
fear of his ability to maintain the parity of the Philippine coinage.
Whether the exchange standard would stand the strain of a great war is
yet to be subjected to practical test.[84] It may be said, however, that
its capacity to meet such a test would run upon all fours with the
capacity of any monetary system which does not consist exclusively of
gold coin. The experience of France in the war with Prussia seemed to
justify the suspension of specie payments for the purpose of husbanding
the national stock of gold. The history of the Spanish exchange, where
the coins have followed the value of the bank-notes instead of that of
silver bullion, is another case in point. Both Russia and Japan,
however, in the war of 1904-5, succeeded in maintaining complete
convertibility of their bank-notes. There is no reason why the gold
exchange standard should not be successfully maintained so long as the
country where it was established retained its national independence and
pursued a sound financial policy. The issue of large amounts of debt
would not in itself impair the stability of the standard, unless the
Government, in order to obtain gold, ravished the exchange funds in
financial centres. The questions involved would be substantially the
same as those involved in maintaining the parity of bank-notes or paper
money: first, the disposition of the Government to maintain its credit;
secondly, the resources which the Government was able to command.
Without either good intentions or monetary resources, the monetary
system, along with the fiscal system, would break down. It is not
apparent, however, that a country operating upon the gold exchange
system would find any greater difficulty in maintaining the system than
the Bank of Japan had in maintaining the convertibility of its notes
during the war with Russia.
If there were a disposition in time of war to transfer capital abroad by
excessive demands upon the exchange funds, it could be counteracted in
three ways. One would be the automatic influence of the deficiency of
currency which would arise at home. Another would be the issue of loans
abroad, from which exchange demands could be met. A third would be the
deliberate elevation by a small percentage of the charge for exchange.
This would amount to a slight depreciation in the currency, but if kept
within prudent bounds, it would probably permit the maintenance of an
adequate circulation without disturbance to local prices and without
even a theoretical depression below the 2 or 2-1/2 per cent. which
affected the notes of the Bank of France in the war of 1870.
The gold exchange system may indeed be said to be an extension of the
bank-note system to token coins. The token coin is, in effect, a
metallic bank-note, whose maintenance at gold par is subject to the
rules of sound banking. Its advantages over the bank-note in undeveloped
countries are that it conforms to a strong prejudice in favour of "hard
money," not subject to the vicissitudes of tropical climes, and that the
output can be more safely regulated, where new coins are issued only for
gold, than where a bank may increase its note issues to take over assets
of speculative or doubtful character. In the advanced countries, with a
highly organised credit system, gold, and gold alone, is the proper form
of full legal-tender coin; but in the less advanced countries of the
Orient silver token coins have the advantage that they conform in size
and denominations to the small scale of local transactions, that they
are not so rapidly absorbed by hoarding, and that their very
non-exportability enables the Government to keep in circulation a
quantity of currency which might under a different system be drained
away to richer countries, and leave the community denuded of an adequate
medium for carrying on exchanges.
OBJECTIONS TO THE GOLD-EXCHANGE STANDARD FOR THE STRAITS SETTLEMENTS
ANSWERED
[85]... the establishment of the gold standard in the Straits
Settlements ... in the spring of 1903 ... provided for the recoinage of
the British and Mexican dollars then circulating in the Malay Peninsula
into new Straits Settlements dollars ... of the same weight and fineness
as the British dollar, and for the subsequent raising of the value of
these new dollars to an unannounced gold par by means of limiting the
supply, in accordance with the principle by which India raised the gold
value of the rupee....
The objections urged to the adoption of the gold-exchange standard are
[were]: (1) That it would unduly interfere with the [foreign exchange]
business of the banks. (2) That it would encourage banks to work on
dangerously low cash balances, knowing as they would that they could
obtain dollars of the Government on a moment's notice by the purchase of
cable transfers on Singapore from the crown agents for the colonies in
London. (3) That there would be danger of the Government's notes [a part
of the circulating medium] depreciating unless they were redeemable in
gold in the country itself. (4) That the monetary circulation of the
Straits Settlements was too small to make the plan feasible there. (5)
That the plan would require a larger reserve fund than would otherwise
be necessary, because the Government would be compelled to keep a
reserve both in London and Singapore; and that in each place the reserve
would have to be large, because drafts on the fund through the sale of
telegraphic transfers would not give the Government any such warning in
advance of the demands liable to be made as would enable it to replenish
the reserve.
The above arguments, all of which were urged upon the writer either by
officials or business men in the Straits Settlements, do not appear to
be conclusive for the following reasons, which may conveniently be
stated in the same order as the objections.[86] (1) If the rates for the
sale of government drafts were fixed at the "gold points," as they
presumably would be under the gold-exchange standard, and if only drafts
of large amounts were to be sold by the Government, redemption by the
sale of drafts would not interfere appreciably more with the business of
the banks than would redemption in coin. Under these circumstances the
banks themselves would be the principal purchasers of government drafts,
and such drafts would be purchased and forwarded merely in lieu of the
shipment of sovereigns. (2) The sale of telegraphic transfers, while
desirable in the interest of currency elasticity, is by no means a
necessary feature of the gold-exchange standard. If the Government were
opposed to making a minimum legal reserve requirement of banks, it could
limit its sales of drafts to demand drafts or even, if need be, to
short-time drafts. (3) If government notes were redeemable in silver
dollars on demand, and if the silver dollars were redeemable in gold
exchange on demand, depreciation would be impossible in a country where
the people have the confidence in the Government which they have in the
Straits Settlements. (4) The system of the gold-exchange standard is
better suited to a country with a small circulation than to one with a
large circulation. It is evidently easier to maintain a small reserve
abroad than a large one and the operations with a small reserve are less
disturbing to the money market of the financial center in which the
reserve is located. (5) It is not probable that the Straits Settlements
would require so large a reserve under the gold-exchange standard as it
will under the system to be adopted. Under either system it would need a
sovereign reserve and a dollar reserve. Under the system to be adopted
both reserves will be located in Singapore; under the gold-exchange
standard the dollar reserve would be located in Singapore and the
sovereign reserve in London. The sale of cable transfers is not a
necessary part of the system, as above pointed out; and, even if it
were, the movement of market rates of exchange would ordinarily give
ample warning of a demand for dollar drafts or sovereign drafts.
Emergency cases, if such should arise, could be met through the
temporary transfer of funds to the gold reserve from the security
portion of the note guarantee fund, or through the transfer of dollars
to the credit of the home government in Singapore in exchange for an
equivalent amount of sovereigns placed to the credit of the Straits
government in London.... A prolonged and severe drain upon the reserve
fund, which in a country like the Straits Settlements would be an
extremely improbable contingency if the Government withdrew from
circulation dollars presented in the purchase of government drafts,
could of course always be met by the forward sale on the London silver
market of the redundant dollars piling up in the Government's dollar
reserve in Singapore. The gold-exchange standard would probably enable
the country to get along with a smaller gold reserve than will the
system to be adopted, inasmuch as it would keep gold coins out of
circulation and the demands upon it would be limited to the requirements
of meeting foreign trade balances--the only monetary use to which the
dollars could not be applied. The Straits Settlements, inasmuch as it is
a country for whose trade requirements silver coins are better adapted
than gold, and a country which is anxious to maintain its reserve at as
small an expense as possible, would in fact seem to be a place
peculiarly adapted to the gold-exchange standard. The premiums which the
Government would realize on its sale of exchange, together with the
interest it would obtain on that part of its reserve deposited abroad,
would doubtless yield sufficient profit, as in the Philippines, to pay
the expenses of administering the currency system and to provide in
addition a substantial annual increment to the gold reserve.
FOOTNOTES:
[80] Charles A. Conant, _The Gold Exchange Standard in the Light of
Experience, The Economic Journal_, Vol. 19, June, 1909, pp. 190-200.
[81] _Le Marche Financier en 1907-8_, p. 711.
[82] These figures are from the annual budget statements of the Minister
of Finance.
[83] For some of these doubts see _London Bankers' Magazine_, October,
1908, LXXXVI, p. 435.
[84] Throughout August, 1914, while sterling rates in other countries
rose to unprecedented heights, India succeeded in maintaining rates on
London in the neighborhood of the gold export point--a striking
testimony to the soundness of the Indian arrangements.--EDITOR.
[85] E. W. Kemmerer, _A Gold Standard for the Straits Settlements II.,
Political Science Quarterly_, Vol. XXI, No. 4, p. 663, 678-680.
[86] The answers given to the objections just stated have been confirmed
and strengthened by the actual operation of the gold-exchange standard
as later adopted by the Straits Settlements.--EDITOR.