Transcriber’s Note: Italics are enclosed in _underscores_. Additional
notes will be found near the end of this ebook.
THE WAR AND OUR FINANCIAL FABRIC
THE WAR AND OUR
FINANCIAL FABRIC
BY
WALTER WILLIAM WALL, F.J.I.
FELLOW OF THE ROYAL STATISTICAL SOCIETY
AUTHOR OF “BRITISH RAILWAY FINANCE,” ETC.
LONDON
CHAPMAN & HALL, LTD.
1915
PREFACE
In this work I attempt to gather up some of the lessons to be learnt
from the experiences of the greatest of financial crises. Many
predictions have been unrealized and many theories destroyed, and we
are able, I think, to see with greater clearness and to grasp with
more boldness the problems that perplexed us in the past. Banking,
credit and currency problems have ever been subjects of contentious
controversy, experts and academic critics alike being unable to agree
upon their reading of phenomena and upon right interpretations. The
problems are indisputably complex, the most complex, probably, in the
vast domain of economics, and vision and logic have not guided us with
sureness amidst their intricacies. Hence we have groped and gone our
different ways, finding ourselves at no common goal. Royal Commissions
have been asked for in order to tackle and, if possible, to find
solutions that will be universally acceptable. For some time before
last year’s crisis a small committee of bankers had been sitting in
order primarily to deal with the reserve problem and the provision of
emergency currency. It is believed they were on the point of presenting
a scheme to deal with future crises when the sudden outbreak of the
war put an end to their labours. Whether or not their scheme will
ever be made known to the public may depend upon future developments.
Perhaps the public may never be enlightened, for it may now be thought
that inspiration and genius discovered the most practical solutions at
the right moments. Something had to be done swiftly. And that which
was decided upon swiftly revealed deeper insight, maybe, than slower
deliberation.
This is not uncommon, however, in the career of genius. Civilization
has profited more, perhaps, from flashes of inspiration than from
uninspired controversy.
In order to build up my arguments I start from the foundation, and in
the earlier chapters deal with the monetary problem and the general
working of the banking system. These lead us into the region of
dialectics and controversy and to a survey of the happenings during the
crisis.
I urge amongst other contentions that banks do not in the true
connotation of the word create credit. If it be possible to convince
ourselves that they do not create credit, that credit is a something
existing prior to and independently of banking, it will, I think, make
the gold reserve problem easier to solve. What we gaze upon is not an
unsubstantial structure called in Lombard Street “the superstructure of
credit,” but is something more solid. It is a superstructure of wealth.
All that banks do is to transform this wealth into liquid capital,
resolve it into its constituent, or original, elements. This enables
wealth to perform its fructifying functions, to reproduce itself, just
as the mature fruit reproduces itself when re-sown. Were the wealth
to remain in its fixed, or, as the market would say, its frozen form,
what sort of wealth-harvest could we hope to gather from it? Unless it
be made liquid it cannot flow. And if it did not flow, but remained
frozen, sterility would result. If this transforming machinery were not
provided by banks, the Government, on the nation’s behalf, would have
to provide it, or the nation would become inert. As there is not, and
never can be, enough legal tender coinage for this work, other legal
tender currency should be provided.
In answer to those who have ever clamoured for high gold reserves I
have endeavoured to show the impossibility, in the present system, of
this realization. What critics have at the back of their consciousness
is, not quantity _per se_, but proportion. They do not mean a mere
counting of sovereigns, but the ratio of an individual bank’s reserve
to its liabilities. A small bank cannot have as much gold as a large
bank, but it can have as high a proportion. Now, a high proportion
can be attained only by keeping down the loan-deposits. It cannot be
attained by getting a larger quantity of gold if the loan-deposits
grow correspondingly. When banks see these deposits rising and the
proportion falling, they cease lending, call in their loans, and allow
the proportion to rise. We then see what we fallaciously call the
loan-fund of Lombard Street diminish, showing that the loan-fund is not
in the deposits, but in the gold reserves and in the totality of the
wealth in the keeping of the banks at any given moment.
When banks cease to lend they drive borrowers to the Bank of England.
Borrowing there causes a drop in the Bank’s proportion. Therefore,
we cannot have simultaneously high proportions of joint stock bank
reserves and a high proportion of a Bank of England reserve unless
both stop lending simultaneously. As the Bank’s reserve is the reserve
of the joint stock banks collectively and the national reserve, then,
if its proportion falls, the reserve-proportion of the entire system
falls. The only way to keep it high is for all to stop lending and for
the whole money market to lapse into a state of stagnation. So far as
my knowledge extends, this has not been pointed out.
We know that efforts are made, by raising the Bank rate, to replenish
the reserve automatically from outside sources. But whether the gold
flows in or not, it does not disprove the fact that a high proportion
in the independent joint stock banks and in the independent Bank
of England cannot be maintained at simultaneous moments except by
a simultaneous refusal to lend. It needs no exceptional power of
imagination to picture what would result from this action. It would
have the same consequences as a great destruction of capital by war
or any other calamity. If we had an elastic legal tender system, to
provide for what I call a supplementary inflow of legal tender, we
could avoid many inconveniences from which the money market and the
nation suffers.
The supply of liquid capital in a perfect economic system should keep
pace with the output of wealth. But our system is not perfect. Progress
must necessarily be impeded by artificial and arbitrary restrictions.
I think, too, we could simplify the problem by segregating the
composite deposits of a bank. These deposits are an aggregation of
what I call, for lack of something more precise, pure deposits and
loan-deposits. The loan-deposits are debts to the bank, which the
bank has power to call in. If these loan-depositors have legal power
to withdraw money on demand, the banks have power to withdraw from
many of them on demand. On the approach of a crisis, or stringency,
they do this, though in certain contingencies such withdrawals might
precipitate a crisis. Nevertheless, the important fact remains that
they have power to call them in.
If we set the gold reserves against the pure deposits we shall find
that the reserve is invariably high.
But why do we want a high proportion? Why do we wish to hoard gold,
when we know that the hoarding of gold is more harmful than beneficial?
To avoid a panic, the critics and seers say. But a panic is not a
mathematical problem; it is a psychological problem. If mathematics
could save us from fear and madness we could then automatically ensure
general sanity and common sense. What mathematical proportion will save
us from a panic? Who is to lay down the proportion? Where are we to
draw the magical line of safety? Is it to be an exact proportion or an
approximate proportion? Is it to be an universally exact or universally
approximate proportion? Or is it to be an individually exact or
approximate proportion? There can be no exactitude, particularly if
we include the Bank of England. In mathematics, however, we must have
exactitude, for half per cent below the formula might be fatal. And if
in order to keep up the proportion simultaneously in Lombard Street and
Threadneedle Street lending ceases, then the crisis comes, despite the
proportion.
A psychological disease is not to be diagnosed by the mathematician.
We must find a psychological remedy for it, and that remedy is
knowledge and common sense. The nation that met the crisis in August
last so calmly and has faced since, resolutely and philosophically,
the most terrible ordeal of its existence, is not likely to be seized
with ungovernable madness because we cannot get an exact mathematical
formula in dealing with bank reserves. The knowledge, and the only
knowledge that will keep them sane and calm, is that banking is
conducted soundly. The confidence of the community is based, and justly
based, upon sound banking methods. So long as banks transform into
currency the best wealth, then they are soundly managed, irrespective
of mathematical gold reserves. The best wealth is to be tested by
time--that is, by its durability. The highest wealth is durable; the
lowest wealth transient.
If we are to have no solid, lasting confidence in sound banking, only
in mathematical ratios, and if the highest wealth the banks possess are
to stand them in no stead in a panic, then banks can reasonably refuse
to liquefy the best wealth. We could not in that case blame them if
they speculated. If they maintain the mathematical inexact ratio laid
down by critics they will be mathematically safe, for sound wealth in a
panic will, the theorists say, be as worthless as unsound wealth.
If banks are conducted soundly, if they perform vital services to
the nation, if the nation would stagnate without those services, if
the nation restricts their freedom of action by the provision of an
inadequate supply of legal tender and by the law of legal tender, then
it is the duty of the nation to help them in that trouble for which
they are not responsible. It is also expedient for the nation to do
this. It would be conforming to the law of self-preservation. To do
otherwise would be national suicide.
Banks cannot do two contrary things at the self-same moment. They
cannot keep a high proportion and in the same moment lend freely. If
they lend freely the proportion speedily falls, and might speedily
fall far below the mathematical formula of safety. If they do not lend
freely the mathematicians say they will aggravate the crisis. The only
sensible course for the nation to take is to be its own physician. The
Government on its behalf can do again what it did last year--provide
a supplementary fund of legal tender currency. This was effective
more than half a century ago, and it has been effective again. And
experience is of greater value than theory.
These, then, are some of the questions I discuss in the following
pages. I do not expect, of course, to find common agreement. This would
be presumption. Nothing is more difficult than to destroy theories.
Experience is often impotent. Prophets are not always silenced when
their predictions are unrealized. They continue to prophecy. They
predicted confidently that when the world-war came the financial crisis
would be far worse than the military crisis, and that this country
would be in the throes of a panic the dimensions of which no human
imagination could conceive. Foreign countries with vast credits here
would take away every sovereign and every bar of gold they could lay
their hands on. Only those sovereigns would remain that we had been
far-sighted enough to store in our back gardens, or, if we had no back
gardens, in our discarded stockings. Nothing of this happened. There
was no financial panic, no raid upon our gold reserves. If there was
any apprehension it was mild and momentary, thanks to the soundness
of our banking system, the strength of our financial structure, and
the wisdom of our Government, to say nothing of the soul of the
nation. It was discovered that, instead of other countries having it
in their power to take gold from us, they were so greatly in our debt
that they could not liquidate those debts, and the exchanges went
violently against them. Since then gold has flowed into the country
in unprecedented amount, and there is still no sign of interruption
to the flow. This country is now overwhelmed with gold. The reserves
of the Bank of England and of the joint stock banks continued to grow
so rapidly that loans, or “credits” as they are called, glutted the
market. Banks lent with difficulty even on nominal terms. So far from
predictions being fulfilled, that has come to pass never dreamt of in
the wildest of dreams--a land towards which, in the midst of war, the
golden river was flowing, fed by tributary streams, and undiminished
in volume by huge purchases of warlike stores and material from neutral
countries.
The country was saved by wisdom--by the wisdom of the people and by the
wisdom of the Government which promptly acted on the wisest advice.
This begot confidence and strengthened faith. It was calm confidence
and serene faith in intellectual ability that enabled the country to go
through the crisis with success and that evoked the profound gratitude
of all.
Confidence, the energizing, vitalizing spirit of economic progress is
distinct from what is called Lombard Street credit. Yet both connote
a confiding in or a believing in something. In what? Confidence is
fundamentally a confiding in the greatness of the nation. There can be
no confidence in the littleness of a nation.
The financial writer would probably be discharged who wrote in
his money article: “Confidence in Lombard Street yesterday was in
superabundant supply, and sellers could find no borrowers of it even
on nominal terms. In fact, before the close of business balances of
confidence were unplaceable. Overnight confidence fetched no more
than 1 per cent. and weekly confidences 1½ per cent. In consequence,
therefore, of this great mass and weight of confidence the discount
market was very weak and rates fell further. It is thought probable
that the Bank of England may have to make confidence scarcer and
dearer by taking it off the market, that is to say, by borrowing
confidence.”
Is, therefore, that superstructure of “credit” that superstructure of
confidence beneath which the country economically prospers? Is there
not often in Lombard Street an abundance of “credit” coincident with a
scarcity of confidence? And is not all this “credit” impotent without
confidence? Is prostrate confidence to obtain its re-creative power
only from mountainous gold reserves? Or will it be regenerated by a new
faith in the essential greatness and wealth of the country?
I have great hopes of the future. I give abundant reasons for this
faith within me. Experience has taught me the incalculable harm
pessimism does. Pessimism is like an infectious disease. It spreads
quickly. It is difficult to fight against it. There are numerous
sad-visaged prophets amongst us to-day--men without hope, men without
a smile. They cannot cheer us. They see coming, with the inevitability
and irresistibility of doom, the day of sorrow, the day when we shall
reap the abundant aftermath of woe. But dark as the night may be, I
see a new day of joy dawning, a day when the sowers will go forth with
renewed hope and energy, with the confidence that they will gather in
at the due season a harvest more abundant than they have reaped before.
Let us not wring our hands and moan in dark corners. Let us look
forward with brave hearts and strong minds to the day of victory and
peace. That day will bring us a new faith, a new confidence, perhaps a
new happiness in which we shall forget the old griefs and despairs.
W. W. W.
CATFORD, S.E.
_February, 1915._
CONTENTS
CHAP. PAGE
I. INTRODUCTORY 1
II. WHAT IS MARKET MONEY? 13
III. THE CURRENCY OF CUSTOM 23
IV. CREDIT AND CONFIDENCE 32
V. SOUND BANKING 43
VI. THE SUPERSTRUCTURE OF WEALTH 51
VII. WHAT IS THE LOANABLE FUND? 61
VIII. THE METAMORPHOSIS OF THE FUND 70
IX. THE CENTRAL FUND 80
X. THE CENTRAL RESERVE 88
XI. THE FIDUCIARY CURRENCY 97
XII. BANKING WEALTH 107
XIII. ELASTICITY OR INELASTICITY? 117
XIV. EXHAUSTIBILITY 128
XV. THE THEORETIC LINE OF SAFETY 139
XVI. SOME PSYCHOLOGICAL PHENOMENA 149
XVII. EQUITABLE RESPONSIBILITY 156
XVIII. CORRELATION 166
XIX. THE SUPPLEMENTARY INFLOW 172
XX. CREDIT AND CIVILIZATION 184
XXI. CONFIDENCE AND GREATNESS 193
XXII. FROZEN WEALTH 202
XXIII. SOME CONCLUSIONS 211
APPENDICES 221
THE WAR AND OUR FINANCIAL FABRIC
CHAPTER I
INTRODUCTORY
Treatises innumerable have been written about money. Famous and
non-famous political economists have attempted a definition of money.
These definitions have been divergent, and often irreconcilable.
Political economists have found it no easier to arrive at a simple,
understandable, explicit formula than literary critics have found it to
define poetry. All of us have a vague idea of what money is, but it is
so vague that it is well-nigh impossible to present it in a concise and
precise phrase.
This amazes the man in the street, who believes that nothing is so
simple, nothing so easily conceivable as money. To him, of course,
money consists of so many pounds, shillings, and pence, and when that
is said, all is said. What more is there to explain and define? He is
wealthy or poor, comfortable or miserable, according to the quantity
of pounds, shillings, and pence he possesses. He knows that he can
satisfy his needs, his desires, his cravings if he has enough money
with which to buy what he wants, but if he has insufficient his needs
and longings will not be gratified.
He knows that when he goes into a shop he exchanges money for
commodities. When he purchases a pair of boots he does not tender for
them a watch, or loaves, or a couple of tender chickens that he has
bred on his poultry farm. He hands over a few shillings, receives the
boots neatly packed, thanks the shopman, says “Good-day,” and is quite
unconscious that he really has exchanged for the boots commodities that
he or some other members of the community have produced.
It would be waste of time and labour, in a treatise of this character,
to devote several chapters to the evolution of money, or, rather,
to the evolution of those articles that have served the usages of
exchange. Those who desire to acquaint themselves with these historical
facts must consult the many works devoted thereto. The world’s monetary
systems, at the stage now reached by them--it does not follow that it
is a final stage--are the outcome of experiments and improvements in
national and international exchange. In primitive days direct barter
was resorted to. Goods were exchanged directly for goods, commodities
for commodities. The baker took his bread to the tailor when he was in
need of a garment, and the maker of footwear took his handiwork to the
baker or the butcher when he wanted food.
This worked well enough in small communities living in circumscribed
areas, having no intercourse with communities living at inaccessible
distances. But as the communities grew, as their boundaries expanded,
as they came into closer touch with other communities, as distance
became shortened by the discoveries of means of transport, as
individual and collective mentality strengthened, these primitive
communities had to face the increasing inconveniences of direct barter.
Necessity stimulated ingenuity and invention until in the course of
ages the inconveniences were lessened by the use of selected articles
for exchange. These were selected partly because of their scarcity and
partly because of their durability, for it was discovered that scarce
things were prized more highly than things that were abundant.
That which was scarce, therefore, by being more highly prized became
what we call more valuable. That is to say, more store was set by its
possession. The possession of it excited admiration and envy and greed;
admiration and envy are the bases of economic value to this day. They
are not the bases of ethical value, but economic law and moral law are
opposed in many directions.
Scarce things, therefore, were just as much prized by primitive
people as they are prized by civilized people to-day. It was these
scarce things, therefore, that could be exchanged for an abundance of
things, because no one valued what could easily be got and what all
could have. There was a time when iron was scarce. As iron, too, was
most useful for a great variety of purposes and as its utility was
constantly showing itself, its scarcity, added to its usefulness, made
it increasingly prized and valued. A ring of iron for a crown was of
greater worth once than are the diamond-studded crowns of present day
monarchs, and iron was at one time scarcer than diamonds and rubies
are now, and a man in possession of a little iron could exchange that
possession for a great quantity of cattle with the man who had more
cattle than he knew what to do with. Cattle, therefore, were what we
call cheap and iron was dear, the primitive idea being, as it still is,
that cheapness consists in much and dearness in little, irrespective of
their values in preserving life.
Iron was dear because it was scarce, cattle were cheap because they
were plentiful. But man cannot live by iron, though he can live on
cattle. Judged, therefore, from the standpoint of life-preservation,
cattle should be more precious than iron; but judged from the
standpoint of envy and vanity, iron was, as gold now is, of greater
value than cattle. The one preserves life, the other pride, and here we
see some components of the foundation on which the economic fabric has
been reared.
A savage with a little iron and no live stock was considered wealthier
and more enviable than the man with no iron and a vast quantity of
live stock. The man in possession of the iron knew that he could get
as much live stock as he wanted by parting with all or only a portion
of his iron, and when he exchanged a portion of his iron for cattle he
actually parted with money. The iron and the cattle were money--the
iron was the sovereign and the cattle the pence in those days.
Now, the iron being scarce and being highly valued by the community
on whose land it was found, a greater value was conferred upon it in
time by law. The king and his counsellors of those days enacted that
a certain quantity of iron should discharge so much taxes or redeem
so much debt, that the Government would accept it in payment of taxes
and in liquidation of debt, thereby absolving the payer from all
legal responsibilities and penalties. From being merely an instrument
of custom iron was raised to the higher function of being a legal
instrument. It was given a certain arbitrary value, the value being
expressed in the amount of taxes it should represent and in the amount
of debt it should legally discharge.
Great importance lies in the conception that the legal, apart from the
custom value, was purely arbitrary.
Cattle would be accepted in payment of taxes and in discharge of debt
also; but, being more plentiful, and therefore of less value, the
Government decreed that so many cattle would be equivalent to so many
pounds of iron. Those who had no iron, therefore, had to pay in cattle,
just as in these times those who have no gold must pay in silver or
bronze.
Although a diamond may be worth many sovereigns, it will not be
accepted by the tax collector, nor by our creditors, because it has no
legal value. That is to say, it is not a legal instrument.
We are beginning to have some glimmering now of what money is. Money
performs two important functions. It is a medium of exchange and it is
a standard of value.
Money was the instrument man invented, after mental travail, to lessen
or remove the inconveniences of direct barter.
Money represents the possession of a claim on the products of the
community. It is a present and a future claim upon a portion of the
wealth of the general community. When the claim is exercised it
performs its function of a medium of exchange.
The idea is this. We are all potential consumers and producers. We
have read of the early Christian community, when all the members of
that community brought their goods and possessions to the common store
and divided equally. This is precisely how society lives to-day. We
all bring our goods and possessions to the common store, or market,
as it is called, and there they are divided. But they are not divided
equally. This is the chief difference. They are divided unequally in
accord with our notions of equitable distribution.
Our claims on the common wealth are supposed to be based justly upon
our individual produce. The more we produce the more we claim, the
less we produce the less we claim. This is the fundamental idea, or
hypothesis; but, like many ideas or hypotheses, the practical working
of it is far from just and perfect. But the fundamental idea will make
clear the function money performs.
We are familiar with those schemes of relief in times of distress
when tickets are given to the poor, representing a certain quantity
of food. On presentation to the butcher the ticket is exchanged for a
pound of meat, and on presentation to the baker it is exchanged for a
quartern loaf. These tickets are money. They are a media of exchange
and possess exchange value. They are claims on the butcher or baker.
If the possessor chooses, he can exchange the ticket with another for
a pint of ale, and the other can claim the meat or the bread. They can
pass from hand to hand, become currency, as money is called, and the
exchange can be effected immediately or deferred.
The meat and the bread are subsequently paid for out of another fund,
and the butcher and baker hand over the tickets and are paid their
respective portions out of this common fund.
Now, the Government of the land can proclaim, if it pleases, that these
tickets can represent permanent claims on the community. Instead of
being destroyed, they can be used over and over again for an indefinite
period--be made what is called legal currency.
What the laws have done is to decree that gold, silver, copper, and
paper shall represent our claims on a certain proportion of the
nation’s wealth. When we take our products to market we exchange them
for these claims. These claims we afterwards present to the butcher,
baker, and tailor, and when we have got rid of them we have exhausted
our claims on them. If we can get no further claims we become poor or
destitute. The only means of getting fresh claims is to bring more
wealth to market and exchange it for more claims, and according to the
quantity and quality of that wealth, so are the claims we get greater
or smaller. The greater our claims the richer we are, the smaller
our claims the poorer we are. If we bring to market products that no
one wants and people will not exchange part of their claims for our
merchandise, then we know our labour has been in vain.
In order to live, we must obtain these legal claims on the general
wealth, and if we cannot obtain them we starve or become parasites.
A distinction exists, and a most important distinction, between money
and legal tender currency. Anything may be money. If I have no legal
tender currency and only a gold watch and I am in great need of a dress
suit and I offer the watch for the suit and the watch is taken, that
watch is money. It is no one else’s concern if the tailor accepts the
watch in exchange for his labour, his skill, and his cloth. He has
liberty to exchange the dress suit, if he pleases, for some ancient
ornament he desires to possess, instead of for legal coin or currency.
But he knows that the ornament will satisfy only his desire, and will
be no claim on any portion of the community’s wealth. The butcher will
not accept it for meat. But it has performed the function of money
nevertheless.
The law has decreed, however, that there shall be a species of money,
or currency, that shall have permanent value as a medium of exchange.
It has decreed that all must accept this in exchange for wealth and in
discharge of all legal obligations. With this object in view it has
chosen gold to be the legal claim, and has set up gold to be what is
called a standard of value. Treatises have been written on standards
and on values. Both are highly controversial subjects, but these
controversies must be ignored here.
This standard, or unit of value, is called in Great Britain a
sovereign. It was decreed that this coin should consist of an
arbitrary quantity of gold, mixed with alloy, and that it should be
stamped with certain designs. These designs alone make it legal money,
or legal tender. If I had a coin, containing exactly as much gold as
a sovereign, and worth exactly as much, but plain, with no design, it
would not be a legal coin. It would not be accepted in discharge of
debt, in payment of taxes, in exchange for wealth. I could, perhaps,
sell it to the jeweller for something below its real value, because he
could make use of the metal to advantage; but it would be useless to
buy meat and bread with.
The law, therefore, has decreed that a coin composed of gold, of a
certain weight, and with certain designs upon it shall be a legal unit
of value, and that so much silver and so much bronze shall be equal
in value to this unit. It has decreed that sovereigns shall be legal
tender for liabilities to an illimitable amount, that silver shall be
legal tender to the maximum equality of £2, and bronze to the maximum
equality of one shilling. That is to say, a creditor, if he chooses,
can demand gold in redemption of his debt beyond £2, but whether he
will put the demand into execution or not depends upon his will or
circumstances.
It is necessary, therefore, to lay emphasis upon this distinction
between money and legal tender currency. Money is relative wealth,
because it represents relative, temporary claims; but legal tender
currency is absolute wealth because it represents absolute, permanent
claims.
If Germany conquered this country and enacted that the sovereign should
no longer be legal currency, and that the mark should be substituted
for it, the sovereign would then become a commodity, worth only its
value in gold. Sovereigns are commodities abroad, just as continental
gold units are commodities here. Sovereigns have no legal value on
the Continent. Francs, marks, and dollars have no legal value in
this country. What, in each country, confers upon the commodity gold
its legal function as money is legislative enactment. Legislative
enactment can also make a comparatively worthless product like paper
of much greater value than gold. The paper value of a note for £100 is
trifling. But because the Government has decreed it shall be worth one
hundred sovereigns, then the individual members of the community take
it at its face value. What is its value in Germany, especially when we
are at war with Germany?
This shows the great and arbitrary power the Government of a nation
possesses.
It can make stones legal tender if it chooses. Or it can make diamonds
legal tender. Many nations have made silver and not gold legal tender.
When individuals of a nation exchange commodities they exchange it as
in national legal tender. There is, however, no international legal
tender. When nations exchange commodities the payment is made in
different instruments, such as bills of exchange. Whenever gold is
exchanged it is exchanged solely as a monetary commodity, and not in
its national legal character as money. The gold in the sovereign is
valued according to its quantity, and not by its value as a legal
instrument, token or claim. But it is rarely that gold passes from
one country to another in payment for goods received. This payment is
managed in a much easier and less expensive fashion.