The Theory of Money and Credit

In the returns of the Bank of France it has been repeatedly asserted that the gold-premium policy was directed only against those who wished to withdraw gold from the bank for speculative purposes. The bank, it was said, never put difficulties in the way of procuring gold for satisfying the legitimate demands of French trade.22  No explanation was given of the idea of “legitimate” demand and its contrary “illegitimate” demand.

The idea on which this distinction is obviously based is that trade in commodities and dealings in capital are two perfectly distinct and independent branches of economic activity and that it would be possible to restrict the one without affecting the other; that refusal to surrender gold for arbitrage dealing could not increase the expense of procuring commodities from abroad so long as no difficulty was made about placing at the disposal of the importer the sums needed by him to pay for his purchases.

On closer examination this argument can hardly be accepted as valid. Even if we completely ignore the fact that dealings in capital only constitute one form of the general process of exchange of goods and consider nothing beyond the technical problem of the withdrawal of gold, it is clear that the bank cannot achieve its aim by discriminatory treatment of different requests for gold. If exportation of gold did not seem profitable because of the difference between the rates of interest, imported raw materials would actually be paid for, partly or wholly, by the commodities exported. The importer would not try to obtain gold from the bank; he would go into the market and buy bills originating in the French export business. If gold were delivered to him by the bank without a premium while the rate of exchange rose roughly by the amount of and on account of the premium that was charged to arbitrage dealers, this might well mean a favoring of the import business, and might possibly in some circumstances benefit the consumer as well, although that depends entirely upon the state of competition among importers. But all the same, the rate of exchange would experience the variation that the bank wished to avoid. The upper gold point would be fixed too high by an amount equal to the amount of the premium.

Finally, it must be pointed out that the distinction between a legitimate and an illegitimate demand for gold for export cannot be applied in practice. The demand for gold with which to pay for imported goods may be called legitimate, the demand for gold with which to buy foreign bills as a temporary investment with a view to exploiting a difference in interest rates may be called illegitimate. But there are many remaining intermediate cases, which cannot be placed in either one or the other category. Would it have been possible, say, for the Bank of France to put obstacles in the way of the withdrawal of deposits held by foreign states, municipalities, and companies, perhaps as the balances of loans? Or for the Austro-Hungarian Bank, which has repeatedly been accused of refusing to issue bills to persons who intend to carry out arbitrage dealings, to increase the difficulty of speculative repurchase of home securities from abroad?23

• 22Thus, in the Compte rendu for 1898 (pp. 12 f.): “Si nous nous efforçons de conserver de grandes disponibilités métalliques et de les ménager le mieux possible, nous ne devons pas non plus perdre de vue les intérêts du commerce et lui refuser les moyens de payement qu’il réclame pour les besoins les plus légitimes, c’est-à-dire pour l’approvisionnement du marché français.”
• 23See my article Das Problem gesetzlicher Aufnahme der Barzahlungen in Osterreich-Ungarn, p. 1017. If the Austro-Hungarian Bank were to follow the example of the Bank of France in this or some other way it would achieve an exactly opposite result to that achieved by the French institution. Like that of the Bank of France, its action would restrict not merely the efflux but also the influx of gold. In France, the creditor nation, this means something very different from what it means in Austria, the debtor nation. In France, restriction of the importation of capital (which would only exceptionally occur) is unobjectionable; in Austria, the country that is dependent on constant importation of capital from abroad, it would have quite a different effect. The fact that there was a possibility of difficulties in subsequently repatriating the capital would mean that a greater gap than otherwise would have to occur between the Viennese and the foreign rates of interest before capital would be sent to Austria, and this would mean that the rate of interest in Austria would always be higher. The fact, on the other hand, that the export of Austrian short-term capital would also not be profitable except when there was a greater gap than otherwise between the home and foreign rates would not counteract the above disadvantage, because the question of capital exportation from Austria-Hungary to western countries very seldom arises.