Gold Into More Money
Consider now the machinery by which gold measures the commodities of the world. Exhibit A: the gold standard. As there is not enough metal for everyday use, each nation issues currency and agrees to relate its currency to gold or to go on what is called a gold standard. There are, broadly speaking, three types of gold standard in use. There are (I) the absolute or orthodox standard: paper money is redeemable in gold -- the U. S. and Sweden are committed to this make of gold standard; (2) the gold bullion standard: paper money is only redeemable in gold in large quantities (you can buy a gold bar but not a gold coin) England, France, and Belgium use this type; (3) the gold exchange standard: paper money is supported by the reserves of some other country which is on a strict gold standard -- in other words currency is exchangeable for paper based on gold. The reserve behind credit issued on gold exchange may or may not contain gold metal along with the paper of a gold standard country. Austria, Poland, Rumania, etc., are on this paper-based-on-paper-based-on-gold basis.
There are dozens of different sub-species, hybrids, etc., etc. The subtleties involved in these arrangements are enormous, and the introduction of the relatively new gold exchange standard (Austria used it before the War, but its present popularity was born of post-War necessity) opens up a whole new field of international relationship. It also introduces the paradox that, while any country may use it, if every country did, it would, ipso facto, cease to exist. For being based on a gold standard, it implies the existence of one. The whole machinery of gold exchange standard is in the formative stage. But the idea of a country's using another's gold as a reserve does exist and does work, if only with the din of controversy in its metaphorical ears.
Having suggested the methods, the next step is to observe what we may of the execution. The first problem is how much gold or gold exchange should be reserved against currency. Experience has convinced governments that they should have gold on hand to the value of 30 or 40 per cent of their currency in circulation. And gold exchange nations keep about the same ratio of gold exchange. The ratios are, generally, fixed by law. But the legal requirements are universally based on banking experience and represent roughly what the financiers of the nation think a safe margin. The U.S. requires 40 per cent, France 35, Italy 40, etc. England's system is involved, and legal requirements are phrased in terms of maximum amounts of currency authorizable against certain sums of reserve, in effect necessitating a 33 per cent ratio. The gold a nation possesses may be figured as reserve behind actual bank notes issued, or as backing up these notes and other obligations. Reservations are the rule, and a lifetime could be spent studying the laws of various lands. But back of all systems runs this idea: a country must keep enough value -- gold or gold exchange -- on hand to preserve man's confidence in its currency, to have enough cash in the till to meet its obligations as presented. Once more: if everyone asked for his money at once, he couldn't get it. But experience has shown that a stable country maintaining about these ratios will never find itself embarrassed by too many of its citizens demanding gold at the same time. This issuance of more currency than gold does not end the expansion of the metal's use as a final guarantee, and before we can take up the problems which have arisen as a result of such expansion we will have to touch on the further projection.