The notes are ... legal tender, but, of course, may be exchanged, at sight, against cash—I don't say against gold, as I will explain presently.
The denominations circulating at present are $10, $20, $100, and $200. One dollar and $4 notes were issued at critical times, but have been withdrawn since. In case of need, they would be resorted to again, and in this respect I should like to mention the fact, demonstrated by experience, that even where the circulation is already sufficient, a supplementary issue of small notes—unless, of course, the amount be too unreasonable—is much less likely to depreciate the currency than an issue of larger ones. In a certain sense, we may consider that a country which refrains from issuing small notes in normal times, possesses ipso facto a valuable reserve in case of emergency....
I need not recall the remarkable rôle played by the Bank of France, under the leadership of its very distinguished governor, M. Pallain, during critical periods such as 1907, when that institution succeeded in keeping the French discount rate on an exceptionally moderate level, while giving valuable and effective aid, at the same time, to the London market.
How is this successful policy of the Bank of France materially possible? Precisely because it has the option to pay in silver as well as in gold. When the situation is such that withdrawals of yellow metal are to be feared, the bank quotes a premium on gold. At present, for instance, the quotation is about one-tenth of one per cent. premium, that is to say, you will only get $999 in gold against $1,000 in notes. If you want to get $1,000 cash, you can get them, but in silver.
As a consequence, there is no necessity to raise the discount rate in order to protect the gold reserve, and French commerce has the privilege of benefiting, as a rule, by the lowest rate of discount in the world. Thus the average bank rate, in 1912, was 3.37 per cent. in France, as against 3.77 per cent. in England, and 4.95 per cent. in Germany.
If we consider a period of fifteen years, from 1898 to 1912, the average rates are:
| per cent. | |
| France | 3.8 |
| Holland | 3.52 |
| England | 3.62 |
| Belgium | 3.65 |
| Switzerland | 4.14 |
| Austria | 4.22 |
| Germany | 4.50 |
CASH HOLDINGS OF THE BANK OF FRANCE
[166]The undeniable characteristic of our present currency system is that it presents a transition between the money system and the clearing system, the ultimate form of which we are unable accurately to define. This period of transition, which began when the idea of genuine credit was conceived, will last for centuries before we can rid ourselves of money as a medium. The system of purely fiduciary currency, which is in process of becoming firmly established, is not yet sufficiently stable to prevent us from being thrust rudely back into the old ways whenever we exceed the limits of our resources.
Crises afford a striking proof of this fact. The initial period, the precursor of the crisis, is nothing but an abnormal extension of credit and of speculation. At such times the need of leaning upon the solid foundation of metallic currency is felt with a new intensity; and when, with a blindness resulting from overconfidence, this need has been neglected, when, from a disregard of the functions of money, a crisis is brought about by the violent rupture of the equilibrium of credit, gold at once resumes its rights, is sought for on all sides, and, according to the seriousness of the offence, exacts complete amends, with the honors of a premium as high as it may choose to make.