[76] Ibid., pp. 67-69.
[77] Adapted from The Purchasing Power of Money, pp. 150-157; and Bulletin of the American Economic Association, Fourth Series, No. 2. Papers and Discussions of the Twenty-third Annual Meeting, December, 1910. p. 70.
[78] David Ricardo, Reply to Mr. Bosanquet's Practical Observations on the Report of the Bullion Committee, Works, pp. 326-328. John Murray. London. 1888.
[79] The Bank could not on their own principles, then urge that most erroneous opinion, that the rate of interest would be affected in the money market if their issues were excessive, and would therefore cause their notes to return to them, because, in the case here supposed, the actual amount of the money of the world being greatly diminished, they must contend that the rate of interest would generally rise, and they might therefore increase their issues. If, after the able exposition of Dr. Smith, any further argument were necessary to prove that the rate of interest is governed wholly by the relation of the amount of capital with the means of employing it, and is entirely independent of the abundance or scarcity of the circulating medium, this illustration would I think afford it.
CHAPTER XII
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.