I'KKSIDKNTIAL ADDRESS SECTION F. l6l 



prevents overissue relative to any possible demands for im- 

 mediate payment. It is important that it should be reco^^nised 

 that the opening of a mint in the Union may greatly increase 

 the strain on the banks' reserves. If gold only left a country 

 because exchange favoured it the matter would be simple ; only 

 the surplus gold from the mines would go. As soon as that had 

 been absorbed exchange would automatically fall to a point 

 at which it did not pay to export void. But, as has been seen, 

 gold is often moved at a loss to its importer, who expects to 

 find his profit in other ways. It follows that the South African 

 banks will have to maintain reserves sufficient to meet a con- 

 siderable foreign drain when foreign banks begin to purchase 

 gold here regularly. It is not to be expected that when there 

 is pressure for gold, they will confine their demands exactly 

 to the new production from the mines. If we could be sure 

 no mushroom banks would be established here it might be suflfi- 

 cient to rely on a continuance of the good management of the 

 existing banks, especially as publicity of accounts has been 

 assured by the Bank Act of 1917. But new banks are certain 

 to appear. Their stability concerns not only depositors but the 

 whole community. The widespread unemployment and depres- 

 sion in trade in England in 1908 was largely due to the bank 

 crisis in the United States. If, through bad banking, your cus- 

 tomers lose their purchasing power, you suffer in turn, and so do 

 those from whom you would have purchased. I propose there 

 fore to consider how the problem has been dealt with by othei 

 nations whose banking reserves are open to the dangers which, 

 in lesser degree, will in future be present in South Africa. 



No country can afford to leave its exchanges unregulated 

 " All the great financial countries," Withers says, " have central 

 banks, whose business it is to regulate the money market, except 

 x^merica. where they are trying hard to get one and call it by 

 some other name." Since Withers wrote, America has also 

 found it necessary to regulate money movements. It is some- 

 times thought that if a country has a gold standard 

 the exchange will regulate itself. But before this automatic 

 regulation comes into play some of the weaker banks might 

 have lost so much gold that they were forced to suspend pay- 

 ment. In any 'case, exchange would be suddenly forced from the 

 gold export to the gold import point. Frequent and sudden 

 movements would be a serious hindrance to trade. We have 

 avoided this till now partly through the combined action of the 

 banks, but very largely because it was not worth while to attempt 

 to take the small amount of gold here. 



The American system is of special interest to South Africa 

 because the Cape Bank Act is based on the earlier American 

 system which broke down in the 1907 crisis, and had to be re- 

 placed bv the Federal Reserve Taw of 1913. This Act divided 

 the United States into twelve Federal Reserve districts, in each of 

 which a Federal Reserve Bank was established. Membership of 



