164 PRESIDENTIAL ADDRESS SECTION F. 



commercial bill basis, the currency in circulation is not increased 

 unless there has been a previous increase in the volume of goods 

 produced. " Hence," he says, " there is no similar effect on 

 prices consequent on an increase in currency obtained in this 

 way, as would be the case when notes are issued against securi- 

 ties not representing goods, such as Treasury Bills." " When 

 trade diminishes in volume and the total of bills of exchange 

 outstanding is reduced, the total of notes outstanding must also 

 automatically be reduced." 



There appear to be several fallacies in Sir Edward Holden's 

 arguments. The volume of bills is not an exact measure of the 

 volume of production. Mr. Benson has shown the possibility 

 of £5,000,000 or more bills running against goods whose first 

 cost was £1,000,000. This, it may be admitted, is not probable 

 in South Africa. In fact, the tendency here is to have book 

 debts rather than bills of exchange. More serious is the assump- 

 tion that because the total of bills is reduced when trade falls 

 off, therefore the total of notes outstanding must also be auto- 

 matically reduced. But not all bills are or could be used as 

 note reserve. As the amount of bills always vastly exceeds the 

 quantity of notes required, a considerable contraction in the 

 volume of trade and in the amount of bills might take place 

 without any " automatic " contraction of currency. The cur- 

 rency expands readily enough, but it does not contract automati- 

 cally in the way claimed. It is not, at least on the grounds 

 claimed, automatically elastic. It appears that the real restric- 

 tion imposed by the American system is not the holding of re- 

 discounted paper, but the necessity of a reserve of 40 per cent, 

 in gold, or the payment of a tax if the gold reserve falls below 

 40 per cent. Having that regulation, it may be preferable to 

 hold the balance in commercial paper rather than in Government 

 securities, partly because the danger of a fall in capital values 

 is reduced, partly because the Government has less incentive to 

 compel or to induce overissue. 



In Great Britain the Committee on Currency and Finance has 

 recently reported on the regulation of note issues. The Committee 

 recommended that the principle of the Bank Act of 1844 should 

 be maintained, that the note issue — except as regards existing 

 private issues — should be entirely in the hands of the Bank of 

 England, and that there should be a fixed fiduciary issue beyond 

 which notes should only be issued in exchange for gold. The 

 1844 -^ct, it was recommended, should, however, be amended so 

 as to make provision for the issue of emergency currency in times 

 of acute difficulty. The power given to the Bank by the 

 Currency and Bank Notes Act, 1914, under which, subject to 

 Treasury consent, it may temporarily issue notes in excess of 

 the legal limit, should be continued in force. Parliament should 

 at once be info'-med of such action. Profits derived from the' 

 excess issue should be surrendered by the Bank to the Exchequer; 

 the' Bank rate should be raised to a figure sufficientlv high to' 



