l68 PRESIDENTIAL ADDRESS SECTION E. 



to inflate the currency. This, however, can best be treated of 

 in connection with the reserves. 



Plans for economising gold are popidar at the present day, 

 though South Africa cannot be anxious to see the rest of the 

 world economising in such an important product. Even in 

 South Africa there are some who think that the gold held in 

 reserve by the banks is money which should be used to develop 

 South African trade. But money which is in use in ordinary 

 times cannot be a reserve against emergencies. " There is no 

 way of making a profit on idle capital, and money kept for reserve 

 is idle capital ; or, at any rate, capital which is productive only in 

 an indirect way." There is only one exception to this rule, viz., 

 when the ie.';erve is invested in bills on a foreign market in which 

 gold can be obtained on demand. In the case of a demand for 

 gold for export, these bills form an additional gold reserve to 

 meet an external drain of gold. Refusal to renew internal bills 

 would not increase the stock of gold immediately available ; it 

 would simply intensify the crisis. The real reserve is that which 

 makes gold available at once. As between the American system 

 of a percentage holding and the British proposals for a i for i 

 reserve above a certain amount, the latter seems preferable. The 

 American system may be more " elastic," but its elasticity is of a 

 sort which imposes severe stresses on trade. When gold is being 

 withdrawn from reserves for export from England only a corres- 

 ponding reduction need be made in note issues, iioo in notes for 

 iioo in gold. But if a 40 per cent, gold reserve is required, 

 i250 in notes must be withdrawn from circulation for every iioo 

 of species. There is the same difficulty in the system of requiring 

 banks to hold a fixed percentage reserve against their other 

 liabilities. But in this case the fixed amount will only be a 

 minimum. When the actual holdings drop near to that level, the 

 banks will exercise caution in creating new liabilities, and will 

 import gold. It is not an automatic safeguard in times of pressure. 

 Its chief advantage is that it puts some restraint on the weaker 

 banks, whose collapse might bring about a general crisis. Thus 

 it seems that for South Africa, whether the notes are issued by 

 banks or by the Government, it will be best to haye a fixed 

 fiduciary issue, subject to alterations as our trade grows. To 

 begin with, it might be fixed at the average issues from 1910 to 

 1914. That represents the minimum amount which in any case 

 will remain in circulation, for it was absorbed before the present 

 rise in prices and alteration in our habits of carrying gold. For 

 the rest of the issue a £ for i gold reserve should be maintained, 

 though there seems no strong reason why some part of it, say 

 20 per cent., should not be held in bills payable in countries in 

 which there is a free market for gold. Those who, like myself, 

 prefer safety to profit in note regulation, would rather have the 

 amount held in foreign bills deducted from that part of the 

 reserve against which Government securities are held. It then 

 becomes a real additional gold reserve. 



