PRESIDENTIAL ADDRESS SECTION F. 117 



liberally mainly by way of rediscount ing sound bills. The know- 

 ledge that such bills can be turned into cash enables them to treat 

 bills thus discounted as another reserve. It is this greater mobility 

 of bank assets which makes the Central Reserve Banking system at 

 once safer and more elastic than the system of decentralised 

 reserves. Strengthening the reserve of one bank does not imply 

 the weakening of other reserves. To enable such a Central Bank 

 to fulfil these functions adequately it must have the sole right of 

 note issue. Other credit instruments do not disturb the relation 

 between cash and business. They each represent a transaction 

 and expire when that transaction is finished, so they cannot pos- 

 sibly produce inflation. Notes, however, which pass into circula- 

 tion and are re-issued when returned to the bank do add to the 

 currency and sensibly disturb the balance between currency on the 

 one side and wealth and business on the other. It seems sound, 

 therefore, that they should be issued only on a backing of mer- 

 chantable bills. It gives elasticity to the currency based on the 

 changing demands of trade — expansion and contraction in accord- 

 ance with the volume of the country's trade. The output of 

 metallic currency is rigid and not necessarily related to the demands 

 of trade. On the other hand the capricious, or the interested, issue 

 of notes means inflation and the consequent raising of prices against 

 the consumer. There is little doubt, therefore, that the policy of 

 a Central Reserve Bank with powers of note issue subject to prin- 

 ciple is both a sound and beneficial improvement to the banking 

 system. It probably guarantees the maintenance of confidence 

 and credit under circumstances of crisis when an internecine 

 slaughter of values takes place under the circumstances of separate 

 and independent reserves. It is probably a principle which might 

 be introduced wherever there are competing banks of the commer 

 cial type, and operate as an independent but unmistakable function 

 of government assuring the stability of values without interfering 

 with the rapidity of exchange. 



But a useful principle once discovered, and supported by suc- 

 cessful practiced should be utilised to its fullest possibilities. It 

 must accordingly be pointed out that the difficulties of international 

 exchange are parallel to those of decentralised reserve banking : the 

 absence of a common denominator, the estimation of sales and pur- 

 chases in terms not of a common third measure, but in terms of 

 separated and distinct reserves which have no necessary relation 

 to each other, and are, in fact, often engaged in preying upon 

 each other in a sort of elemental struggle for existence — all repro- 

 duce upon the stage of international finance the characteristics of 

 decentralised and competitive banking. As they show the same 

 diagnosis they are susceptible of the same cure. We may say. 

 therefore, confidently that if there was an international reserve 

 bank, with issue of an international currency, the difficulties of 

 intercourse across the boundaries of currency systems would dis- 

 appear. All other proposals, international barter, international 

 credit, philanthropic proposals of one kind and another, fail to 

 set up an automatic reflex system such as we enjoy in normal times 

 within national limits. 



