252 TRANSACTIONS OF SECTION F. 



businesses to a reasonable and fair general comparison. Graduated gently from 

 the lower excess above a ' normal ' rate of interest on capital, it reaches a high 

 rate upon very high rates of earnings on capital. Thus it does not discourage 

 trade nor lead specially to evasion. Its practical difficulties are no greater than 

 those attaching to the rival alternatives. Its basis of principle, though new, is 

 clear : certain economic units through a fortunate set of circumstances get a 

 special ' pull ' which yields supernormal profit, that has a high capacity for 

 bearing taxation without ill-effects. It is an impersonal faculty, which has 

 hitherto not been realised as a basis for taxation, in an attempt to reach more 

 directly the differential non-functional elements in profit and income. 



^. The Gold Standard. By E. G. Hawteey. 



The monetary standard regulates the value of the monetary unit, or the 

 unit for the measurement of debts. The function of the standard is to maintain 

 the stability of the system of debts based on the unit, that is to say. to ensure 

 that the unit represents approximately the same command over wealth throughout 

 the currency of the debt. As the relative values of different kinds of wealth 

 vary, an ideal standard is not theoretically possible. The gold standard is a 

 rough and ready solution of the problem by fixing the price of one commodity. 

 Debts are made payable in gold, or alternatively a paper currency is so regulated 

 that the monetary unit is in fact equivalent to a prescribed quantity of gold. 



In 1914 the gold standard "was established neai'ly everywhere, except in 

 China. Gold and credit were interchangeable. But this system has been 

 destroyed by the war. Excessive creations of paper money and credit have 

 depreciated the monetary units, have driven gold out of circulation, and have 

 put an end to the interchangeability of credit and gold. During the war there 

 has been no world market for gold ; now that the market is reviving in America, 

 whither the superfluous gold displaced from circulation in Europe has flowed, 

 the value of gold in commodities is found to have fallen heavily. The existence 

 of large stocks of gold in use as currency, which may be released and flood 

 the market, is a source of instability in the value of gold. In considering the 

 future monetary standard, we have to deal both with the depreciation of 

 existing monetary units in comparison with gold, and witb the loss of value 

 of gold itself. 



To restore a depreciated unit to its nominal gold value requires a measure 

 of deflation. Deflation, which is a reversal of the process of inflation, must 

 mean a decrease in the aggregate of money incomes. This is effected by a 

 contraction of credit, and especially by a high rate of interest on short-period 

 borrowings. A high rate of interest deters traders from holding stocks of 

 commodities or securities. It hastens sales and retards purchases, and brings 

 about a fall of prices and a contraction in the volume of credit. The fear of 

 the consequent depression of trade makes the business community hostile to 

 any drastic measure of deflation, and unemployment and falling wages are 

 likely to create further difficulties. 



Other methods of re-establishing a gold standard are. firsf, the immediate 

 re-introduction of the old gold unit and the reduction of the current value of 

 the depreciated paper below its face va'lue, or, secondly, the reduction of the gold 

 value of the monetary unit below its former nominal value. The first gives rise 

 to serious difficulties owing to the sudden increase in the buixlen of debts. Both 

 methods are open to the imputation that public faith is not kept. 



If the use of goW as money is restored either by deflation or by a manipulation 

 of the currency, the result may be a revival of the former demand for gold, 

 which would intensify all the difficulties. In particular it would cause grave 

 embarrassment by increasing the burden of national debts. If the embarrassments 

 of any country become so severe that its credit system breaks down, the natural 

 conseonence will be a rc'lapse into depreciation, and there may follow a complete 

 loss of confidence in the paper currency and a disretrard of the lesra! tender laws. 

 The resultintr demand for metallic cvirrency would raise the world value of gold 

 in commodities, and threaten the geld standard elsewhere. 



To gain the advantages of an imvarying gold currency unit, the den-and for 

 gold as currency must be kept as steady as possible. Tf the demand is not to 



