116 SECTIONAL ADDRESSES 
quantity of gold. Its economic significance is that it maintains a fixed 
rate of exchange. 
While a country is on that standard it is forced to adjust its price average, 
and therefore its wage average, to the international price average. So 
long as the currency is a stated proportion of the gold supply the currency 
adjustment to a change in the latter is automatic. But when such 
currency is supplemented by means of payment the supply of which is 
not automatically controlled, some other means of adjustment must be 
found. In modern communities the duty of adjusting the supply of 
money, in its broad sense, and thereby administering the Gold Standard 
Act, is entrusted to the Central Bank or some equivalent organisation. 
The Central Bank is given the right to issue legal tender, and the supply 
is always—though, not necessarily—specified in relation to gold supply.° 
But there is no legal regulation of the use of other means of payment. 
Control is left in the hands of the Central Bank, and the instrument of 
control is the rate of discount, supplemented and made effective by open 
market operations.® 
By means of the rate of discount, reinforced, when necessary, by open 
market operations, the bank is able to control the supply of means of 
payment and thereby to adjust the wage and price average to the inter- 
national price average. That being so, control by law of the supply of 
legal tender is not inevitable. It may still be desirable, for it is usual 
for the discount policy of the bank to be governed by the supply of legal 
tender held in reserve and this, in turn, is determined by gold movements. 
Nevertheless it represents a stage in the evolution of the credit system 
rather than an integral part of a perfect system. It is even more desirable 
in other countries than in Great Britain. On the other hand it is clear 
that the proportion of gold held against currency may be materially 
4 In the English Gold Standard Act of 1925 it was provided that legal tender 
was only convertible into gold provided that the amount to be converted was 
not worth less, at the defined rate, than 400 ounces of gold; but this provision 
was merely a safeguard against the use of gold for internal purposes, such as 
currency. The paper pound was declared to be convertible into gold at the 
rate of £3 17s. 103d. per ounce of standard gold, that is to say, it was worth the 
gold contained in the pre-war sovereign. 
5 The precise methods differ in different countries. We favour a fixed fiduciary 
issue ; other countries favour a fixed percentage gold reserve. This difference 
is not fundamental. The former produces less violent reactions and therefore 
facilitates a steady adjustment. The latter tends to produce unnecessary 
fluctuations during a process of adjustment to a new state of equilibrium. The 
English method seems to me better than that employed in the United States. 
6 It is important to stress the fact that the Central Bank is not a free agent. 
It is entrusted with the duty of maintaining the gold standard, and its action 
must be guided by the need for fulfilling its obligation under the Act which 
defines the standard. Since 1925 the Bank of England has been criticised on 
numerous occasions for pursuing a discount policy which was regarded as inimical 
to industrial progress. I do not suggest that the policy of the Bank has always 
been above reproach. I do not, indeed, believe that academic economists 
usually possess sufficient information to justify comment upon current policy. 
It is clear, however, that much of the popular criticism of the Bank has been 
due to failure to distinguish between the necessities imposed by the Act of 1925 
and the policy of the Bank in circumstances that allowed freedom of choice. 
