Ill

THE RETURN TO GOLD

207

would be fixed on to provide for contingenciesand to inspire confidence; and the creation ofcredit would be regulated largely by referenceto the maintenance of this proportion. TheBank of England , for example, would allowitself to be swayed by the tides of gold, per-mitting the inflowing and outflowing streamsto produce their “natural” consequences un-checked by any ideas as to preventing the effecton prices. Already before the war the systemwas becoming precarious by reason of its arti-ficiality. The “proportion” was by the lapseof time losing its relation to the facts andhad become largely conventional. Some otherfigure, greater or less, would have done just aswell . 1 The War broke down the convention;for the withdrawal of gold from actual circula-tion destroyed one of the elements of realitylying behind the convention, and the suspensionof convertibility destroyed the other. It w r ouldhave been absurd to regulate the bank-rate byreference to a “proportion” which had lost all itssignificance; and in the course of the past tenyears a new policy has been evolved. The bank-rate is now employed, however incompletelyand experimentally, to regulate the expansionand deflation of credit in the interests of busi-ness stability and the steadiness of prices. Inso far as it is employed to procure stability ofthe dollar exchange, where this is inconsistentwith stability of internal prices, we have a relic

1 Vide, for what I wrote about this in 1914, The EconomicJournal, xxiv. p. 621.