America's Money Machine

132 PART II / THE GREAT REVERSAL
Bank ofEngland to deliver gold for export against the receipt ofany form
of legal tender money.
The return was formalized by the passage of the Gold Standard Act of
1925 (May 13), but it was not to the gold standard as historically known
in England. While the Act declared that both Bank of England notes and
the war-time Currency notes were legal tender, they were no longer
convertible into gold coin. The ancient right ofall persons to bring gold
to the Mint and have it coined was abolished, and this privilege was
restricted to the Bank of England. Holders of notes could, however,
obtain gold on presentation of their notes, but only in quantities of400
oz.-the weight ofthe standard gold bar. The utility ofthis provision was
practically limited to foreign trade.
To support the pound against possibility ofheavy unloading ofsterling
by speculators who now no longer had interest in it, the government
arranged for a $300 million credit with the Federal Reserve Bank ofNew
York. Fortunately, this credit was not required.
The significance ofthis arrangement lies in a related field-the growth
of the gold exchange standard. The ability of the U. S. economy to
support, almost unimpaired, the gold convertibility ofthe dollar throughout
the war, led to the general acceptability abroad of dollar bank balances
as the equivalent of gold. It now became customary-and indeed
authorized in many instances by the respective banking and currency laws
-for European central banks to treat as the equivalent of gold in their
reserves any holdings of convertible bank balances abroad-particularly
in London or New York.
Actually the beginnings of the gold exchange standard may be traced
to the great shift from silver to the gold standard that took place in the
1870s. Various European banks of issue, faced with insufficient gold
reserves for the purpose, began to hold small amounts of foreign exchange
in their reserves, to be used to stabilize the external value oftheir
moneys. In 1893, when Great Britain put its Indian dominions on the
gold standard, it did so by carrying a substantial part of the Indian
reserves in sterling exchange, and the Indian expedient was then adopted
by all the colonial powers. 3 It was, however, the resolutions of endorsement
of the gold exchange standard by the Genoa Conference that led
to its abuse in a fantastic pyramiding of credit.
The way the gold exchange standard corrupted the monetary systems
of the world can be illustrated by an example drawn from actual happenings
in the money markets during the years 1924-1929: