But the draining of one nation's gold credit base is not the only way in which the necessarily free movement of metal may upset the smooth functioning of the machine. If you start with the thesis that gold reaches its fullest value to the world only when the maximum sound credit is being advanced on it, it at once becomes evident that, theoretically, for the ultimate welfare of mankind, an individual nation may have too much gold. For the mechanical efficiency of gold is, per se) its ratio to the credit built on it. Hence if one nation owns so much gold that, even after allowing the most generous factor of safety, it has no use for the excess of credit its gold could supply, that excess of gold is doing no useful work and is what is happily called "sterilized." Of course the laws of supply and demand should tend to counteract this tendency of too much gold to pile up, but as intimated, normal times are matters of history – perhaps never existed. Moreover, the legal requirements of individual systems may, conceivably, nullify supply and demand. Indeed, for theoretical perfection, all the nations would have to have identical systems the same gold reserve ratios, the same volume of trade to be financed, the same banking laws, the same facilities, and their peoples the same habits. A nation on a 40 per cent reserve would use more gold for the same credit structure than one on 30 per cent reserve; so would a nation whose people always paid in cash. Their machines would have lower coefficients of efficiency. Now even adjusting the ratios, etc., to allow for the fact that one country may need a more efficient credit system to do its more complicated and demanding work, it is obvious that a vast disparity in the efficiencies of credit systems of leading nations exists. Some parts of the gold machine have evolved faster than others. The result is that the backward members with their lower efficiency require more than their share of the common fuel to keep them running.
Summing up this phase of the business, then, the efficient use of gold as a common base may conceivably be endangered (1) by a country's having more than it can use and (2) using more than it needs.
The main outlines of the working drawing of the gold machine are now sketched in. Observe, to review, the credit structures of the individual nations, the same general principles underlying each and linking each to its, or somebody else's, supply of gold. Between them all, the mechanics of foreign exchange, constantly shifting (and not always happily) the raw metal at the base of each structure. Now go back to the original conception of an automobile rolling from the line in Ford's Dearborn factory and gold being lifted from the Bank of England. Every wheel and lever and piston suggested in the picture of the machine which links them operates inevitably to change their values, the one in terms of the other, interchangeably.
So far there has run through our analysis the tacit assumption that the machine's raison d' etre is economic, i.e., that it was conceived and set in motion for the benefit of all the peoples of the world and that while jealousy and greed and stupidity might, unhappily, have entered in the making, the common goal was the creation of an efficient instrument of commerce and an efficient instrument of commerce only. There is a good deal of evidence that other and less beneficent motives sometimes make its wheels go round, tinker with its governors, and handle monkey wrenches carelessly. In fact, a popular generalization of the day is that "the gold problem is no longer economic but political."
The ground hereabouts is dangerous. Many assertions are made and few are proven. Statesmen and politicians move in devious ways with red herring in every pocket. This much is true: the existence of a state of war tends to divorce gold from its credit structure and make the physical metal the only ultimate reality. The first thing a country usually does when it declares war is to go off the gold standard. This means that it runs its internal affairs on credit, using the expectation of victory as collateral, and saves its gold for dealings with neutral countries. Its "gold reserve" is now definitely a hoard, something to be saved for the last emergency, the only reality in a barbaric chaos. Hence back of all the fine subtleties of the world's economic system there lies this atavistic instinct to hold on to the metal itself.
This fundamentalism is not war's only hold on the gold machine. Obviously the financial balance between nations -- as between individuals -- affects their relationships. And, the millennium not yet at hand, offensive and defensive alliances, with war in mind, may still be sought after. The lending or borrowing of money may still be a part of such machinations.
It is evident, then, that these two factors, the premium which war places on possession of gold metal and the idea that large financial policies may have political rather than economic aims, may have a profound effect on the functioning of the gold machine, influencing alike the bar of gold in Threadneedle Street and the automobile in Dearborn.
What does all this machinery do? There it stands in all its unbelievable complexness, its wheels whirring, stopping, starting, insanely complicated, affecting the lives of nearly 2,000,000,000 people, giving them more to eat or less, making their beds for them or letting them sleep on the floor. Man created it, but it has grown too large for the mind of any man to understand in one conception as a mind understands a steam engine or a simple chemical formula. All one can say is that basically it works thus and so, and it tends to effect this and that. And the major this and that, in terms of your welfare and mine, is the price level. The price level rises -- good times. The price level falls -- hard times. Not necessarily and invariably. Nothing so certain as that in this business. But generally speaking.
A version of an equation explaining a shifting price level is not hard to diagram, although there is some doubt, in higher academic circles, as to whether any such equation is of real value. But the following may help to visualize one conception. The ultimate price of the world's goods is the ratio of supply to demand. The supply is the sum total of everything for sale. The demand is the sum total the world wants and can afford to pay for. These are large conceptions, but relatively clear. Now, relating this equation to the money machine, it is obvious that the latter enters directly into the demand factor only. And the demand factor, expressed in the financial resources of the world, divides itself into two parts: the aggregate of cash available and the credit available. In this last factor, and in this last factor alone, can the engineers of the money machine take a hand in controlling the answer to this equation, or any other such. Deviously they work, through the whole top-heavy contraption, two men tugging at the same lever in opposite directions, the machine running amuck while a dozen others debate on which control to pull next. On one valve especially they all concentrate: the valve labeled "central bank rediscount rate," which we have already seen in action.
If from anyone central point the machine can be maneuvered, it is here. For at this bottle neck in the spreading of credit from gold, the supply can be choked off, thrown wide open. A group of men sit about a mahogany table and agree; the next day their countrymen have that much more money to spend, that much less. A grave responsibility. If their people get more than is good for them, they will indulge in excesses; too little will depress them. Quite obviously, the control is not absolute. Today they have not only their own people to think of, but the whole world.
