Inflation and Stabilization
3
failed to understand that an arbitrary increase
in the supply of means of payment could have
any effect on the value of the currency, which
was thought to be protected in some mysterious
way by the gold reserves of the central bank. In
consequence of this view great efforts were made
to increase these gold reserves by withdrawing all
gold coins from circulation and accumulating them
in the vaults of the central bank. When such meas-
ures proved insufficient to keep up a decent ratio
of gold cover against notes, the authorities re-
sorted to the device of diminishing the note
circulation by replacing in the widest possible
degree payments in notes by payments in the form
of checks. In several countries great importance
was ascribed to such alterations in the composi-
tion of the means of payment actually in use, and
a willing codperation in such a policy was pro-
claimed to be the first patriotic duty of the whole
nation.
Nothing could better illustrate the formalistic
character of the prevailing ideas with regard to
the foundations of the monetary system. In fact
it was very difficult and it took many years of
hard work to get people to understand that the
only thing that has real importance for the value
of a currency is the total supply of means of