THE DEVELOPMENT OF CENTRAL BANK POLICY 147 
culty, brought about by gold movements of unpre- 
cedented magnitude. 
THE DOLLAR STANDARD 
It is necessary now to observe the bearing of 
American monetary policy on the operation of the 
sold standard. To-day, as before the war, the price 
of gold in America is fixed, and we are apt to 
assume that the value of gold continues to govern 
the value of the dollar. But such an assumption is 
no longer correct. While an ounce of gold can always 
be exchanged for a definite number of dollars, the 
value of the ounce will depend upon what these 
dollars will buy, and this in turn will obviously de- 
pend upon the American price level. If the pricelevel 
in America fluctuated according to the movements 
of gold, the purchasing power or value of the dollar 
would still depend, as it did formerly, upon the 
value of gold. But we know that this is not so. As 
I have just shown, the American price level is not 
affected by gold movements, but is controlled* by 
the policy of the Reserve Banks in expanding or 
contracting credit. It follows, therefore, that it is not 
the value of gold in America which determines the 
value of the dollar, but the value of the dollar which 
determines the value of gold. 
The mechanism by which the dollar governs the 
external value of gold is obvious. If the price level 
outside America should rise in consequence of an 
increase in the supply of gold, America would 
absorb the surplus gold; if, on the other hand, the 
*The use of the word “controlled” must be understood in relation to 
what has gone before. On page 138it was observed that the supply of mone- 
tary gold was only one of the causes affecting the price level, and the 
statement now made is that, so far as gold movements formerly controlled 
the price level. policy has now taken their place.—R. McK.