RECOVERY OF THE EXCHANGES 37 
internal requirements—but of the system of free coinage in 
order to sever the connection between the rate of the cur- 
rency of the country and that of silver. 
(2) The acceptance of gold in payments by foreign 
countries at a fixed rate corresponding to the parity 
between it and the internal silver currency. 
(3) The constitution of a gold reserve, by means of 
gold coin and bullion or a foreign credit in some currency 
circulating at gold par, so that gold or foreign bills may 
be available at the same rate in the event of a scarcity of 
commercial paper, or, in other words, of an unfavourable 
trade balance. 
It is evident that the essence of a monetary reform 
carried out on these lines is its effect on the exchange, in 
confining it within the import and export gold points as 
effectively as if there were a plentiful currency upon which 
to draw. 
This very exact and straightforward method is not directly 
connected with variations in the internal stock of currency, and 
such variations, unless they are exceedingly wide, may be 
presumed to exercise no influence whatever upon its 
operation. 
Only two conditions are essential during the period in 
which stabilisation at the fixed rate is to take place. 
The first 1s that the gold reserve should be sufficient to 
counteract any considerable and prolonged deficit in the 
trade balance, 7.e., that a supply of gold or drafts payable 
in gold should always be available for the payment of debts 
abroad. 
The second is that the price of silver should not rise 
above the fixed parity ; otherwise there is a risk that silver 
coin, having a greater value abroad than at home, will 
be exported in spite of measures of prohibition, and that 
it will be necessary to forestall the drain on specie by 
altering the parity, thereby admitting a relative failure in 
stabilisation.! 
1'This in fact happened when silver appreciated after the war.