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