about between the Government, the sellers of bonds, and the gold exporters and jewelers, would go abroad or into the arts, being displaced from the "surplus" by bonds.
But, the dollar being now heavier than before, the gold "reserve" of 50% would be proportionally depleted, even assuming the physical gold in the "reserve" to remain unchanged, and so would have to be replenished from the "surplus."
In short, the original "surplus," in the process of being converted from gold into bonds, would tend to shrink in value. It would so tend to shrink both because, if the gold was forced on the market, it would have to be sold at some sacrifice and also because the resultant impairment of the "reserve" would rob some of the "surplus" before it could all be sold.
We are now ready to describe the opposite tendency by which the conversion of the gold surplus into a bond surplus would work toward a higher value of gold. The reactions so far described take no account of an important indirect effect on the price level from reducing the volume of outstanding bonds. As recent war experience has illustrated, bond issues tend toward inflation so that bond retirements would tend toward contraction. This effect would be considerable, not only because bonds are used as a basis for circulating bank notes but also because, as the most convenient form of collateral security for private loans, they are often made the basis for such loans and so for deposits subject to check. The withdrawal into the Treasury of bonds would thus tend to contract the note and deposit circulation and thereby offset, in part or in whole, the expansion from the issue of gold dollar certificates.
After the supposed initial replacement of the gold surplus by bonds, if the reserve needed replenishment from time to time, or, expressed differently, if the certificates outstanding needed to be reduced, the surplus fund would simply reconvert some of its bonds into certificates which would then be canceled up to the
