157	APPEECIATION OF GOLD.

(2.) Tlie next inrportantconsideration is the amount
of transactions which have to be effected by the gold.
Here it is necessary to get rid of a prevailing mis-
conception. Many people have a hazy notion that
the substitutes for gold can be indefinitely increased,
and that the quantity of the actual metal is, in the
modem world, of small importance. The error has
been admirably exposed by Mr. Giifen in his work
on Stock Exchange Securities, and in an essay on the
Depreciation of Gold since 1848.1 He shows that
the whole superstructure of credit must rest on a
gold basis ; even in the wildest speculative mania
on the Stock Exchange, a limit to the rise of prices
is set by the amount of gold on which it ultimately
rests. It may be true that 99| per cent, of the
commercial transactions of this country are effected
without the use of the precious metals, but the | per
cent, of gold required is absolutely indispensable.
It may be that if ali claims on ali the banks were
presented at once not fourpence in the pound would
be forthcoming, but the whole banking system rests
upon that fourpence. "VVliatever economies in the
use of gold are made, gold is required for three pur-
poses in every country with a gold currency—
(1.) To form the ultimate banking reserve ;
(2.) To meet foreign drain ;
(3.) For certain currency purposes.
It is upon this third function of gold that Mr. Giffen
1 Essay II. in Essays on Finance.