"GOLD AND PRICES."

Auckland Star, Volume LVII, Issue 276, 20 November 1926, Page 18

"GOLD AND PRICES."

PROBLEMS OF THE FUTURE.

WORLD SHORTAGE ANTICIPATED.

(By HARTLEY WITHERS.)

i I I Are we faced with a scarcity of gold. I ( and if it happens will it mean falling: ] prices, and do falling prices necessarily < spell general depression and bad times? These are questions that touch all of , us nearly, and they were discussed fully i , by a very brilliant array of economists , , and banking experts, who lately gavej ; evidence before the Indian Currency | i Commission. The volumes of evidence : and appendices in which their views are j 1 set forth have been published by His j ; Majesty's Stationary Office and contain 1 a mass of interesting and divergent in- < formation on the point. ' The question arose, because the Com- ; mission had to decide whether it should recommend India to adopt a gold currency. On the evidence, the Commission, though unable to arrive at any definite j' conclusion as to the future relation be- j', tween supply and demand of and for j. gold, decided against a gold currency,, chiefly because of the risk of a pro- j , longed period of steadily falling commodity prices throughout the world, I unless great economy is exercised in the use of gold both as a commodity and , as money. This view has been impressed on them' by evidence received from Professor Cas- j sel and Mr. Joseph Kitchin. The latter, whose researches into this subject are J well known to all students of currency matters, estimated in a memorandum that he put before the Commission that the balance of gold available for monetary purposes in the ten years to 1934 must be expected to be much below the £54,600,000 and £49,400,000 of the two quinquennia to li) 14, while the needs of the world will be much larger than then. In his oral evidence he described , what will, in his opinion,, happen in! consequence, unless great economy is : exercised in the use of gold. "You will," j he said, "have a long period of falling prices, reduced prosperity, and a lower, standard of living and everything that j goes with it." On the question of the gold supply few will care to question Mr. Kitchin's authority; on that of its consequences, those of us who remember the period of falling prices which culminated in 1896, may venture to 6Uggeet that the result was not quite as black as Mr. Kitchin paints it, on which point more anon. Before we consider the consequences let us look further into the possibility' of gold scarcity. Granted the prospective diminution in supply, there are two methods by I which its effects can be modified so that scarcity does not appear. One is, the diffusion over the rest of the world of the great surplus of gold which has been accumulated during and since the war by the United States; the other is by a modification of the policy of central banks with regard to the structure of credit that they are prepared to base on a given quantity of gold. The first method has this weakness, that expert opinion in the United States is by no means unanimous as to the extent of the surplus. In i&tl Mr. G. E. Roberts, some time direetO" of the U.S. Mint, and now vice-president of the National City Bank of New York, seems to deny that there is any surplus at all. He admits that since the outbreak of the war the United States have received approximately 500 million sterling, but he maintains that the "outstanding credits and liabilities of the banks have increased in corresponding degree." Fortunately, doctors disagree. Dr. Sprague, Professor of Banking and Finance at Harvard, said that: "In total we have something between 1200 and 1500 millions" (he was talking in dollars) "of gold which might be withdrawn from the United States without necessitating credit contraction and lower prices." Here We have a difference of something like 300 millions between the opinions of two well qualified experts, but it is reassuring to note that the more optimistic Dr. Sprague appeared to have the support of Mr. Benjamin Strong, Governor of the Federal Reserve Bank of New York. As to the second method, there can be no doubt that much can be done bycentral banks in the direction of cooperation and pooling of gold stocks by which they would be enabled to economise in the use of gold and to base a larger credit structure upon their reserves. Mr. Keynes, in the course of his evidence, argued that "the world's demand for gold is just what the world chooses ... It is just a matter of taste how much of our gold we choose to make useless . . . There is nc rhyme or reason behind the preeent arrangement. It is a matter of taste ard convention." Thus we have plenty of distinguished authority for the view that even if the annual output of gold falls off and the industrial and hoarding demand for it continues and even increases, there need not be enough scarcity of it, for monetary and credit purposes, to cause a continued fall in prices. And even if a continued fall in prices happened, need it involve the reduced prosperity and lower standard of living that were assumed by Mr. Kitchin as its inevitable result? Some- of us who are fleeced with high prices might argue that a fall would rather tend to raise our standard of living; and it is known that in the time of the fall Met century wage and salary earners profited by it because prices fell faster than wages and salaries and the fall in interest rates which accompanied the fall in prices, enabled a great conversion scheme to be carried out, to the relief of the taxpayer. It may be granted that riaing prices tend to stimulate enterprise but economic progress was by no means killed during the period of the fall—in fact, Professor Gregory was prepared to maintain that it was then considerably greater than it is now, and was "inclined to say that some currency authorities, in arguing for the stability of the price level, have rather overlooked the point that in stabilising the price level, some mechanism has to be devised to give the consumer the benefit of lower prices which increased production brings about." It is indeed pleasant to find someone remembering the claims, or the needs—for he never has the pluck to make a claim—of the poor old consumer.