TRACTS FOR THE TIMES

Auckland Star, Volume LXIV, Issue 233, 3 October 1933, Page 6

TRACTS FOR THE TIMES

GOLD AND PAPER

(By PRO BONO PUBLICO.)

There seems to bo a revulsion of feeling in favour of goltl to-day. Newspapers that last year were inclined to favour paper currencies based on indexes of wholesale prices are not so sure now that these devices would work. You may remember that lately I quoted an opinion that paper currencies aro being accepted during the slump because people are convinced that sooner or later the nations will go back to gold and that consequently the paper is, or will be, as good as gold. This view is more widely held than I had supposed.

Paper, of course, is valid in internal currencies so long as it is backed by goods and the assurance of the State that it will bo supported. It is in foreign exchanges that paper reveals its weakness, unless, like New Zealand paper, it happens to bo supported by funds abroad. I often read arguments about paper based on New Zealand experience, but of course Now Zealand was, and is, in a special position. Prior to the interference of the Government the value of New Zealand paper was determined solely by tho funds held by the banks in London. If the banks had money to spare in London they sold it to New Zealanders lat a cheap rate. If their London funds fell off they stiflened the rate and were buyers of London money rather than sellers. This was the sole control of the value of New Zealand money in terms of sterling, and the value of New Zealand money in foreign countries was' dependent solely j on the value of sterling in those countries. " Thus wo could not be said to have a gold basis for our currency, at any rate since the beginning of the war, but we had a definite basis in which sterling was the principal factor. You cannot argue that because our paper had not a gold basis therefore a gold basis is not necessary. We liad. a sterling basis, and we still have it, and New Zealand currency is valid because it can be ex<sianged for sterling at a certain rate. The economists would carry the argument further ky saying that the sterling basis is a sound basis because of the general expectation that ultimately a pound sterling will once more be exchangeable for a sovereign.

When Mr. Hirst, of the "Economist," examined this question recently ho said that ho could scarcely discover an inconvertible paper currency that did not depreciate, and ho found the only warrant for supporting a paper currcncy to lie in the strict limitation of the quantity issued, which is equivalent to s-aying that its relation to the nominal metallic basis must be a fixed relation and not a variable one. In considering the possibility of a currency based on commodity values Mr. Hirst held that its stability could be guaranteed only by an ideal system of control. And this is undoubtedly true, though I, for one, do not despair of the possibility of devising an ideal control. Where I think the argument about inconvertible paper gets out of line is in the common confusion between two functions of money. For domestic purposes the fiat af a Government onglit to be sufficient, provided the Government does no.t abuse the position and issue notes in excess of the normal value of S'oods. But in foreign exchange the fiat of the Government has no real effectiveness and paper must be secured either by gold or by currency of undoubted validity. It is possible for a country to have two different currencies, one for domestic consumption f.nd one for foreign exchanges. The strength of the gold group lies in the fact I that gold is the only acceptable basis for money ' in foreign trade, and unless the nations are prepared to let foreign trade disappear the return to gold is regarded as inevitable. Probably it is the fact that the world's trade is now showing ietinito signs of recovery that is causing tlie revival of orthodox ideas on this question.