"SOUND" MONEY

Press, Volume LXX, Issue 21085, 9 February 1934, Page 10

"SOUND" MONEY

COMMODITY BASIS OR GOLD? THE ROOSEVELT PLAN [By HARTLEY WITHERS.] Champions ol' "sound money'* all over the world are throwing bricks at the President of the United States because he is trying to give to the American dollar the quality and steadiness in purchasing power that seems to be an obvious requirement from any money that can really be called good. At the same ; time there is a large body of criti- ; cal opinion which is inclined to . question every institution and principle that has hitherto been regarded as orthodox. It argues, with a good deal of force, that these es- ' tablished principles, based on the experience of the past, have landed ; the world in a most discreditable ■ mess, in which it is so smothered by possible plenty that it is plunged into a condition varying from depression to destitution; that increased productive power has altered the whole economic problem and made all our notions of what is "sound" wrong, or at least questionable: and consequently, when people talk about "sound money" they are referring to a system that worked quite well under pre-war conditions, but now needs drastic revision, on the lines proposed by Mr Roosevelt, or something better that, may be devised. The Gold Basis Under the old system, the amount of money depended, more or less, on the quantity of gold available; and if. a:; happened lately, the policy of certain countries in acI quiring more gold than others i thought necessary caused a general i shortage, then trade was upset. Mr Roosevelt, with his commodity dollar, is trying to establish a system which will avoid such inconveniences. and if he can succeed he will have solved a problem not only for his own country but for all that want to keep a metallic basis for their moneys without exposing themselves to risks involved by the behaviour of other nations. But 1 began by assuming that steadiness in purchasing power is a quality that really good money ought to possess, and this assumption is denied by some of the most earnest champions of the old system. They say that as production increases it is "natural that prices should fall, and argue that if we j try, by increasing money pari passu | with production of goods, to keep ! prices steady we are introducing artificial manipulations, which will •do more harm than good. And yet evcrvbodv knows that a general i fall 'in prices, due to scarcity of j money, is bad Jor business, and ! takes'the heart out of producers by I increasing the burden of the debts under the weight of which they normally work. All that ' commodity money" seeks to do is to keep the general level steady, and not Jet the creditors take too much | out of industry by means of eheap- ' ness due to lack of purchasing power. It does not attempt to peg the price of every article, and would fail if it did. If any article becomes more plentiful than others owing to more efficient production, its price will fall, and those who produce it will still earn profits, thanks to this greater efficiency; but that general creeping paralysis, which follows when all prices are shrinking, will at least not be caused by lack of money. A System Described I If this object be accepted as desirable, how is it to be secured by any country which still, while linking its money with that of oilier countries by means of the gold link, attempts to regulate its own price level at a certain point? In a book called Prices, by Professors Warren and Pearson, the former <>r whom is believed to be one of Mr Roosevelt's most trusted advisers, we find the proposed system described as follows: "There would no longer be any coinage of gold. The Government's gold supply would be kept in gold bars. The actual circulation would be the same as at present, i.e., paper dollars and small coins. All the currency would be exchangeable for gold on. demand, as at present, but the amount of gold that a dollar would exchange for would vary with the price level, that is, the price of gold would be allowed to vary with its value, just as the price of wheat varies with its value. If prices rose 0.1 per cent, in a week, the weight, of gold purchased by a dollar would be increased 0.1 per cent, until any rise was corrected. If prices fell 0.1 per cent, the weight of gold purchaseable by a dollar would be decreased 0.1 per cent. There would be a small difference between the buying and selling price for gold . . . This

would make the dollar have the same value at all times."

By means of this rather puzzling plan, if prices rose in America, the gold value of the dollar would be raised, with the result that America's foreign customers would have to pay more of their own moneys in order to get dollars for buying American goods; and any dollars that they got by selling goods to America would fetch more when turned into foreign currencies. So America would be a good country to sell to and a bad one to buy from, and unless (as is likely) Congress clamoured successfully for a higher tariff, a flood of imported goods would put prices down; and if the movement was the other way, and a fall in American prices was followed by a reduction in the gold value of the dollar, the position would be corrected in the same way. the other way round. Two Objections

There are two obvious objections to this ingenious device. In the first place it is, apparently, expected to work through the effects of foreign transactions in dollars; and it need hardly be said that very many influences affect these transactions besides the actual purchases and sales of goods. In the second, even if all transactions in dollars could be confined to those based on operations in commodities, there would still be the difficulty that goods dealt in in- ; ternationally make, especially in so self-sufficient a country as America, only one stream among the many that make up the great river of a nation's total activities, on the volume of which the international price level ultimately depends. Nevertheless, if this plan should Ibe found wanting, Mr Roosevelt's power in his own country and in the world at large, is still immense. He has behind him the confidence of the great majority of his people, and the influence of his country's huge resources and moral position as a world creditor, towards which all the nations are more or less in default. If he chose to use part of the American gold stock by flooding the bullion markets, instead of buying gold abroad in pennyworth's, he might quickly put world prices j on a cjifferenj. leycJ, j