DEVALUATION

Press, Volume LXXII, Issue 21907, 7 October 1936, Page 9

DEVALUATION

<■ % \i/, t, /' **> » i*' t Currencies of the Gold REASONS AND PROBABLE N EFFECTS (spbcjaixt ns «n nuws.l [By PROFESSOR A. H, TOCKKB*, Canterbury College.] The devaluation of currencies in the three leading gold standard countries of Europe, the only three that have maintained the pre-depression gold standard intact without severe exchange restrictions, marks the most important monetary change since the United States devalued in 1933. It marks also the practical completion of victory for the expansionist over the deflationary school of thought France, Holland, and Switzerland have all suffered severely from the depression. They have suffered most since Britain suspended the gold standard in Sep-' tember, 1931. and, rightly or wrongly, regarded the worst, phases of depression as due to the abandonment of the stable monetary standard by other countries. They considered stability of exchange as essential to world recovery. and strove to maintain stability on the gold basis within the narrowing circle of the gold bloc. At the time of the London Economic Conference m 1933, when the dance of the dollar threatened general exchange chaos, the gold countries issued a joint statement asserting their determination .to maintain their existing gold panties at all C< But events were too strong for them. While the sterling countries. Japan and the United States, all. whom had depreciated their currencies, gradually emerged from their difficulties and moved towards normal prosperity, the gold countries sank deeper Into depression. Their trade contracted, their prices fell, their unxnployment figures remained high. Despite effort >to maintain internal production by protective and nationalist measures, including tariffs, quotas, embargoes, etc., conditions became won*;, and gave rise to serious political difficulties, in all these countries the average rail m wholesale prices between 1929 and 1933 was about 35 to 40 per cent., about as much as in the United States and Canada and considerably more than.to Britain and Sweden. But while m the latter countries prices rose and condit.ons improved greatly from . 1933, to the gold standard countries prices continued to fall, and to most cases were lower to 1936 than to 1933. What Devaluation Means Devaluation is an effort to escape thif position and to establish a new basis for internal recovery. The agreement reached between the three leading monetary powers. Britain, |rance, and the United Stages, provides for the exchange stability requirwl to promote expanding world trade.. from which all expect to benefit. The of the proposal may be illustrated from the case of France. The unit of currency to France .is the franc, which though paper or silver, represents and is exchangeable for a fixed quantity of gold. Before the war, when the exchange was 25.22 francs to the £l, the gold content of the franc was 4.48 grams. Alter the war it was devalued, and the gold content reduced to J9l grams, and tod exchange rate became 124 francs to the £l. Now the gold content is to be further reduced, perhaps by 25 per cent., to, say, .68 grams. Holland and Switzerland are likely to follow suit. The 'United States dollar content was reduced to 1933 by about 41 per cent. The relative amounts of pure gold represented by the dollar wm franc will determine, in the future as to the past, the gold parity of exchange between dollars and francs. These amounts will also determine the price of gold to the respective countries. Given exchange rates fixed within narrow limits among Britain, the United States, and France, then the British oriee of gold will also be fixed approximately. The Effeete The effects of the. agreement made are twofold. On the one hand it effectively stabilises exchange rates, fixes the prices of gold, and provides a basis for a general restoration « gold standards at new parities which should give ample scope for monetary expansion to finance, trade, and price increases. On the other hand the gold bldC countries adopt the method of monetary depreciation which has preceded recovefv first in Britain and the sterling area, next to Australia and New Zealand, later to the United States, and more recently to Belgium. Assuming the old rate was 75 francs to the £l, and the new rate is fixed at 105, France is taking almost exactly the step New Zealand took m January, 1933. But while New Zealand depreciated her currency 13J per cent, below its existing level with sterling, France is depreciating about 25 to 30 per .cent below the existing gold level. The first result will be that whereas France wa* getting 75 francs for every £1 worth of goods sold m export markets, she will now get 106 francs. Conversely, where she formerly paid 75 francs for every £1 worth of goods imported, she musk now find 105 francs. The immediate effect of the change is thus to encourage exports, discourage imports, and restore a favourable balance of trade. But since to the long run. external payments will balance approximately at any level of exchange, the ultimate effect must be to raise French prices in relation to world prices. It is anticipated that the restoration of a favourable balance erf trade and the movement towards prices will stimualte recovery in all the countries concerned. Freer Trade It Is reported that the agreement includes provision for removing or lessening the present barriers which shackle internal trade and which are the principal present hindrance to general recovery of prosperity. If, lor instance, Britain can sell more to France, then more British workers can be employed producing for French consumption. and more French workers can be employed producing the goods sent to Britain in exchange. In this way freer trade begets increased production, employment and fuller standards of life. The events of recent years have shown very clearly that recovery cannot be promoted by impeding trade and restricting production, while it IS promoted by freeing trade and encouraging production. But In every country new vested interests have grown up behind the trade barriers imposed during the depression in the form of quotas, embargoes, higher tariffs, etc., and much local jsressure will have to be overcome tad many internal differences settled before the emergency measures of the depression period are swept away. Their removal would do much te promote general prosperity throughout the world, but to present conditions it would be' optimistic to expect any rapid, change or reversal of trade policy? At the same time it must be recognised that an important cause of tradebarriers has been removed, and the roftd opened to escape from the depreMkm which has caused much of the recent political uncertainty in Europe. Stgfegfe exchanges, freer trade, and the beginnings of recovery for the depressed gold countries seem to be assuredby the agreement, and all these ahmdai greatlv improve the chances ME maintaintog peace and furthering prosperity. •- ■" ■ • f

The Price of Gold New Zealand is particularly Intjtt* ested in two special of policy, the effect oft the prico/of *oi& and on the level ofnrtees ngl jeff fcr. ' '1 *