The Press MONDAY, JUNE 7. 1937 Another Gold Panic

Press, Volume LXXIII, Issue 22112, 7 June 1937, Page 8

The Press MONDAY, JUNE 7. 1937 Another Gold Panic

For the second time in three months the London money market has been thrown into a panic by rumours of an impending reduction in the price of gold, sales of bullion on Friday reaching the huge total of £4,500,000, On any short view of the situation, there is little excuse for such rumours. Great Britain, the United States, and France are pa ties to a monetary agreement which prevents any one of them from altering the price of gold. Moreover, since the United States Government cannot reduce the price of gold by more than a few cents an ounce without fresh legislation, the prospect of any immediate and substantial change can be ruled out. It can further be said that in all three countries which are parties to the recent monetary agreement, any attempt to reduce the price of gold would be politically unpopular. Public opinion is still overwhelmingly, though not very rationally, convinced of the benefits of " cheap money"; and cheaper gold means deflation. As is usual in such matters, public opinion is a lap behind realities. In 1931, when it was desirable that money should be cheaper, public opinion, in England at any rate, was firmly convinced that retrenchment was the key to recovery and inflation an imminent danger; in 1937, when the prospect of further steep rises in commodity prices is disturbing bankers and governments throughout the world, public opinion regards cheap money as essential to prosperity. The holders of gold who feel that some fall in the price of the metal is inevitable are closer to economic realities than the public, even though their fears of an immediate fall may be unjustified. Since 1931 the value of gold in terms of the three most important monetary units has increased, as the result of currency depreciation, by nearly 70 per cent. This has greatly stimulated the production of new gold and in countries like India has released vast private hoards. At present the world production of gold is 35,000,000 fine ounces a year, compared with less than 20,000,000 in 1928; and the rate of expansion of production is not decreasing. At the same time the scope of the market for gold has contracted, central banks and exchange equalisation funds being practically the only buyers. The effect of this on the gold stocks of central banks is shown in the following table taken from a recent number of the " Economist":— MONETARY GOLD STOCKS (Millions of Fine Ounces) 1929. 1936. England .. ..34 74 United States .. ..138 322 France .. ..79 77 Germany .. 26 .1 Holland .. ..9 14 Belgium .. .. 8 21 Switzerland .. .. 5 19 Totals .. ..299 528 In spite of what has been done in the United States and elsewhere to "neutralise "additions to gold stocks by increasing minimum reserve requirements, it is obvious from the steep rise in commodity prices that a gold inflation is under way. Andi if it continues the governments of Great Britain, France, and the United States will be compelled to make some attempt to control the situation. Presumably they would first try the effect of higher money rates and sales of securities in the open market. But if the experience of the United States in 1929 is any gu?de, these expedients are not sufficiently drastic to check a boom once it is well under way. Anticipations of a forced reduction in gold prices have therefore some foundation.