A STUDY OF VALUES

Dominion, Volume 16, Issue 164, 29 March 1923, Page 4

A STUDY OF VALUES

WAR PERIOD AND POST WAR READJUSTMENT THE RETURN TO THE GOLD ..BASIS ; STEADY PRICE DECLINE IN PROSPECT • ' * The second part of Mr. .W. D. Hunt’s paper on “Values” is quoted below. In it the writer describes. ' what occurred in the war period, when the nations abandoned the gold standard. He predicts that in the years ahea’d, as the nations return to the gold basis, ; ' the level of values, measured in gold will fall.

/ Now we come to the war period. In the beginning of Augiist, 1914, the War broke out. Every country in the world abandoned the gold standard or put such restrictions upon its use that it did not function, and in every country inconvertible paper was used as currency and became legal tender. The result waa- the gold' anchor which had both measured and controlled prices was removed and nothing was put in its’ place, except the general credit of i the various countries and the belief by their inhabitants and by the people’ of other countries that some day their paper would be redeemed by a return to gold. Whereas; between 1896 and 1914 one line on a chart, might represent the general level of values in all gold-using countries, no matter what their currency was, the departure from gold in 1914 put every country on a different footing, nnd ! a chart showing, the general level of values in each ■ country would have a separate line on it for each separate country. Thi§> is what took place in values measured in sterling; Values rose from 100 in. 1914 to 326 in March, 1920,. and they are back again to-day to 171. In France the level of values which was 100 in 1914 is to-day approximately 500; in Italy',• about 700. In Germany the level of values that stood at 100 .in 1914'is : to-day about 850,000 ; that is,* what you gave 100 marks for in 1914 you would have to give about . 8-50,000 marks for to-day. H this building that we are in were as.high as. the Woolworth Building in New York it would ‘not contain my chart if I tried to show the rise in values in Germany, and as for Austria and Russia, a chart to hold their’ line of general values would have to be so high that you would require a ' telescope to see the top of it. RETURN TO THE GOLD STANDARD Now, what is it that has. brought the general ’ level of .values in Great Britain down from 326 ‘in March,.l92o, to 171 at the- present time? It is the belief that .Great Britain .will -before Very long restore the gold currency on the old'basisthat is, her paper money will be convertible on demand into standard gold at the rate of £3' 17s. COld. per ounce, and we are therefore getting back to a level' of values fixed by the commodity value of gold. The duly countries in the world that have irctuallv got back- to the gold standard since the war camo to .an end are the United- States' and Japan. Theii; paper is now convertible' on demfind into gold, and gold can be exported from these . countries. The United States dollar is now the world’s standard of value, and the" depreciation' of every, other currency in the world, excepting only Japan, is measured by the rate at which it will exchange into tiollars. The exchange between Great Britain and tho United States is now on tho basis of 4 dollars 70 cents to tho £. as comparer! With 4 dollars 86.66 cents., when both were on the gold standard. The difference between tho exchange value rate and par is Steadily decreasing, and it seems quite evident that before very long Great Britain will lie back to the gold standard on her pre-war basis. We in this country have tho same currency as Great Britain, and what interests'us therefore, is what is going to be the general level of values measured in sterling. To-day the general commodity value of sterling is 171, as compared with 100 in 1914; that is, it is 71 per cent, higher. At the beginning of 1922. that is 15 months ago* it stood at 170. The general level of values has therefore been about stationary for fifteen months. What is it going to do in the future ? Is it going up or is it going down? That interests quite a lot of people. What is going to happen when we actually get back to the gold basis? The problem to bo solved is: What is going to be the commodity value of gold? This commodity value will in the future, as in the past, be settled by the law of supply and demand. It will depend upon the world’s stock of gold on the Ono hand and on tho demand for that stock ort the other hand. At tho present time wo have the greatest stock of gold the world has ever seen —264 pence per head of the world’s population, compared with 230 pence in 1914. Tim difference in supply between now and 1914 .is not-great, but where the great difference comes in is in the demand. There is not nearly tho samo demand for gold to-day as there was ip 1914. Wo have only two countries, the United States and Japan, actually on a void basis, and we have the British Empire, so close to a gold basis that it is evident that it will get There before lung, and its demands’are probable being ant'cipated. Holland, Sweden. Switzerland, Denmark, Nor■tvfty find Argentine are all getting their , paper near the gold parity. There is po other country, however, anywhere near a gold basis at present, .but while they are not on a gold basis the. present state of their various currencies is so unsatisfactory, and their exchange fluctuates so much and causes 'so much difficulty, that there is no doubt that every commercial country of any importance will endeavour to get back to a gold currency whenever they possibly pan manage it. The probability is that except the countries I have just mentioned, none of them will ever redeem their paper currencies in gold on theit pre-war basis, but they will come back to gold on some basis even if it means scrapping their present naper currency and starting afresh ; and as every country comes back to gold it will increase the demand for gold. This increase in tho demand for gold will increase tho value of gold, that is, it will increase its purchasing power, anil thus reduce the general level of values measured in gold. Are we not back to a world position similar to that of 1873, but instead of the British Empire "being the only country on a gold basis it is now the United States and Japan, and it scetns to me that the general level of values in the years that are ’ ahead of us will fall as it did in the years 1873 to 1896.

i PRICE DECLINE IN • ’ PROSPECT . We have been standing for 15 ’ months with the general level of val- ■ ues at between 165 and 171, as comi pared with 100 in 1914, and this seems- , to bo about the general level of val- . ues that is settled by the present supply and demand for gold. As each ! country comes on to a gold standard i it will increase the. demand for gold; ■ this will cause a drop in. the general ' level of prices measured in gold, and we must therefore, I think, be pre-. >’ pared in the years that are ahead of \ us to witness a steady fall in prices in the samo way as thev fell between 1873' and 1896. They then fell from ■ 134 to 78—a fall of 42 per cent. A • similar fall would bring our present level of 171’ back to .99, which is just below the 1914 level. A great deal however, will depend upon the production of gold through the years that • are ahead. Any new- discoveries of • gold, or cheapening in the cost of production, that brought about a great increase in supplies would help to meet the increase in demand that seems to me is sure to come; but unless this does' take place I do not sec liow wo are to avoid a general fall in values '■ ,as tho countries of the world return to- a gold basis. NECESSARY ADJUSTMENTS i A fall in values such as seems inevitable makes a great many adjustj ments necessary. Producers, traders, and others can make these adjustments; although with difficulty, but where tho greatest difficulty of all ’ comes in is through the changed relations that a great fall in value.s. Brings about in the position of those individuals or countries who- have borrowed on long-term loans and invested the money in fixed assets. The fall in values that took place between 1873 and 1896 caused many of these longterm loans to he very difficult to carry. Older business men will remember the troubles ' that we had in this country in those years. The rising values since 1896 have made the carrying of heavy loans either by individuals or by the country a comparatively I easy matter Huge rises in values such as those caused by the depreciation' of; currency in European countries --rmeans- that loans incurred in these currencies give borrowers no anxiety whatever; In Germany, Austria; Poland. Russia, etc., internal loans incurred, in years gopo by have been practically wiped out by the' depreciation of tho currency. A concern that borrowed one milion marks in Germany in. 1914 can repay that loan with one million marks to-day. One million marks in Germany in 1914, however, meant approximately 12,500 ounces of gold. To-clav a debt of one million marks can be settled with 2} ounces of gold.. A prewar debt of 10,000 marks, which then represented about 125 .ounces of gold, can to-day be paid off with one pound ' of butter. You will see, therefore, that all old debts have been practically wiped out. The same reduction in' liabilities although much less in degree has taken place in loans expressed in I tho currencies of Italy, Belgium, i France, etc. It is' obviously, to the advantage of Great Britain to restore the gold currency on the pre-war basis as soon as possible. Apart from her huge debt to tho United States, Great -Britain is still a great creditor nation and the amounts duo to her are payable in ' sterling. As far as these debts are concerned it is obviously to her advantage io make sterling as valuable as possible, and this advantage is not affected in any way by her debt to the United States because this has to be paid in United States dollars, and tho amount of tho debt is, therefore, fixed regardless of the value of sterling. NEW ZEALAND BORROWING “Wo in New Zealand, on the other hand, are a debtor country. We have been borrowing from Great Britain very freely through recent years—not only Government borrowing, hut loojjl pody Borrowing to a very largo extent. If there is any truth in my arguments that the general level of values must fall in the years that aro ahead, then these burdens that wo are so lightly incurring, will prove very heavy. We are receiving these, loans now in the shape of commodities on the basis of a level of values of 166 ' to 171; wo will probably bo paying in- ' terpst and repaying -the principal in commodities on a level of 100 or be- ' low. 1 “A very heavy general fall in values always has disastrous consequences, particularly to long term borrowers. ( I know many leading men and writers , think that we aro never going back . io tho old pre-war level of values. The Cunliffe Commission on British • currency that recommends the restora- ■ tion of the gold standard on tho old i basis, stated that in its opinion it > did not think this would mean going i back to the old level of values. I ' have never, however, been able to fol--1 low this argument, and I have never ’ read or seen Mated anywhere what 1 appeared to me inadequate reasons for ' this belief. I can never get away from ' these facts: A currency changeable ' into gold on demand means that large . stocks of gold must he held. This ’ means a demand for gold. Gold, howi ever, is always being consumed; .it ' is used in large amounts in art and • manufacturing of various kinds, and • largo suras disappear in tho East, ’ and aro hoarded there. The United • States, which is one of tho largest gold producing countries now uses in its 1 arts and manufacturers every year more > gold than it produces. This means ’ that there is a continual outflow of ’ gold, which can only be balanced by ' new production. Gold, however, will 1 only bo produced if its pays to produce it; that is, the general costs of material, wages, machinery, etc., used in gold mining must be such that gold I can bo produced at a .profit when , minted into currency. This means that > the general lovgl of values must be brought down to a level that will

enable this gold to be produced. If it is too high gold will not bo produced, and tiliis means that credit will have to be restricted. The restriction of credit always brings down prices, and prices will fall until gold' can bo produced. THE OUTLOOK To sum up the outlook for future values, it seems to me: — (a) That as long as the volume of gold-financed trade bears a smaller proportion to the world’s stock of gold than it did before the war, the level of values measured in gold, will be higher than pre-war values. (b) That every country returning to a gold standard will cause a fall in the level of values measured in gold, and the extent, of this fall will correspond with the financial importance of the country in question.