Government and Gold

Dominion, Volume 27, Issue 47, 18 November 1933, Page 9

Government and Gold

Sir, —The Minister of Finance is reported to have stated on several occasions lately that were it not for the fact that the Government had made the notes of the trading banks legal tender in 1914, the holders of these notes would be able to demand gold from the banks in exchange for their notes; the impression conveyed to the man in the street being that the holders of the notes could demand a sovereign in exchange for each £1 note presented. It is not quite clear, Mr. Editor, on what grounds this contention is based. There is no promise made on the face of the notes to redeem them in gold. The promise made by the banks, is to redeem their notes in sterling, which is now a very different proposition to redemption on the basis of a sovereign for each £1 note. It is true that the banks are required by law to maintain a reserve of 33 1-3 per cent, in gold against notes issued, but this in itself would not entitle the holders of notes to receive £6 sterling worth of gold in exchange for £4. worth of sterling promises unless, there is also in existence an Act of Parliament imposing on the banks a definite obligation to Q redeem their notes in gold, and on the basis of one sovereign for each £1 note. Redemption of notes in sterling, or its equivalent value in gold, has been made more expensive for the banks by adverse manipulation of the exchange, but it is not clear to me that the banks could not legally discharge the whole of their sterling obligations on £6,000.000 worth of notes by a payment of less than £4,000,000 sovereigns. The pound sterling must not be confused with the sovereign. It was once of equal value, but the position is very different to-day. The Minister of Finance is also reported as having stated that there is no difference of opinion as to the absolute justice of paying “a fair price and proper value” for the gold to be taken over from the banks. But what is a ' fair and equitable price to pay for this gold?. The gold has, in reality, cost the banks, directly and indirectly, substantially more than most people, and particularly politicians, seem to realise. The banks are only required by law to hold gold to the extent of one-third of the notes issued, but, owing to the embargo placed by the Government on the export of gold, the banks have been compelled, since 1914, to hold idle and unproductive in their vaults an average amount of gold slightly in excess of the average amount of notes in circulation. This of course means, in effect, that the banks have been prevented from obtaining any productive benefit at all from the notes issued, and that the compounded cost of the note issue, since 1914, is the actual cost of the gold now held by the banks. If we consider that the note tax is 44 per cent per annum; that the cost of running the note issue is probably 1 per cent, per annum; and that income tax at the rate of 17/6 per cent, per annum is charged.on the gold compulsorily lying idle, we will arrive at the conclusion that the dead-weight cost of the note issue to the banks is between 6 and 7 per cent, per annum.—l am, etc., AJAX. Palmerston North. November 13.