BANK OF ENGLAND’S GOLD

Dominion, Volume 30, Issue 41, 12 November 1936, Page 14

BANK OF ENGLAND’S GOLD

Question of Revaluation

The devaluation of the franc has given rise to a fresh crop of rumours and speculations over tiie revaluation of the Bank of England’s gold, says the ”Eeoniist” of October 10. It is unlikely that revaluation will be undertaken in the immediate future, for. as Mr. Chamberlain has made clear. Great Britain is not. yet returning to gold. Yet it may be of use to set forth a few simple facts.

'Die gold held by the Bank of England amounts to approximately £250 millions. This is valued, by law. at 84/11 per ounce tine. If the future price ot gold turns out to be 144/- per fine ounce, that gold will become worth £4’25 millions. There will thus be a profit of £175 millions. Now. as this gold is part of the assets of the issue department, of the bank, this profit will presumably accrue to the Government, in accordance with the Currency- and Bank Notes Act of 1925: and under the law as it stands today, the Government will include it as a miscellaneous receipt in the years revenue, which means that they can use it as they think fit.

The point, however, has been legitimately made that £175 millions represents a serious over-estimate of the prolit. because a lot of the gold now held by tiie bank was acquired since September, 1931, mid. therefore, cost considerably more than 84/11 per ounce. 'Die answer here is that the bank actually incurs a loss every time it buys gold at, say, 140/- per ounce, and promptly writes it down to 84/11 per ounce. This loss, however, by the Finance Act of 1932. has to be made good by the Exchange Equalisation Account there and then. This fact enables us to give the true calculation. When tiie bank's gold is revalued, the Government will obtain the full profit of, say. £175 millions, which it can apply to current, revenue. There will also remain the assets of tiie Exchange Equalisation Account. These consist of: —(a) The sums issued to it in 1932 and 1933, believed to be £375 millions; (I>) its accrued jobbing profits or losses; less (c) the amount paid to the Bank of England in compensation for Hie bank’s losses on its gold purchases since September. 1931. The Government will have to decide whether to keep the Exchange Equalisation Account in being, and if so, to determine its size, but if tiie account is wound up. its assets must be applied to the reduction of the national debt. It looks, therefore, as if under existing legislation tiie Government will got for the redemption of debt the whole of the profit on the revaluation of the bank's gold for revenue, and an unknown net profit, (the loss <>n the bank's gold purchases since 1932) from the Exchange Equalisation Account. It is a matter for careful consideration whether this is the best way of dividing these profits and assets.