THE GOLD STANDARD

Evening Post, Volume CX, Issue 155, 29 December 1925, Page 2

THE GOLD STANDARD

ITS EFFECT ON ENGLAND A CONFUSED SITUATION BURDEN AND HARDSHIP IN- ' VOLVED. In a remarkable speech before the Congress of the International Chamber of Commerce at Brussels in June last, Sir .Tosiah Stamp pleaded for the recognition of the economic expert in the many economic problems which confront modern statesmen. "I am going to enunciate the following unpleasant principle," he said. "Is this economic statement true, or as nearly true as wo.can foresee? If so, is it also unpalatable? Is it running counter to our desires and prejudices'-" >Sir Josiah Stamp i 3 one of those who have expressed the opinion that the recent monetary policy of Great Britain has aggrevated the depression in tho export industries, and he is not alone among economists in that opinion, writes Professor D. B. Copland in the Melbourne "Argus." But there is weighty authority on tho other side, and Sir Josiah Stamp is well aware of the many-sided nature of the problem. In the speech referred to he went on to say: "National economic life docs not consist, any more than individual ltfo does, in having the best of everything. It involves self-denial of one set of advantages to secure others." There thus must bo a choice betAveen courses that are relatively incompatible. « When Britain restored the gold standard sho made one of these choices. It involved some burden and some hardship, but the question is: "Is there a net advantage in the long run?" Economists are not agreed upon this, but they all recognise the burden. The opponents of the gold standard naturally emphasise this burden, which the followers of Mr. Churchill rather ignore. IBICES AND TBADE CONDITIONS. The price level of any country is probably its most significant economic barometer. Eecently an investigation carried out by the League of Nations showed a very definite connection between price movements and economic prosperity in many countries. It was an argument against the gold standard that it would involve a slight decline in British prices, and tho expert committee that advised the Chancellor of the Exchequer spoke about a fall in the price level of "a significant though not very large amount." This certainly happened. Thus the Federal' Eeserve Board index number of British prices fell from 178 in February to 163 in July, 1925, and there was a further slight fall in August. Meanwhile American prices had dropped from 167 in February to 162 ■in May, but wore back again to 165 in August, and have been rising slightly sinec. Of course, it is by no means certain that this decline in British prices, compared with American prices was duo wholly to the restoration of tho gold standard, but there is a, general presumption in favour of this cause. Naturally, this has aggravated the trade depression in Great Britain, but if must; be remembered that sooner or later such an adjustment of British to American prices was inevitable. Thanks to the upward tendency of American prices this adjustment had proceeded fairly rapidly during tho six months prior to the adoption by England of the gold standard. It was this that allowed sterling to come so near to pre-war parity early this year. Such a movement in the exchanges always involves a burden upon the exporting industries. Thus as the sterl-ing-dollar exchange steadily approached parity the receipts of British exporters declined slightly, while their costs, especially interest, wages, and

raw materials, showed no such decline. If sterling moved from 4.7 to 4.8 dollars, an exporter with a bill on New York for 4700 dollars would receive" £1000 at the first rate, but only £980 at the second rate. His coats and internal prices generally would not respond rapidly and automatically to such a change in the exchanges. Hence the improvement i:i the exchanges at any time, involves a burden upon the exporting industries, just ag a depreciating exchange for a time, as in France, is a definite encouragement to these industries. The point at issue is whether this improvement in the exchanges should have been sought at the particular ' time. Only the ultimate outcome can decide the issue. If American pries rise slightly, and there is every hope that they will, the process of adjustment would soon be completed. MONEY BATES AND GOLD MOVEMENTS. ■ Meanwhile the position in the British money market is, to say the least, obscure. For a. few weeks after Britain restored gold there was a net import of gold of some £16,000,000, but during September the ijosition changed, and the English financial papers at the end of September were all apprehensive of a rise in the Bank of England discouut rate. To the general astonishment of the financial world the Bank lowered its rate on 30th September from 4$ to 4 per cent. At the same time the market late of discount had fallen, and at the end of September was about 3£ per cent. As this was also the market rate for bills in New York there Was no inducement for American capital to seek the British short loan market. Indeed, there had been considerable withdrawals of such capital, and during September gold to the value Of nearly £7,000,000 was exported from London. It should be explained that the Bank rate is the official rate at which the Bank of England will discount bills, while the market refers to the bill broken*, who usually seek accommodation from the joint stock banks and rarely go to the Bank of England. The jont stock banks follow the lead of the Bank by altering their rates for advances and deposits. Before tho war, when there was an export of gold and the Bank found its reserves declining, it raised its rate of discount. The joint stock banks followed, and the bill brokers could then get accommodation only at increased rates, and were driven to the Bank of England. Thus the Bank controlled tho exchange situation. It still does this, but now we have the extraordinary ! feature of a low bank rate with encouragement to exchange transactions i at a time when gold'exports are relatively heavy. Since the Cunliffe report on currency in 1918 it has been accepted as a maxim that tho gold rc- | serve of the Bank should not be lower than £100,000,000. This reserve is used to support not only tho Bank of England note issue, but also the curi rency notes which were issued as an emergency currency during the war. The latter have been systematically reduced from £320,000,000 in 1920 to slightly less than £200,000,000. Tho Bank of England issue is at present ! about £105,000,000, and- as it is intended eventually to amalgamate the two issues under the Bank, a reserve of £100,000,000 in gold will be necessary.' But recently the reserve has been less than this figure and in'a recent Bank return •it was only £14,734,000. With the New York exchange at 4.840 dollars, we have a situation characterised by (a) a low bank rate, (b) exports of gold, aud (,c) exchanges below the exporting specie point. A POSSIBLE EXPLANATION. It has been suggested that the Bank and the Treasury are anxious to dispel the idea that the maintenance of the gold standard involves high interest rates and financial stringency in Great Britain. To keep a low bank rate in the face of gold exports may, mean drawing upon the American reserves, which were arranged by the Treasury when the return to gold was announced. The usual seasonal drain on sterling which takes place during the close of the year, when the American crops are moving,, involves a tightening of money rates in England. This rather lends colour to such a suggestion. Moreover, the announcement that the Treasury is lifting the embargo on Dominion and foreign loans strengthens this impression.' It is possible that the decline in the Bank rate in such circumstances is the official raply to the criticism that monetary policy is aggravating the trade depression. The city editor of the "Manchester Guardian Commercial," whose comments on the situation have high authority, considers this a possible explanation. Kccently he remarked: "It means that tho Bank of England, when it lowered the Bank rate, cither embarked upon a definite policy of cheap money at.any price, from which it is hardly likely to be deflected by anything that has happened sines, or it simply miscalculated the effects of the .lower Bank rate." He thinks that the Bank will not, iv either event, go back to a higher rate. There is. one important reason for «uch an opinion. If gold is exported from England it will-go to the United States, where it is definitely not wanted. Continued American imports of gold will force upon the authorities there lower money rates and a possible rise in prices. America then will take some of the burden off British shoulders. As it seems likely now that there will bo a slight rise in gold prices the Bank may have acted wisely. There is every reason to believe that it acted in conjunction with America in this matter.' In this way Mr. Churchill may yet confound his critics.