A STEADY POUND

Evening Post, Volume CXV, Issue 144, 21 June 1933, Page 9

A STEADY POUND

! HOW IT IS SOUGHT j EXCHANGE EQUALISATION j OPERATION OF FUND With tiie approval by the House of Commons o£ the proposal of the. Chancellor of the Exchequer to increase the Exchange Equalisation Account from £150,000,000 to £350,000,000, Great Britain is assured that when the new Finance Act becomes effective in July she will have at her disposal greatly increased resources for the defence of the pound ia the international markets. This means that the Bank of England will continue to buy/ gold when the pound tends to rise. , In recent months the Exchange Equalisation Account, as a financial device, lias become famous throughout the world. What was'the set of circumstances that brought it into being? What is the nature of its operations and what has it achieved? writes Harold Callender in the "Now York Times." For months the 'Bank of England has been buying up gold, though the country is oil the gold standard, and British statesmen, bankers, and economists have frequently assured the nation that there could be no early return to gold.' The gold standard could be re-established, they said, only under strict conditions that would guarantee its working smoothly, and these # conditions were dependent upon an international agreement, which did not seem imminent. Some of these conditions were formulated by the preparatory committee of the World Economic Conference. They were drastic and extensive.: They did not seem ea3y to realise. England, off gold, was in a senso hostile to gold. Yet tha Bank of England was accumulating a great pile of gold. ' On April 20 last, the bank held £185,938,526 worth of gold—its valuo in the present British currency being about £250,000,000. This was £50,000,000 more gold1 than tho bank held when England abandoned the gold standard iv September, 1931, and £34,000,000 more than it held in May, 1931, long before tho withdrawal ot foreign funds, which led to tho lapse of the gold standard, had begum It was, in fact, a record. Never in all its history,' in good times or bad, on the gold standard or off it, had the bank had as much gold in its possession as it had on April 29, 1933. GOLD AND THE DEBT. This huge and unprecedented stock of gold puzzled many people; especially since tho British Government had emphasised the difficulty of paying tho American debt in gold. Tho Bank of England had'bought back within a few weeks far more gold than was transferred to America in December, lhe purchase gave rise to rumours of an early return to the gold standard. This, however, was not the aim. Gold standard or no gold standard, international payments' must be made from time to time in gold, and a stock of gold must be kept on hand for that purpose. Moreover, though off the gold standard, England was determined to maintain the full gold cover .for her notes; and .while the pound sterling has dropped in value in relation to gold currencies, its value has undergone little change in England since the pound has not been devalued internally by inflation of tho currency. Domestic prices were, on the whole, kept from falling —thanks to the abandonment of the gold standard —but they were not maintained or raised through any manipulation of the currency. The gold basis of the currency was greater thanbefore. All that had been done was to remove the legal obligation previously imposed upon the bank to pay out gold in exchange for its notes. Since September 21,1931, Britain has maintained what has been called a "managed" currency, and it was as a part of the technique of currency management that her great stock of gold was accumulated. The accumulation was duo to the operation of the Exchange Equalisation Account, created to defend tho pound in the money markets of the world, and to reduce as far as possible the inconvenient fluctuations ia the value of the pound in terms of other currencies. THE PRICE LEVEL. The objects of British monetary policy were—and still are—the maintenance of the internal price level, an antideflationary measure designed to enable trade to continue, if, not expand; and the checking of temporary and spasmodic variations in the exchange value of the pound whilo.it was gradually finding, its proper level as determined by the movements of overseas trade and the international balance of payments. . . Tho path of the pound N was to be lnado as easy as possible in a world of disordered currencies and disorganised trade. Pending stabilisation at a new level—a level which, all agreed, must bo lower than the former par—the. pound was to bo protected within practicable limits so that speculative or panicky exchange movements c'ther up or down might be reduced to a minimum. Against a precipitate declino iv value tho pound was. protected by tho new tariff, which did much to right the adverse balance of trade, andl, by a heroically balanced Budget. Against undue rises in value it was protected by tho Exchange Equalisation Account, which could sell pounds and buy gold or foreign currencies when an upward movement of the pound threatened to drive it back in tho direction of tho old parity which had imposed such a burden upon British. trade. Moreover, armed as it is with a growing stock of gold and foreign currencies, the account fortifies Britain against any sudden withdrawal of shoNt-term foreign capital from London such as drove the country off the gold standard in 1931. A panic of this kind on the part of foreign lenders could be met much moro easily today than in the summer of 1931 because Britain has far more gold and foreign currencies with which to pay. Thus tho Exchange Equalisation Account serves both as a means of ballast when the pound shows signs of rising and ns a reserve to prevent foreign withdrawals from driving it downward.