GOLD MARKET

Evening Post, Volume CXVII, Issue 51, 1 March 1934, Page 11

GOLD MARKET

NEEDED IN-AMERICA-

FOREIGN' PURCHASE FAILS

TEMPORARY EFFECT

The Administration's monetary policy is again at the cross roads. The issue is simply: Shall the gold-buying plan be abandoned, or shall it be made effective? To do the latter, it appears necessary to set up a-free gold market in the United States and/or to be prepared to invest at least 1,000,000,000 dollars in operations to boost the gold price, says the "Christian Science Monitor." This clear-cut Issue is brought out into the open by the surprising revelation that some 35,000,000 dollars was expended in purchase of foreign gold— an operation which Mr. Jesse H. Jones, chairman of the R.F.C., recently described as "not enough to make a good bridge work." "Maybe our teeth have been getting a little bad lately." Here is the situation: The domestic gold-buying has had scarcely any perceptible effect on the world price of gold. And, the world price being unaffected, the dollar has not continued to depreciate. Thus, with the world- price held down, and the dollar remaining steady, commodity prices—the goal of Professor George i l. Warren's plan—have not risen more than a fractional point. To render the plan effective, it is now disclosed that -35,000,000 dollars was poured into foreign purchases, despite continued official assurances that the amount bought was " negligible." But this sum-only served to push upward the world gold price for the days—probably less than two weeks —during which the actual buying took place. As soon as it ceased, the London price slid down again. . .DEFERS PURCHASE. Being unable to continue deluging money into the London market, the Administration apparently decided to defeiythe foreign gold buying, although the domestic purchases—which also served the different purpose of giving the Government a corner on internal gold—were continued. The original 50,000,000 dollars allotted by the R-.F.C. for gold buying was exhausted, and an additional 25,000,000 dollars set aside. That only 25,000,000 dollars was appropriated is a clear indication that only domestic buying was contemplated at the moment—when the decision was taken. . Seeing that the domestic gold price was only a chalk-mark on a blackboard, the currency experimenters ceased elevating it. Thus^for.the two weeks in question, the price iiung at 34.01 dollars. , , - / : ' But during that period there has been much searching of policy. How could the world price be effected, thus presumably elevating prices f There were only two methods, one of which had been partially tried! They were either-to keep on buying in the London market ;sufficiently-to hold the price there'up, or to set up a rival gold niaTket. .-..-■■ .-.■'. The former alternative was unattractive. Already 35,000,000 dollars had vanished in the London operations the gold is held by the Federal Reserve Bank and the transaction may turn out to be either a profit or a loss—and after the money had ceased to flow the price had left "off rising. : In short, the London price-fixers in their market in St. Swithin's Lane would elevate the gold price only when forced to do so -by American upward pressure. When the pressure-^in ','dtil-. lars—relaxed, the price, receded. , If the Administration took 1,000,000,000 dollars instead of 35,000,000 dollars and began to work with it as a base, it might be able to elevate the gold price indefinitely. The mere threat of such a sum might be adequate to control the price, although the British Exchange Equalisation Fund is even greater and might be used in return. WOULD NOT SIT BY. But neither London nor Paris would sit idly by and watch a forced elevation of the gold price. An embargo on sales would probably result, and the United States would be forced to establish a free gold market of its own— which could attract such 'goTd as was not halted by embargo. ■ This alternative, therefore, seems more feasible. All that would be necessary is an offer —presumably through the Federal Reserve Bank of New York to buy and sell gold freely at a stated daily price. Behind the offer would have to be financial resources adequate to make it valid. Whether these would need to be 1,000,000,000 dollars or whether the stated assurance of the Administration that it actually would buy gold at its fixed price would suffice to convince the world is a vast problem. Presumably, gold would begin to flow towards New York and continue until halted either by embargo or by an equally high price abroad. If the latter resulted", the Administration would have succeeded in Stage 1 of Professor Warren's plan, the world price of gold would be elevated, and, according to theory, prices would rise. Inside financial 'circles are therefore talking excitedly about the establishment of an American "gold market—or a Pan-American gold market, which would attract Canadian gold, peg Western Hemisphere currencies to the American dollars, and perhaps assist exchange transactions between the Americans. An essential stage would be removal of United States restrictions on the export of gold. But presumably .the American price would be high enough,to render export unprofitable. There are other awkward phases, but none of thorn seems insuperable. The plan has many attractive phases as_ well, and' it is clear that the Administration is seriously considering it. Indeed, the only alternative is virtual abandonment of the gold experiment, for the domestic price-fixing and purchase has failed of effect. Presumably, the long conferences the President is having with Mr. Fred I. Kent, foreign, exchange manager of , the Federal Reserve Bank of New , York, and Mr. Eugene Black, Governor 'of the Federal Reserve System, are ; directed towards this goal. Standing stil], as at present, means . tacit abandonment of the whole gold . scheme, for its effects aro not being ; felt and Professor Warren's theory is , not having a fair test. In tho face of . Administration's assurances that the . plan would-be pushed, if would seem ! likely that the next stop, .. free gold > market, is probable. But the consequences are incalculable, f chiefly in the international field. Would 3 London and Paris welcome the estaVj- . Hshmcnt of a rival gQld market? Would . a currency wa,i:-<wvstie ? There seems no , inevitability abojit these conclusions, anc\ the uH.imatejresults are still in a a > state of relative jfog.