The Evening Star WEDNESDAY, AUGUST 30, 1933. THE CURRENCY TANGLE.

Evening Star, Issue 21503, 30 August 1933, Page 6

The Evening Star WEDNESDAY, AUGUST 30, 1933. THE CURRENCY TANGLE.

Mr Montagu Norman, Governor of the Bank of England, is at present in America, and the importance of his mission cannot be over-estimated. The World Conference virtually broke down over the currency question, but that is all the more reason for striving with greater intentness than ever to arrive at some workable arrangement by negotiation between responsible experts. The intrusion of politicians into this highly technical business has doubtless been well meant, but so far it has not been helpful. It was in a sense inevitable. Because of complications arising out of war finance, money transactions between Governments bear a far bigger ratio to ordinary international trade transactions than was normally the case. These have to be transacted through the medium of central banking institutions, and now the influence of the political side has had to be recognised by the bankers. It is proving most distracting and difficult to them. They are being left without a common measuring standard. Wo may be wrong, but it appears to us that there is one fundamental difference between the politicians and the financiers. The former devise programmes designed to get their unemployed back into reproductive work* and do not scruple to tinker arbitrarily with their money system if they think this will facilitate matters. The financiers appear to contend that this is putting the cart before the horse—that one great source of unemployment is the dislocation of international trade, and that this cannot be restored until trade regains a medium of exchange which can be depended on with some reasonable degree of, certainty for some reasonable time ahead. These conditions emphatically do not exist at present, and they appear to be getting worse. The price of gold is rising, which is to say that sterling is slipping. It may bo mentioned that the price of gold is fixed daily at 11 a.m. in London. So long ns Britain remained on the gold standard tho quotation for gold was naturally limited to within a fraction of the Bank of England’s buying and selling prices. With the abandonment of the gold standard tho price of gold has been governed mainly by the rate of exchange ruling between Britain and those countries adhering to the gold standard. The official quotation for gold is for u spot,” and all business is don© for cash.

After the 1931 crisis the British Parliament authorised the establishment of the Exchange Equalisation Eund. With this in operation the holding of sterling at its desired ratio to gold standard currencies and the keeping of tho price of gold steady were achieved simultaneously. But it was cabled this week that the Exchange Equalisation Fund had apparently suspended its activities. In 1931 Britain found the task of staying on the gold standard beyond her; it may be now thr 1 tho task of adherence to the lower level fixed for sterling is beyond her also. That level, since America’s departure from the gold standard this year, lias been kept by anchoring to the gold franc at a rate around 85 or 86. There has all along been a difference of opinion in tho City as to whether it was wise for a great international trading country like Britain to anchor its exchange to the gold currency of an unimportant trader such as France, and it was contended that the use of the Exchange Equalisation Fund for t’ is purpose had not been contemplated and was wrong and deceitful. Possibly that school of thought has now prevailed, and endeavour is being concentrated on linking the pound with the dollar instead of with the franc. For this to be possible it is necessary to stabilise both. Britain has all along shown genuine anxiety to stabilise the pound, but America show's no desire to reciprocate and stabilise her dollar. It is to try and get her to end her dangerous dalliance that Mr Norman has gone in person to America. Both Britain and America went off the gold standard. Both became inflationists. Further than that there is nothing in common botw'eeu the tw r o policies. Tho suspension w'as forced on Britain from outside, and she took immediate and drastic steps to limit its consequences. She balanced her Budget and committed herself politically to severe economy in expenditure, enforced a high bank rate for a time, strove to rectify an adverse trade balance, and prevented an uncontrollable rise in the cost of living. On the other hand, America’s suspension w'as deliberate. There w'as no adverse trade balance needing rectification, tho Budget was left unbalanced, and no stress w’as laid on tho maintenance of the foreign exchanges. America looked, and is looking, solely “inwards,” the re oration of American prices and trade exclusively absorbing her energies. It appears that tho American officials decline to have their attention distracted by Mr Norman.

The dollar has not yet depreciated quite so far as the pound has, but tho point is the uncertainty as to whether American inflation will bo kept within bounds. This is a matter intimately affecting other countries, including our New Zealand producers with their dependence on world prices. If the depreciation of the exchange value of the dollar outstrips the advance in American prices, American commodities will cheapen in terms of sterling and allied currencies, and this will tend to depress sterling prices. To prevent that, will Britain be forced against her principles to go in also for inflation? Will there bo an Anglo-American currency war—a race in depreciation between the pound and the dollar? France and tho gold bloc in Europe are most apprehensive of this, and with good reason—they do not want to be dragged into a form of international bankruptcy. A noted French financial writer, M. Frederic Jenny, has stated that an Anglo-Ameri-can currency war would be tantamount to the ruin of the remarkable results (now showing in British trade and industry) due to the monetary policy pursued since the crisis of September, 1931. This risk, he believes, suffices to justify a rapid restoration of the gold standard in Britain, carried out without regard to the dollar and with the sole reservation that the general conditions essential for stabilisation should be complied with. It is to be hoped the 1 Daily Mail ’ is wrong in declaring present British policy to bo to allow sterling to follow the dollar, but tho intensification of the gold boom, discernible in both England and America, suggests that there are some who are speculating on the strength of an inflationary policy being likely.