INFLOW OF GOLD

Evening Star, Issue 22631, 24 April 1937, Page 20

INFLOW OF GOLD

, PROBLEM FOR AMERICA 4,000,0M,000 DOLLARS' WORTH IN THREE YEARS Between the “ banking holiday ” in 1933 and December, 1936, when the United States Treasury began its programme of sterilising further gold acquisitions, about 4,000,000,000 dollars’ worth of gold_ flowed into America. The heavy inflow, however, did not begin until after the establishment of the “ 59 cent dollar ” on January 30, 1934. With the currency once more attached to gold, on a greatly devalued basis, gold commenced to pour into the country in unprecedented volume, and it has been pouring in ever'since. 'An extraordinary opportunity had been offered to : foreign investors to convert idle gold hoards into American money at rates more favourable than had ever been known before. Not only was there a large repatriation of American capital previously exported, but foreign capital was sent over in enormous quantities to seek safety and profit. To what extent this inflow was the result of devaluation of the dollar is a disputed question. According to some contentions, (the uncertain conditions in Europe made an inflow of capital inevitable, regardless of devaluation. The National City Bank of New York, however, points out that the movement was greatly accentuated by devaluation. The lower dollar cheapened American goods and shares in terms of foreign currencies, and so enhanced the attractiveness of American markets. Moreover, the cheapening of the dollar was in itself partly responsible for foreign internal difficulties that were promoting a flight of capital to the United States. This was particularly true of the gold bloc countries, whose fate was practically sealed by the devaluation of the dollar, and from whom the United States received great quantities of refugee capital in the form of gold. IDLE GOLD HOARDS. This, then, was the origin of the problem with which the authorities now have to deal. Owing partly to world disorders and partly to the high price (35 dollars an ounce) to which the United States is committed, gold has been piling up so fast that it is becoming more and more difficult to know wljat to do with it. Last year the reserve banks announced a 50 per cent, increase of member bank reserve requirements for the purpose of impounding some of the gold in the banking system. In December, the Treasury began a programme of borrowing money to buy and “ sterilise ” the pew gold receipts, and so keep them out of the credit system, and on January 30 the Federal Reserve Board issued an order, increasing by, one-third the percentage of reserves that member banks must carry against their deposits. Half the

increase was to com© into effect on March 1 and half on May 1. The world production of gold last year was 35,000,000 fine ounces, compared with slightly less than 31,000,000 in 1035 and nearly 21,000,000 in 1930. “ The production of gold,” the National City Bank comments, '* continues to increase at an unprecedented rate, and most of this new production is coming to America. Who can suppose that the Treasury will go on indefinitely borrowing money to lock up gold and hold it idle, particularly after interest rates advance, as they ar© likely to do some dayP ” The bank believes that the fundamental trouble is that the world is paying too much for gold. No doubt it was some such conviction that helped spread the rumour, now denied by President Roosevelt, that the United States Treasury contemplated a reduction of its official price. •- (S THERE TOO MUCH GOLD? In contrast to this slightly pessimistic view is that of Professor O. M. W. Sprague, a former economic adviser to the Bank of England. At the international bankers’ meeting at the International Chamber of Commerce in Paris last month ; Professor Sprague, answering a question whether there was a danger of the quantity of gold becoming too great, said he believed that in one or more decades production would catch up with the excess capacity for credit made available through the quantity of gold. He also believed that a recrudescence of Indian hoarding was bound to remove great quantities of gold from monetary use, and that rising prices of commodities would increase costs and check gold production in the, future. It is exactly this superabundance of gold as a credit basis that lias been worrying the United States authorities.