EMPIRE CURRENCY

Greymouth Evening Star, 13 August 1932, Page 4

EMPIRE CURRENCY

AN INTERESTING REVIEW (Prepared by the Dept, of Economics of Canterbury College). The general question of a British Empire currency, managed in the manner best suited to the various parts of the Empire, has recently received a good deal of attention in the press and in public discussion. The currency question is now being considered by a Committee of the Ottawa Conference, and may be examined further at the projected economic conference in London. An attempt is . made here only to examine the genie ral field of discussion and the possij bilities of development. "/ The catastrophic fall in prices dur--1 ing the past three years and the sev- • erity of the consequent world-wide ; depression have occasioned much i feearching for causes, remedies and means of prevention. It is, however, becoming increasingly clear that the causes of the depression are complex, and that it is unlikely to be remedied without intelligently directed and cooperative effort. The causes include the difficulties occasioned by reparations and war debts, by marked changes in the flow of capital, by the altered, direction of production and demand, by restrictions and limitations of markets, by the rigidity of economic structures and of costs of production, including wages and high taxation, and by mistakes in political and economic policies in both national and international fields. Most of these factors are non-mone-etary,' and it is probable that in view of the magnitude of non-monetary causes *• of dislocation, no monetary management could have avoided some measure of depression. None the less, it is undoubted that the international management of monetary affairs has been such as to make depression more severe, and that some part at least >of the depression might have been avoided had money been managed from the international, rather than from conflicting national points of view. The pursuance of national policies has brought competition for money and scarcity of money at a time when co-operation, mutual help, and labundance of money were required to prevent the development of the crisis.

PAST TROUBLESDifficulties occasioned by .the pursuance of individual and national rather than international aims, are by no means confined to the monetary field. During most of last • century it was widely believed that the policy of laissez-faire was the best to follow in economic affairs, and that the free working of competition and self-inter-est would automatically adjust those affairs in the best practical why. But the conditions of economic activity have changed greatly. Now the belief is rapidly gaining ground that laissez-faire is no longer the best policy, and that definite economic planniiig and planning on a much wider scale than has j<et been practised, have become, necessary. Such planning does not call for the elimination of competition, private enterprise and individual effort, but suggests rather that, by agreement and co-operation based on wider information and broader views, the forces of industry and commerce might be directed into channels more productive of good for the communities they serve. For the vast majority of people, the field of. economic cooperation is as yet unexplored, and the practical possibilities have nowhere been fully considered. Such co-operation and planning might be most effective if introduced and practised on an international scale. But the .efforts of the last decade have revealed great difficulties in securing effective international co-operation, and in view of this experience it might more practicable to attempt such co-operation at first within a narrower field. The difficulties are due mainly to the strength of nationalist and individualist sentiment and to the wide disparities of race, language, political and economic aims and organisation, etc., that exists among nations. Within the British Empire such obstacles to co-operation exist in much less degree, and if co-operation between countries for their mutual advantage is to be achieved, it should be more practicable to make a start within the Empire. This is the task .which is being attempted at Ottawa, where the Empire is exploring methods for increasing both the volume of trade and the closeness of econopiic association amongst Empire countries. The Empire’s currency problem falls within this wider field of closer economic co-operation. There is undoubtedly much to gain from more effective planning and closer co-opera-tion in currency matters within the Empire, and the difficulties to be overcome are probably not insuperable. An Empire currency plan does not necessarily involve the restoration of the gold standard, either at old parities or new parities, nor does it necessarily 'involve the adoption of a single unit of currency throughout the Empire. There is, in fact, a. strong case flor continuing with present units which ’ have grown familiar by long use. But a discussion of the problem must touch upon recent developments in currency, upon the basis for co-operation that already exists and upon aims and methods of achieving more effective currency management within the Empire.

THE BAST AND PRESENT In the years preceding the war, practically every country in the woi-ld (except China) was either on the |gold standard or had ti currency closely linked with gold. The effect of this state of affairs was to maintain stability of exchange rates within narrow limits ov«r practically tho whole of the world. This stability •of exchange was looked upon as normal and necessary, and probably few people realised how much it facilitated trade and that growth of production and human welfare which is so closely associated with expanding trade. Either during or after the >var practically every country in the world except the United States departed from the gold standard, cliief’y as a result of inflation and the dislocation of international payments and exchanges consequent upon inflation. The result was seen ’in an extraordinary instability of exchange rates which hampered and dislocated international trade and tended to depress both the production and tho welfare dependent on the smooth flow o' trade. So great were the diffieul-

ties occasioned by fluctuating currencies and exchanges that countries • everywhere made great efforts to iej I store stable monetary standards. From 1925, when Britain restored the gold standard, to 1927, rapid progress l was made, and by 1927 most of the I world was again on the gold standard and enjoyed once more stability of exchange rates and freedom from wide currency fluctuations. Amongst all the countries that took part in the war, Britain and the British Empire were the only ones to. restore gold at the old parity. Other counI tries (except the United States, which never suspended, gold) restored the gold standard at new parities of exchange which registered approximately the depreciation their currencies bad suffered. From 1925 to 1929, however, the general trend of world prices was downward. During that period a series of international strains developed which resulted towards the end of 1929 in widespread collapse on the stock exchanges and in the precipitation of the depression that has followed. The depression forced many countries off gold, and in September, 1931, Britain also suspended the gold standard. It has been said that Britain was really forced off the gold standard by her efforts to combat declining world prices. It is possible that had Britain’s methods and Britain’s leadership been followed by Other countries, the depression might have been much less severe and the remedy much easier. < At the present time the world may be divided into several broad monetary groups. About six countries, including France, the United States, Belgium, Switzerland, Holland and South Africa, remain on the gold standard. A second group, including Germany and most of central and southeast Europe, maintain their currencies nominally at par with gold by means of strict control of exchange transactions. A third group forms the sterling convoy.” It includes Australia and New Zealand, India, the Irish Free State, the British colonies. Egypt, the Scandinavian countries and Portugal, with others on the fringe. A fourth group includes most of the South and Central American countries who, With others, have suspended gold and who manage papei’ currencies depreciated in varying degree. The strength of the sterling group reflects the world’s faith in British policy and British leadership. At the present lime Britain, more than any other country, is looked to for a lead in monetary management. . The policy of her Government has not been clearly stated, but it is generally believed to fee in close conformity with the view expressed by the Macmillan Committee and others that every effort should be made- so to manage money that the general level of prices might be raised to about the level of 1928-1929, and afterwards stabilised at that level

THE BASES There is little doubt that this general aim would be approved by. the rest of the Empire. If the achievement of the goal can be hastened by joint action and co-operation, then the co-operation of the Dominions and colonies should be readily forthcoming. Already there exists a considerable measure of co-operation in monetary management between the various parts of the Empire. This has grown up, however, rather by accident than by design, and rather in response to the need for banking facilities to finance ordinary trade operations and capital movements than as part of any definite plan for the closer, integration of Empire currencies. The question is simpler, too, because many parts of the Empire have the same unit of currency and have banking organisations based upon English models. The differences are not serious. India’s standard coin has been for more than four centuries the silver rupee, and India is unlikely to change or abandon her familiar standard. But India’s connection with Britain in trade and .finance as well as in money and banking has long been very close. In Canada, the unit of currency is the dollar, and in Canada’s case there may be some division of opinion as to where her chief interests Me. Her geographical contiguity to the United States has affected her economic relations closely, and in both finance and trade she is probably as closely associated with the United States as with Britain. At the present time, however, she has suspended the gold standard, which the United States has retained. Some indication of her readiness to co-operate may be found in the fact that she has placed Empire currency problems upon the agenda paper for the Ottawa Conference, and some time prior to the Conference appointed a committee of economists to report to the Government upon this and other matters to be discussed by the Conference.

There is, however, no real reason why either different units of currency or the closeness of economic associations with countries outside the Empire should stand in the way of any Dominion linking up with an Empire currency union. Already the sterling group is a very powerful force in the world’s monetary systems, and, if it were strengthened by a definite Empire organisation, there is little doubt that other countries would attach themselves to it, and so help to give Britain once more the undisputed leadership in the world’s monetary affairs.

While the Empire countries have usually been described in normal times as being on the gold standard, the methods of operating this standard have been modified in recent years. Under an automatic gold standard, it is customary for -countries on that standard to hold gold reserves as the basis for their currencies. If the balance of payments with other countries is against them, gold is exported, their reserves are depleted, and they arc forced to take steps to restore a favourable balance. The essence of the automatic gold standard is then the free movement of gold, combined with the expansion of currency when gold im imported and the contraction of currency when gold is exported.

During the present century, the modifications developed have usually avoided large movements of gold Countries have found it convenient to hold smaller gold reserves at home and to keep some part of their reserves invested in short term securities in the world’s large money markets. If the balance of payments were against them they might draw, not on their domestic gold reserves, but on credits held in foreign centres. If the balance of payments were in tlieir favour, they might receive this balance, not in gold augment their' domestic reserves, but in credits which increase their Im’fUngs in foreign centres.

In the case of New Zealand, Australia and many other British countries such operations were carried a stage further. Although these countries might hold gold reserves at , home, the gold reserves were in practice and in normal times not used at all to settle international balances. Their real balances held on account of international payments were not the gold reserves at home, but funds held abroad for exchange purposes, mainly in London. When the balance of payments was in their favour these funds were increased; when these balances were against them, these funds were depleted. This practice in itself involved some pooling of Empire reserves, for additions to reserve funds were normally invested in the London money market, and, when reserves were depleted, they might be added to by borrowing from that market. Perhaps the best method of securing Empire co-operation in currency and banking management lies in the extension of practices such as these. It should be clear that, for the greater part of the Empire, and certainly for New Zealand, monetary management depends much more upon credit than upon cash currency. In countries where banking is highly developed the note issue is of relatively little importance, so long as it is not unduly restricted, and cash is decidedly subsidiary to credit. It is the effective management of credit that is all-im-portant. But reserves must necessarily be held against credit liabilities, and a banker must always be in a position to meet the demands made upon him. Co-operation in banking provides the means for economising in reserves, pooling fluctuations in funds, and securing a higher volume and greater flexibility of credit upon the basis of a given reserve. The proposal for Empire currency and banking union opens up a prospect of securing such economies and conveniences over’ the Empire as a whole.

THE PRACTICAL DETAILS The chief difficulty in the way of such a project is the obstacle that always hinders co-operation. It might be necessary to sacrifice some independence of action hitherto enjoyed in order to secure the advantages of team-work. There might, in certain' cases, be some immediate individual loss necessary in order to secure the ultimate common good. The immediate gain to be achieved, however, is considerable; the ultimate gain might be very great. Already Britain, by balancing her budget, etc., has achieved a position which has enabled her to inaugurate a period of easy credit and monetary expansion. The Bank of England discount rate, which was 6 per cent, last February, is now 2 per cent; the market rate is little above 1 per cent; the advances rate, according to "The Banker,” is in many cases below 5 per cent; and successive issues of Treasury Bills have been floated at less than 1 per cent. The Dominions might gain much for themselves, if, without unwise public borrowing, they could share in the benefits of this cheap. money, and. they might give much to the cause of Empire recovery if they did share it. For the object of cheap money is to stimulate expansion of production and trade, to reduce unemployment, restore confidence, and increase consumption. Once movements in these directions can be begun, they are likely to act cumulatively, one upon another, and promote a decided movement towards general recovery. The wider: the field over which they can operate, the greater will be the stimulus to recovery. Here, also, co-opera-tion is necessary.

But co-operation is required in a wider field as well. Among many causes that have contributed towards the slump, nationalist aims leading to the establishment and development of inefficient industries behind the shelter of high tariff. walls, unrestricted and unwise lending by creditors, accompanied by unrestricted and unwise spending by borrowers, both States and private individuals, and the panic effort of each individual and each country to safeguard his own position and to build up his own reserves by Securing a greater share of the world’s resources, all have operated strongly. Co-operation requires not only mutual understanding, goodwill and unselfish devotion to a common cause, but also experience, ability and intelligent direction. It is required in the sphere of production and trade, of borrowing and lending, and of migration, as well as in the sphere of money. It involves some willingness to pool the resources of Empire, within agreed limits, and to devote them to a common plan for securing the greater welfare, of the people who compose the Empire. This does not necessarily mean an orgy of Government restriction and regulation. Such co-operation would necessarily have to be largely voluntary and operated in the main by nonpolitical bodies.' We have some political co-operation now. It is closer economic co-operation that is most needed. It should be possible to devise and operate a system of co-operation within which there might be ample flexibility and scope for progress, for the exercise of individual initiative, and for the activities of private enterprise.

Co-operation in currency management might then operate as part of a wider plan of Empire co-operation. It might be developed, however, as a beginning and give a lead to the development of general economic planning. It should secure constant consultation leading to understanding, goodwill and effective team-work j».i monetary management throughout the various parts of the Empire. It should make possible the Empire’s monetary reserves and do much to facilitate the flow of trade, capital and credit between parts of the Empire. 11 might also give the Dominions the great advantage to be secured from the leadership of Britain and from the ripe experience and wisdom of London. Within each country also, there might bo secured greater economy and flexibility of money and banking operations, even though each preserved its own individuality and developed its organisation and its operations in the manner most appropriate to its own particular needs.

There remain. many practical details of the application and management of such a scheme of co-operation to be decided. The questions of units of currency, bases of currency, exchange parities, whether fixed or variable, appropriate ratios of reserves, methods of management, all these are practical details which require examination by men in close touch with both the principles and practices of currency and credit management. It is possible that the Ottawa Conference

may explore the field and suggest broad general lines of development. Most of the detail must-necessarily be filled in by people familiar with the technical aspects.