MEANING AND WORKING OF GOLD STANDARD

Horowhenua Chronicle, 9 October 1931, Page 3

MEANING AND WORKING OF GOLD STANDARD

! Extravagant Hopes and Fears RESULTS DEPEND UPON CONTROL "The suspension of the gold standard "by Britain has, in certain sections of the community, raised quite extravagant hopes, and equally extravagant fears in other sections. The position really is that the suspension will be a good thing -for England and for us if the situation can be controlled. If it cannot be controlled it will De disastrous." With this comment Mr. D. O. Williams, lecturer in economics at Massey Agricultural College, opened a most interesting address on the gold standard, delivered (at the weekly meeting of the Palmerston North Citizens' "Lunch Club last week. Continuing, Mr. Williams stated that the experience of the war had taught every nation to fear the danger of inflation. The experience of post-war years had taught the nations to fear equally the crushing effects of deflation. The gold standard was looked upon as a salvation for the currencies of the world, but the price which we had paid for the protection against inflation had been excessive and had brought us all to the verge of bankruptcy. The abandonment of the standard "destroyed the protection we had against inflation —or rather, we might say that the -standard had not been equal to the strain of providing that protection. The only thing that stood between England and accumulating inflation, with all its dislocation, was the power that the central bank might have to control the credit situation.

The question might be asked: Why not inflate? It must be admitted that a certain amount of inflation would be, for all of us, a splendid thing. The trouble with falling prices had been that some prices had remained high, and these had been the prices that had entered into the causes of industry. The benefit of rising prices would be that those costs which earlier had refused to fall would also fail to rise, so that rising prices would brim/ about fl- - adjustment between receipts and costs.

Therein lay the basis for the present optimism in connection with the gold standard, foe money no longer being tied to the value of gold, was free within the discretionary control of the banks to initiate and support a ai'Vier Level of prices. The danger, however, of rising prices was that when once begun they could rot be stopped except wish great difficulty, s: that at tne moment we were on the horns of a dilemma between the desirability and necessity of moderate inflation on the one hand, and th 3 danger, on the other hand, that inflation would escape control. Meaning and Working of the Gold Standard The effect of the gold standard might conveniently be discussed under two heads—its internal and external effect's. Where the gold standard operated the essential principle was that the value of all forms of currency within the country was fixed unvaryingly to the value of gold. If, for instance, at one time a pound's worth of gold would purchase 100 commodities, then at that same time a pound note, 20 shillings, 240 pence or eight half-crowns would purchase 100 commodities. If at a later date a pound's worth of gold would purchase, say, 150 representative, commodities, then under the gold standard so would all the subsidiary forms of currency purchase the same amount. This would be true in England and equally true in all other countries having a gold standard —France, Germany, the United States, and so on, since each of these countries tied the value of its currency, francs, marks, dollars or sterling, to a common or mutual commodity equal. They automatically tied the value of their currencies to each other. Sterling within very narrow limits, the value of francs in terms of sterling, sterling in terms of dollars, j dollars in terms of marks, and so on 'were kept stable. In 'other words, the foreign exchange between gold . standard countries was kept relatively fixed. Each of them employed as its basis a metal* having a world value. As the value of gold'rose, so the value of sterling, francs, marks, dollars, etc. rose. They had to ri v se to preserve the operation of the gold standard- In the last resort, the movement of gold from one country to another preserved the necessary equilibrium. For instance, an adverse balance in England's trade due to a rise in the price level of exportable commodities would cause a fall in sterling value on the exchanges, and the adverse balance would then be corrected by a flow of gold from England overseas. This would reduce the gold reserves in England and make it necessary, therefore, for the rate of discount to be raised in order to preserve the banks' proportion between their assets and liabilities. The results, spread throughout the country, would be re-s-t«ficted credit for industry and eventually falling prices as trade and business slackened .off. The fall in prices would in this way adjust the original causes of England'-s adverse balance by lowering her export prices. In this way the flux and reflux of gold throughout the world bound the countries using it to a common standard. Breakdown of the System The causes of the breakdown were to be found in no single cause, but in a number of events, such, as mal-distn-bution of gold—the war-time : flow of gold to America, flow to America to pay for tfe balance which

could not be liquidated in any other way, America's reluctance to admit imports freely, and the anomaly of a creditor country with an export balance, the sterilisation of her gold, reluctance to invest in debtor countries because, of their economic position being insecure as a result of the huge burden of war debts and reparations. In this way America had got more gold than she could or dare use locally. Then there were the French gold acquisitions, the result of the post-Avar flight from the franc resulting in enormous balances being built up in England, and all these redeemable in gold. The return to currency stabilisation in France and the weakening in the English economic situation had resulted in the repatriation of French investments held in London.

Both these gold importations, American and French, had failed to produce their normal influence because they had not been used to a proportional extent in either country to extend bank credit. Therefore there was no rise in prices in either country, and therefore no adjustment of trade balance, which would have involved an outflow of gold from the country. Both were frightened of gold inflation. The Monthly Beview of March, 1931, stated: "Formerly, the inflow or outflow of gold was, as a rule, more or less quickly reflected in a corresponding expansion or contraction of the credit structure, but one of the features at the present time is that large movements of the metal frequently produce little apparent effect upon the credit position. If the movement of gold is not allowed to exercise its natural influence promptly, then serious instability may result and gold may continue to flow from one centre to another until its shortage or excess forces upon the central banks a drastic change of credit policy." In the last two or three years neither France nor America had employed her surplus gold in the way in which Great Britain had always employed hers, namely, in additional imports or in making additional foreign long-term loans. On the contrary, they had both required payment of a large part of their annual surpluses either in gold or in short-term liquid claims, their higlj protectionist tariffs tending to prevent their debtors from paying in goods. As the McMillan report said: "This is a contingency which the normal working of the international gold standard dots not contemplate, and for which it does not provide." The position had been greatly complicated by war debts and reparations in England. To make effective payment, debtors had to remit either goods or gold. Effects of Suspension in England

The immediate effect of the suspension of the gold standard in England was a fall in the exchange value of sterling. This was in the meantime good for some sections of England and bad for others. The present effect on the London money market was obviously bad. London as an international clearing house had built its "greatness on the certainty that all claims on it were equivalent to claims on gold. This was no longer so. The loss due to the suspension of the gold standard was a loss of financial business and a blow to the prestige of London. So long as sterling was not linked up with gold, its value would be independent of gold, and foreign investors in sterling could not, in the meantime, be certain of the future value of the sterling. They would, therefore, be chary of anything but speculative investments in sterling.

Unless sterling could be stabilised; in such a way as to command universal confidence, Lpndon's future as a money market was worth nothing, The inescapable logic of eventsj therefore, suggested that every endeavour would .be'made to return to gold under some system or other. To English manufacturers the present situation was equivalent to a gift from the gods. It cut two Gordian knots for them. It meant that their competitive, sterling power against other industrial countries which remained on the gold standard was enormously iPr creased. This was so because at" present there was no rise in Eng- , s , lish manufactujf-ing equivalent to the f all in ttye external yairieof the sterling. Foreigners upon -the gold standard couid now purchase ■ English-iianufactures at less j •inft co%ffp themselves. This was tie reason w&f British industrialists welcomed the suspension with hoots of joy. It must not, however, fee imagined that -this advantage was a permanent one. The fall in the value of the pound in England would sooner or later b*t,*ccompa»ied by rising prices, and therefore rising costs of production, The first effects were already to be seen

in the rising prices of raw materials imported into England for purposes of manufacture. Imports from countries remaining on the gold standard necessarily cost England more, but even in the case of imports from countries that adhered to the sterling English manufacturers would, in their optimism, be willing to bid higher prices. Some margin of t'heir present profit on the exchange situation would, therefore, diminish. Foreign buyers, eager to buy at such cheap rates, would also be glad to pay as promptly as possible for fear that the sterling would depreciate still further. This would set up a strong demand for the sterling and so help to support, if not raise, its value. For the Empire, assuming that the Dominions retained the sterling, the depreciation of sterling was equivalent to an additional discriminatory tariff against all countries retaining the gold standard, such as France and America. Conclusion The danger .inherent in the abandonment of the gold standard was that we would have cut ourselves off from the international money system and would have to depend for the stability of our money upon the wisdom and power of our banking institutions. If they were unequal to the task, the pressure that would be brought to bear on them by industrialists would set in motion the cumulative forces of inflation which, once fully in process, were difficult to arrest. If not arrested, the end was financial chaos and the ruin of whole classes of helpless- people. If this was the price we might be called upon to pay for our present escape from the crushing weight of depressed prices, it was too heavy. At the same time, a return to gold on the same plan that had operated; since 1925 committed us to no happier a future than the prospect of low and perhaps falling prices. Somewhere between the imponderable risks of uncontrollable inflation and the subjection of the world to the gold standard in its present form there must lie an alternative which could m:>re effectively utilise gold as the universal basis, dbviously the solution between the two extremes rr.:;st lie in more effective utilisation and control of gold itself, and it was to this task that international cooperation must bind itself.

Clearly the world was not yet ready "to abandon gold. "We have found ourselves incompetent to control gold itself and, a fortiori, we are even more remote from the successful management of a currency which is not in some way tied to a commodity," the speaker concluded.