BRITISH MONETARY POLICY.

Matamata Record, Volume XVI, Issue 1444, 24 July 1933, Page 7

BRITISH MONETARY POLICY.

TO GET A STEADY POUND. New Exchange Equalisation. With the approval of the House cf. Commons of the proposal of the Chancellor of the Exchequer to increase the Exchange Equalisation Account from £150,000,000 to £350,000,000, Great Britain is assured that when the new’ Finance Act becomes effective in July she will have at her disposal greatlyincreased resources for the defence of the pound in the international markets. This means that the Bank of England will continue to buy gold when the pound tends to rise. In recent months the Exchange Equalisation Account, as a financial device, has become famous throughout the world. What was the set of circumstances that brought about it into being. What is the nature of its

operations, and what has it achieved? writes Harold Callender in the “New’ York Times.”

Bank Buys Up Gold.

For months the Bank of England has been buying up gold, though the country is off the gold standard, and. British statesmen, bankers and economists have frequently, assured the. nation that there eoulcl be no early return to gold. The gold standard could be re-established, they said, only under strict conditions that would guarantee its working smoothly, and these conditions were dependent upon an international agreement, which did not seem imminent. Some of these conditions were formulated by the preparatory committee of the World Economic Conference. They were . drastic and extensive. They Aid not seem easy to realise. England, off gold, was in a sense hostile to gold. Yet the Bank of England was accumulating a great pile of gold. On April 29 last ,the bank held £185,938,526 worth of gold—its value in the present British currency being about £250,000,000. This was

£50,000,000 more gold than the bank when England abandoned the gold standard in September, 1931, and £34,000,000 more than it held in May, 1931, long before the withdrawal of loreign funds, which led to the lapse of the gold standard, had begun. It was, in fact, a record. Never in ail its history, in good times or bad, on the gold standard or off it, had the bank had as much gold in its possession as it had on April 29, 1933. Gold and the Debt.

This huge and unprecedented stock of gold puzzled many people; especially since the British Government had emphasised the difficulty of paying the American debt in gold. The Bank of England had bought back within a few weeks far more gold than was transferred to America in December. The purchase gave rise to rumours of an early return to the gold standard. This, however, was not the aim. Gold standard or no gold standard, international payments must be made from time to time in gold, and a stock of gold must be kept on hand, for that purpose. Moreover, though off the gold standard, England, was determined to maintain the full gold cover for her notes; and while the pound sterling has dropped in value in. relation to gold currencies,, its value, has undergone. little change in England since the pound has not "been devalued internally. by inflation of the currency. Domestic prices were, on the whole, kept from falling—thanks to the abandonment of the gold standard —but. they were not maintained or raised through any manipulation of the currency. The gold basis of the currency was greater than before. All that had been done was to remove the legal obligation previously imposed upon the bank to pay out gold in exchange for its notes.

A Managed Currency.

Since September 21, 1931, Britain

lias maintained what has been called , a “managed” currency, and it was as a part of the technique of currency I management that her great stock of 1 gold was accumulated. The accumulation was due to the operation of t.ie Exchange Equalisation Account, created to defend the pound In the money

markets of the world, and to reduce as far as possible the inconvenient fluctuations in the value of tiie pound in terms of other currencies.

The objects' of British monetary policy were —and slill are—the maintenance of the internal price level, an anti-deflationary measure designed to enable trade to continue, il' not expand and the checking'of temporary and spasmodic variations in the' exchange ! \aluc of the pound while it was grad- ! un.lly feeling its proper level as determined by the movements of over- , seas trade and the international bal- : ance of payments. j The palli of the pound was to be i made as easy as possible in a world ! of disorganised currencies and disorj ganised trade. Pending stabilisation lat a new level —a level which, all i agreed, must be lower than the forjmer .par—the pound was to he pro- | ic-ctcd within practicable limits so I that speculative or panicky exchange ; movements cither up or down might ; be reduced to a minimum, j How New Tariff Helps.

Against a precipitate decline ‘.n value the pound was protected by the new tariff, which did much to right the''adverse balance of trade, ahd by a heroically balanced Budget. Against undue rises In value it was protected by the Exchange Equalisation Account which could sell pounds and buy gold q? foreign securities when an upward movement of the pound threatened to drive it back in the direction of the old parity which- had imposed such a burden upon British trade. ■

Moreover, armed as il was with a growing slock of gold and. foreign currencies, the account foriifjcs Britain against any sudden withdrawal of short-term foreign capital from London such as drove the country off the geld standard in 1931. A panlo of this kind on the part of foreign lenders could be met much more easily tv-day than in the summer of 1931 hr cause Britain lias far more gold and foreign currencies , will,i which to nay. Thus Ihc Exchange Equalisation Account serves both as a means of ballast when Ihc pound shows signs of rising and as a reserve to prevent foreign withdrawals from driving downward.