NORTHERN ADVOCATE DAILY SATURDAY, NOVEMBER 16, 1929. THE BANK RATE

Northern Advocate, 16 November 1929, Page 8

NORTHERN ADVOCATE DAILY

SATURDAY, NOVEMBER 16, 1929. THE BANK RATE

Registered for Transmission Through the Post as a Newspaper.

On September 26 the Bank of England raised the bank rate of discount B jto 65 per cent. Following closely i upon the Hatry scandal, the action of - the bank was regarded by those unlearned in finance as being a result of the crash of companies. This deL duction was quite fallacious. As the London “Times” said when the inc. crease was announced, it had no. in- £ ternational. significance, nor had it m any bearing on credit • policy. ■ The “ rise in the rate was the inevitable S and unavoidable ' consequence* of unprccedently . large . withdrawals- of D. gold from Britain, extending over a to period of twelve months, and- which, had they been allowed to continue, would ultimately have brought about a crisis of first magnitude. On Monday last we published a cable message id stating that the bank rate had been reduced from 65 per cent, to 6 per 3- cent. “The decision of the directors g of the Bank of England,” ran the J cable message, “is regarded (on the • Stock Exchange) as an indication that the emergency which caused the ad-

vance has now passed.” It is pleasant to hear that economic condition*have impi’oved, but it is well that T people should understand the system I upon which currency is based. This _ j was explained very clearly by the “Times” whep dealing with the rise in the bank rate. It pointed out n that the currency of Britain, as of every civilised nation, is based upon gold, and gold therefore forms the technical basis of the credit or bankP. ing system. Our gold stock forms

p the apex of a huge inverted pyramid of currency and credit, and, though small in relation to the whole, it conf' stitutes in the present state of civilisation the rock upon which all sound and stable monetary systems are ) founded. When all other means for “ making foreign payments, such as the sale abroad of goods, services, Insecurities, are exhausted, international j debts can be discharged in one remaining commodity—gold. It is foi P that reason, and for that reason alone, that a gold basis is essential to a i- monetary system. In the tweleve months ended August 31 last the gold stock of the. Bank of England was reduced by over £40,000,000, and as the figure at the time of the bank rate increase was about £133,000,000. 9 the reduction amounted to about a quarter. In addition in the same

period nearly £40,000,000 of newli mined gold which had reached London had gone abroad, so that the aggregate loss of gold in the year had been nearly J 80,000,000. Further, the stock on September 26 was over £22,000,000 less than it was at the beginning of the year, and the same amount below the country’s reserves in April, 1925, when the gold standard was restored. Parenthetically it may be noted that the stock was about I £17,000,000 below the minimum of (£150,000,000 which the Cunliffe Committee considered to be necessary and £28,000,000 less than the pre-war reserves of gold, which were in excess of £161,000,000. In September the inverted pyramid of credit which rests upon the gold stock was larger (than before the war, while the eco,l nqmic position of Britain was j weaker and its obligations larger. The country is now the debtor instead of the creditor of the United States of America, but the latter, in spite of j her creditor position had been steadily (drawing funds from Europe. Britain’s j capacity to lend abroad was* less than j before- the war; while her great exl port industries had passed and were j still passing through a period of unI precedented depression. For twelve months the foreign exchanges had moved steadily against Britain, except during the one brief period that followed the raising of the bank rate to 51 per cent early in February last. This movement indicated that Britain’s means of foreign payment had been j exhausted; hence exports of gold had to be resorted to. These, however, had had no other effect than to check the decline of the exchanges; that is to say, they had prevented the pound j, from falling to a larger discount in j i

terms of foreign currencies. That

the gold exports failed to restore the exchanges and stop the outflow of gold showed that the fundamental cause of the movement was still continuing to operate. Rates for money were lower in London than in other international financial centres. A speculative “boom” 'of gigantic proportions had been in progress in the United States for some years and money had commanded high rates there. This had induced a more or less constant flow of funds from London to New York, while high rates in Germany and elsewhere in Europe had had the effect of concentrating borrowing on the London market, which had indulged in lending to an extent far beyond its capacity. Overlending is the cause of adverse exchanges and the loss of gold. “The object of the Bank of England in raising its rate of discount,” said the “Times,” “is to stop the export of capital from this country which was threatening to deprive our trades and industries of the credit supplies which they at present enjoy. If the pound sterling had been allowed to stand at a discount much longer the result would have been harmful to British prestige. It would have given the appearance of a flight from the pound and would thus have diminished foreign confidence in the stability of this country.” In view of these facts, it is indeed gratifying to hear that the restoration of the bank rate to 6 per cent, indicates that the emergency which caused the advance has new passed. . •