End of Fiction: The Gold Standard

Northern Advocate, 18 March 1939, Page 4 (Supplement)

End of Fiction: The Gold Standard

The Chancellor of the Exchequer has now taken advice which brings to an end the more than seven-year-old compromise with the traditional gold standard, wrote the Financial Editor of the “Manchester Guardian” on February 2, commenting on the revaluation of the Bank of England’s gold, reserves, provided for in a Bill passed by the House of Commons this month. After September 20, 1931, the bank ceased to pay out gold against notes at 85s per ounce, but has ever since shown its gold holdings at that same value of 85s per ounce, and as the permissible note issue has remained limited by the total of gold shown plus a statutorily established surplus the physical amount of gold held by the bank has continued to mark the maximum of the permitted note issue. In practice, indeed, this limit has never since 1931 been of much importance, for, first of all, the Exchange Control has held large amounts of gold, of which portions could be made over to the Bank of England if desired; seccndly, the Treasury has freely exercised powers to vary the statutorily established surplus (fiduciary issue). From 1932 to 1933 the Control made over about £70,000,000 of gold (at 85s) to the bank and from 1935 to 1936 more than £ 100,000,000 at the same price. The Treasury in 1931 added £15,000,000 to the fiduciary issue; cancelled this in 1933; subtracted £60,000,000 in 1936; and temporarily added £20,000,000 in 1937. On balance, between the end of 1931 and that of 193 < £150,000,000 had been added to the permitted circulation.

Early this year the Treasury arranged for the most important modification of the whole period since 1931. It took £200,000,000 (at 85s) of gold from the bank, ttfus reducing its noteissuing powers. At the same time it expanded the fiduciary issue by £200,000,000 (a small part of this had been conceded earlier for the special needs of the Christmas season).

Now the Chancellor of the Exchequer announces an end to the whole fiction of the issue of banknotes being determined by the bank’s holding of sovereigns (for the pounds in terms of which gold bullion is valued at 85s per ounce are by definition gold pounds of the weight of sovereigns). The proposal is this: At present the bank shows gold at £126,400,000, this being the value at 85s per ounce of the amount held in the bank alone, excluding the holdings of Control. This stock of gold now held in the bank is in weight nearly 30,000,000 ounces. This is now to be valued at the market price, or at about £222,000,000. The bank will then be able to issue £222,000,000 instead of £127,000,000 of notes against gold, but will at the same time be deprived of £100,000;000 of present fiduciary issue powers. It remains then able to issue all but the present permitted maximum of notes.

Meanwhile each week the bank will work out the value of its gold holding at the prices in the market that week. It will also take an audit of the assets which it holds against the fiduciary issue (about £400,000,000 of Government securities, of which it must be deprived of a quarter, and a small amount of silver, etc.). If by reason of a change in the value of its assets, it finds that its note issue, both in circulation and in reserve, is worth more than the assets, it will take note of a loss; if the contrary, it will take note of a gain. . It will then pass on this loss or this gain to the Exchange Control. The Chancellor will explain to Parliament the' closer meaning of the provisions of this weekly valuation and transfer of losses and gains to the Exchange Control. On a first study of the preliminary statement it would seem that the note issue will be for the time being fixed at the equivalent of the present gold holding of the bank revalued at a given price, and regardless of further changes in the gold price, but subject to changes in the fiduciary issue. The decision can bear the interpretation of a first approach to a gold standard at a new gold content of the pound equivalent to about four-sevenths of the sovereign. Yet for the time being the Government holds all the controls and can keep any -automatic working of this gold standard far in the distance. I