THE MONETARY POSITION.

New Zealand Herald, Volume LXVI, Issue 20324, 3 August 1929, Page 12

THE MONETARY POSITION.

Fears of an increase in the London bank rate have been allayed by the announcement that the Court of the Bank of England, at its meeting on Thursday, decided not to make any alteration. The difficulty of maintaining the policy indicated by this decision from to-day's financial cables. Between the beginning of February, when the rate was raised to ol per cent., and the middle of June, the bank had added about £13,500,000 to its gold holdings, but by the end of the latter month half of this amount had gone abroad owing to the pressure of a variety of influences on the exchanges. Consolation was then sought in the fact that the gold reserve was still over £160,000,000 and in the expectation that relief would follow the passing of the half-year stringency. The efflux of gold has, however, continued, the bank's stock now being about £142,600,000. The tension is revealed by the fact that the market discount rate is within the narrowest possible margin of bank rate, while the principal exchanges are still below gold export points, and, as a sensational incident reveals, gold is still bei:ig shipped to France. There is, however, substantial reason for attributing this efflux of gold chiefly to abnormal circumstances, arising from international transactions in which London is involved as tho principal monetary centre, so that the Bank of England has determined to modify the reactions on the domestic money market by a liberal interpretation of the gold standard. It has accepted the necessity o:i a temporary departure from the minimum of £150,000,000 of gold cover for the note circulation, but, 'a t the expense of a severe reduction in its reserve, has avoided increasing the fiduciary issue. On the other hand, it has modified internal stringency by greatly increasing its holdings of securities, enabling the currency in. active circulation to expand substantially. These methods may suffice if the strain is not sustained much longer; official policy may even prefer to resort to the emergency provisions permitting an increase of the fiduciary issue, since the existing influences would probably not be checked by raising the bank rate, but would force other reserve banks to follow suit. The situation has been created by a complication of causes, the origin of which is, however, the pressure upon international exchanges produced by tho high rates ruling in America, and the curtailment of American foreign loans. Borrowers have consequently turned to London, with effects that arc illustrated by the action of the Reichsbank in suspending its unofficial embargo on gold imports, so that shipments have been made in large volume. For six weeks, there has been keen competition among the great reserve banks for a limited supply of gold, tho bulk of which has been moved to New York, where it has been promptly sterilised through the Federal Reserve Banks' selling of an equivalent volume of bills and securities. The most definite prospect of relief is that with the passing of August 1, the critical date in connection with tho French debt agreements, gold transferred by Franco to Now York may be returned to London. The situation must, however, be regarded as critical, and, while there appears now to bo a more hopeful tone in London, the course of the exchanges and the direction of gold movements will still bo anxiously watched.