MONETARY POLICY.

New Zealand Herald, Volume LXIX, Issue 21144, 30 March 1932, Page 5

MONETARY POLICY.

A MANAGED STANDARD. LEADING BANKER'S CLAIM. BRITAIN'S SOUND POSITION. Tin* advocacy of a managed monetary standard was made by Mi'. R. McKenna, chairman of directors of the Midland Hank, at the annual meeting of shareholders. Mr. McKenna claimed that a managed standard could he so worked as to maintain stability of price level. For upwards of six years, Mr. McKenna said, monetary authorities of Great Britain in seeking to maintain the gold standard fought a losing battle on ill-chosen ground. It was a great and increasing sacrifice for a mistaken ideal. 'I ho actual consequences of abandoning the !i"hl standard had belied the terrible alarms expressed before tlie event. For many years dcKvn to the war the gold standard worked tolerably well, and the question arose whether gold was for ever to remain the standard of money value, however well or iil it were made to work. The most rational answer to the question would seem to bo that if (he gold standard could not work without. depressing and even ruining trade, the proper course must he to seek another and better one. But the financial authorities of the world with deep-rooted traditions and long-established practice had still a profound conviction that the gold standard was the firmest basis for sound money, the surest protection against inflation, the best safeguard from political interference with national currencies by needy Governments. Control of Gold Standard. "If the operation of the gold standard woro properly controlled," Mr. McKenna continued, "this conviction might be well founded, but as matters stand there is little or no justification for it. For my own part 1 am unable Lo attach any meaning to the phraso 'sound money,' except that a sound unit of currency would always be of the same value measured in tho aggregate of the things on which our money is spent. If the gold standard achieved this result would need no further justification—it can hardly bo disputed that it would be of inestimable advantage if the pound always maintained the same purchasing power; in other words, if our internal price level remained constant. ''ls it possible, with or without the gold standard, to maintain the pound at a constant value measured in internal purchasing power ? If we are not frightened by the term 'managed currency,' and can harden ourselves to some degree of indifference to exchange fluctuations, there seems no reason to doubt the possibility. I do not know why wo should be alarmed by the idea of a managed currency. The phrase is perhaps misleading, for currency is subsidiary credit —we ought perhaps more accurately to speak of a 'managed standard' —but it only means that the central bank will control credit in such a way as to secure a particular object.. The essential difference between a gold standard and a managed standard is a difference of objective. 'J he instruments are precisely the same, the bank rate and 'open market operations,' the second being a technical term for buying and selling bills or securities in the open market with the object of increasing or diminishing the quantity of money. These instruments have long been employed by thtf Bank of England, whose main objective hitherto, with a gold standard in operation, has necessarily been the maintenance of exchange stability, whereas with a managed standard the objective would be stability of the internal price level. Experience of Britain. "It seems, therefore, that the achievement of a high degree of stability in our domestic price level should present tio insuperable difficulty," continued Mr. McKenna. "What in fact has happened in the last four months? Following almost immediately upon our going off the gold standard the British wholesale price love! rose about 8 per cent., and since then has remained practically stationary. Ihere has been no inflation, and the supposed miracle of maintaining a currency stable in purchasing power without any metallic standard has been accomplished. "I conclude, then, that it is possible for long-term stability in the price level to be achieved by the exercise of monetary policy. But this does not necessarily mean that, the gold standard should be permanently abandoned, for if a country off that standard can achieve stability of the price level, so also can countries on it, provided they act in concert. It is because the gold standard has been left too free to take its own course that the world has suffered the ill effects we are now experiencing. The immediate choice before this country is inescapable; either we must have a soundly-managed gold standard, which can only be secured by well-ordered international action, or we must definitely abandon gold and relv on a managed standard without any metallic basis at all. In cither event one thing is certain: the art of monetary management will have to bo relied upon more and more to obviate such catastrophes in economic life as we are witnessing to-day. YVc must not, delude ourselves once again into thinking that if we return to gold all will be well; renewed indulgence in that comfortable idea would be ratal. Deliberate, skilled, and resolute monetary management, with or without gold, is a sine qua non of steady economic progress. Prospects Encouraging. "When we look ahead we find the prospects more encouraging than a year ago. The proposals of the Government for a general tariff will certainly ensure the balancing of our Budget, and will ovon provide a surplus which may be advantageously used for the relief of the present uneconomic burden of excessive direct taxation. As far as British trade is concerned, the outlook is undoubtedly brighter now that we have established our independence of the continued decline in gold prices. World trade, however, on which wo are largely dependent, is still under the influence of this decline, and no signs of its cessation have yet appeared. Nevertheless, the reversal of tho trend must, be daily brought nearer by the inability of the creditor countries to obtain payment, in respect of their foreign claims. Behind and above all these economic tendencies is the necessity of securing a final and satisfactory solution of the problem of reparations and international war debts. In spite of temporary disappointments and setbacks, there are strong indications that the problem is steadily becoming bitter and more widely understood. The world can never attain the level of prosperity justified by its own productive powers until this unhappy chapter of post-war history is finally closed." TIN IN NEW YORK. NKW YORK, March W. Tin (standard) futures, March, are quoted at 21.65 cents a lb., compared with 21.60 cents on March 21. AMERICAN WHEAT MARKETS. (' 1111'A(i<), Mmivll 'J*. Wheat.—March, sljj cents a bushel; May, cents; July, Mr cents; September, 137g cents. The New York quotation for is 63J cents.