GOLD CURRENCIES

New Zealand Herald, Volume LXXIII, Issue 22543, 7 October 1936, Page 7

GOLD CURRENCIES

DEVALUATION MOVE PROBABLE WORLD EFFECT INFLUENCE ON PRICES FREER TRADE FAVOURED BY PROFESSOR A. n. TOCKKR, Canterbury College The devaluation of currencies in the throe loading gold standard countries of Europe, the only three that have maintained tho pro-depression gold standard intact without severe exchange restrictions, marks the most important monetary change since tho United States devalued in 1933. It marks also the practical completioin of victory for tho expansionist over the deflationary school of thought. France, Holland and Switzerland have all suffered severely from tho depression. They have suffered most since Britain suspended the gold standard in September, 1931, and, rightly or wrongly, regarded the worst phases of depression as due to the abandonment of tho stable monetary standard by other countries. They considered stability of exchange as essential to world recovery, and strove to maintain stability on tho gold basis within the narrowing circle of the gold bloc. At the time of the London Economic Conference in 1933, when the dance of the dollar threatened general exchange chao3, the gold countries issued a joint statement asserting their determination to maintain their existing gold parities at all costs. But events were too strong for them. While the sterling group of countries, Japan and the U.S.A., all of whom had depreciated their currencies, gradually emerged -from their difficulties and moved toward normal prosperity, the gold countries sank deeper into depression. Their trade contracted, their prices fell, their unemployment figures remained high. In spite of effort to maintain internal production by protective and nationalist measures, including tariffs, quotas, embargoes, etc., conditions became worse, and gave rise to serious political difficulties. Fall in Wholesale Prices In all these countries the average fall in wholesale prices between 1929 and 1933 was about 35 to 40 per cent, about as much as in the United States and Canada, and considerably more than in Britain and Sweden. But while in the latter countries prices rose and conditions improved greatly from 1933, in tho gold standard countries prices continued to fall, and in most cases were lower in 1936 than in 1933. Devaluation is an effort to escape this position and to establish a new basis for internal recovery. The agreement reached between the three leading monetary powers, Britain, France and tho United States, provides for the exchange stability required to promote expanding world trade from which all expect to benefit. The effects of tho proposal may be illustrated from the case of France.

The unit of currency .in France is the franc, which, though usually paper or silver, represents and is exchangeable for a fixed quantity of gold. Before the war, when the exchange was 25.22 francs to the pound, the gold content of the franc was 4.48 grains. After the war it was devalued, and the gold content reduced to .91 grains, and the ■exchange rate became 12-1 francs to the pound. Now the gold content is to be further reduced, perhaps by 25 per cent, to, say, .68 grains. Holland and Switzerland are likely to follow suit. The United States dollar content was reduced in 1933 by about 41 per cent. Franc-Dollar Exchange Parity The relative amounts of pure gold represented by the dollar and the franc will determine, in the future as in tho past, the gold parity of exchange between dollars and francs. These amounts will also determine the price of gold in the respective countries. Given exchange rates fixed within narrow limits between Britain, the United States and France, then the British price of gold will also be fixed approximately. The effects of the agreement made are two-fold. On the one hand it effectively stabilises exchange rates, fixes the prices of gold, and provides a basis for a general restoration of gold standards at new parities which should give ample scoi>e for monetary expansion to finance trade and price increases. On the other hand, the gold bloc countries adopt the method of monetary depreciation, which has precoded recovery, first in Britain and the sterling area, next in Australia and New Zealand, later in the United States, and more recently in Belgium. Assuming the old rate was 75 francs to the pound and the new rate is fixed at 105, France is taking almost exactly the step New Zealand took in January, 1933. But while New Zealand depreciated her currency 13J per cent below its existing level with sterling, France is -depreciating about 25-30 per cent below the existing gold level. The first result will be that, whereas France was getting 75 francs for every £-1 worth of goods sold in export markets, she will now get 105 francs. Conversely, where she formerly paid 75 francs for every £1 worth of goods imported, she must now find 105 francs. Encouraging Exports The immediate effect of the change is thus to encourage exports, discourage imports, and restore a favourable balance of trade. But since, in the long run, external payments will balance approximately, at any level of exchange, the ultimate effect must be to raise French prices in relation to world prices. It is anticipated that the restoration of a favourable balance of trade and the movement toward higher prices will stimulate recovery in all the countries concerned. It is reported that the agreement includes provision for removing or lessening the present barriers which shackle internal trade and which are the principal present hindrance to general recovery of prosperity, if, for instance, Britain can sell more to I'ranee, then more British workers can bo employed producing for French consumption, and more French workers can bo employed producing the goods sent to Britain in exchange. In this way freer trade begets increased production, more employment and fuller standards of life. The events of recent years have shown very clearly that recovery cannot bo promoted by impeding trade and restricting production, while it is promoted by freeing trade and encouraging production. New Vested Interests But in every country new vested interests have grown up behind the trade barriers imposed during the depression in the form of quotas, embargoes, higher tariffs, etc., and much local pressure will have to be overcome and many internal differences settled before the emergency measures of the depression period are swept « away. Their lemoval would do much to promote general prosperity throughout the world, but in present conditions it would be optimistic to expect any rapid change or reversal of trade policy.

At the same time it must be recognised that an important cause of trade barriers lias been removed, and the road opened to escape from the depression which lias caused much of the recent political uncertainty in Europe. Stable exchanges, freer trade, and the beginnings of recovery for the depressed gol<l countries seem to bo assured by the agreement, and all these should greatly improve the chances of maintaining peace and furthering prosperity. Now Zealand is particularly interested in two special effects of the new policy, the effect on the price of gold and on the. level of prices received for her exports. The price of gold is fixed in anv country that remains on the gold standard. In the United States, for instance, the dollar represents one thirty-filth of an ounce of gold, for the price is lis dollars an ounce. If we divide the sterling-dollar exchange rate into .'55 dollars, we get approximately the sterling price of gold in pounds per ounce. At 4.86 dollars per £1 the par price is nearly £7 4s sterling; the market price is usually Is loss because transport costs must be paid when London is exporting to America. If the exchange is 5 dollars the net gold price in London is about £0 19s per ounce; at exchange of 4.70 dollars it is about £7 Bs. It seems unlikely then that the price of gold will fall below £7 sterling per ounce, and the price will probably be fixed somewhere about this figure and will remain fixed for the indefinite future. From 1816, when Britain adopted the gold standard, to • 1914. when it was suspended for the war, the sterling price of gold remained very close to £4 5s per fine ounce. Similar stability is probable while the new agreement remains in force. It is more difficult to estimate the effect on New Zealand's export prices. The importance of the agreement is shown bv the fact that already other countries, Latvia, Greece, Turkey, are adjusting their affairs to the changes. Others appear likely to join the croup until most of the world's exchanges become stabilised and the trade handicap imposed by instability and insecurity is removed. The ultimate effect is likely to he more trade and more prosperity for all. Effect on London Market The immediate effect, in Britain and countries dependent on the British market, may not bo so favourable. There has been a heavy flow of European gold currencies to London. This has made money abundant in London, lias kept down short interest rates and kept up the prices of the securities in which this foreign money was invested. Much of this money is now likely to be repatriated, and substantial profits taken in its home currencies. Its removal seems likely to contract monetary supplies in London, and to stimulate a hardening of short money rates and a fall in security prices. It is probable, of course, that London has taken some steps to offset this tendencv.

Tt must be remembered, too, that while the effect of the agreement is to depreciate the gold currencies in terms of sterling, ■ dollars, etc.. conversely it appreciates sterling and dollars in terms of the gold currencies. Price levels in the gold countries are likely to move up, relative to levels in other countries; conversely prices in other countries may move down relative to levels in the gold countries. When Britain appreciated her currency and restored the gold standard in 1925, the general effect on New Zealand was a fall in export prices. At present the gold countries, including as they do both the French and Dutch colonial Empires, exert an appreciable influence on world trade sind world prices, though an influence far less than that of the rest of the world, which includes the sterling and dollar groups. The general effect of relative currency appreciation will be in the direction of lower British prices, but that effect might be offset by the greater weight of trade in the sterling, dollar and other countries, as well as by any positive measures taken to meet the changed situation. New Zealand Export Prices

It will be interesting to see whether the new situation has any effect on next season's wool sales. New Zealand's direct exports to the gold countries are not large; France took £1.250.000 (Now Zealand) in 1934. But it is a recognised fact that at auction sales the marginal buyer sets the price and the activity or otherwise of one buying country might make an appreciable difference in the results.

In order to buy about 24s 9d (Now Zealand), or £1 sterling's worth of wool in the Dominion, the French buyer will have to pay this year about 105 francs in his own currency, instead of about 75 francs under last season's exchange rates. Where the products manufactured from New Zealand wool arc exported by France, the extra outlay will be recovered from the higher exchange rate, but whero they are sold for consumption in France the recovery is not assured in the same way. Hence the countries whose exchanges have now been depreciated may set lower buying limits. On the other hand, of course, it appears probable that, for other reasons, Japan will bo a keener buyer. The- New Problem Set

Such considerations illustrate the type of new problem set by the devaluation. The ultimate effect should bo to promote greater stability and security, freer trade, increased production and prosperity throughout .the world, to lessen political difficulties and provide a sounder basis for peaceful international co-o|>cration. The immediate effects will be to start a movement toward rising prices in the countries that have devalued, but this movement might bo balanced in part by some temporary setback to the rising trend of prices in other countries. Of these Britain and the countries dependent on Britain, being most closely concerned with world trade, appear likely to be most readily affected. Possibly this is the chief reason why Britain nppears anxious that the rate between sterling and the dollar should not be unduly high.