The Seven Business Virtues

New Zealand Times, Volume LII, Issue 12093, 21 March 1925, Page 10

The Seven Business Virtues

A Striking Article

By

Lord Riddell

"THE ONLY WAY" RESTORATION OF GOLD STANDARD THSFRiISK OF UNSTABLE OURv BsiNcr and exchange. The exchange valuq ,of the paper pound is now about life SB in gold—-a higher level than at any time since Armistice —and, there can be little doubt.that the commodity value of sterliitg -is only, slightly below the gold value. Although'- it might he potable to devise, a system of paper money whioh, in theory, would remoye.gonie of the imperfections attaching to ihe gold standard,’ the experience df countries throughout the world during and l since the war has tended to discredit paper roi&ney,, unless hacked by real valued, and a widespread feeling exists that a .return to the gold. Standard- is necessary,- in‘order to restore those stable .'Conditions which must precede any appreciable improvement in international trade. Instability of currency and exchange introduces a considerable measure of uncertainty and risk into all transactions expressed in monetary terms, especially id the case of forward business, ana it is very desirable that money should again function, not only as a. medium of exchange, but also as;a , reliable store 'of value. In the Past, most of the countries of the world 1 hath secured relative stability in price* and exchange bv means of an effective gold standard/-and for all practical purposes gold remains the only . acceptable .medium of, universal exchange. The desire for stability is not confined- to 1 one country, hut .extends throughout ‘the world, >nd many Governments have already'l token, or are -taking, steps with *T inew>to,-linking their : currencies onto inofe- itdi.gold. The position of London as jWorlcFa monetary centre and the imftiffSnce ,s|rf our‘international • trade make -it .tosehtial -■ that' this country should play a leading part in helping to restore • toe pre-war machinery ae Goon as possible. THE DOUBTING ONES. There are, however, a number of people who view the prospects of a return to the gold standard with some misgiv- . Ing, toe principal reasons for this-at-titude being: r ‘ 1 ; -(1) The fear that it might, in. practice, prove necessary to revert to. in* convertibility or. alternatively,- that it tjpght only he possible to maintain 4 fete gold market by means of priofe.de-' fiat-ion And/or high interest rates) (2) The'feeling that as the wprld’s told is now very. inadequately distriuted and the factors affecting the supply of and the demand for it- are so changed, the metal may be subject to severe fluctuations Iti tertbs ofcommQdities. It is true that; our ability to maintoip i.tofe gold-standard involve* not only that the rate should. reaSh 4.86 2-3, hut that we should, bfe able to keep it at or near that flgiife without undue i neonven ienoe, and .it is, therefore, of interest to examine the fac- ; .tors responsible for the recent rise in the rate. These-'Various aspects of the return to a- gold standard were dealt; with at r wmiefslength by our chairman, Mr :FC. floidenmtgh'. in his 6pee:-h at the ' .ordihafy-general meeting of the shaieholdms .of this bank, wn«n he pointed out that the' low interest rates -ini America, the acceptance of the Dawes report-, the determination of many Continental countries to balance their budgets -a%d to stabilise their currencies, and the general improvement. in conditions in Europe, have all- been favourable to sterling and haye ted to a very considerable increase in American. rnxestments in Europe,, as wel 1 ‘astto.rthP .transfer of American funds to the. Don don market. " Sterling has also Been purchased Speculatetely for a rise, and although gome of these itt.fluenres, being of a temporary character, may lead to some reaction, there can be no doubt as to the imprertj?gnent in the- real value of sterling, tn further support of this statement, Mr Goodenough mentioned the substantial -reductions in the National Debt and the conversion of short, dated ’ into longer dated securities. The industrial outlook, he stated, has also improved, as'a result of Sotand credit and greater purchasing power abroad, while the absorption of manufactured -docks and raw materials left over from the war, and the writing off of’ heavy losses incurred 44 a result of the trade slump, have made the outlook > much, clearer and more hopeful - than was the cdso- a .yoai* ‘ag0.... It;must r,l?o ho remembered that,, although- our oveix.eao IrAdiiig opnratioy s for - t. vaar, evhti when MlowSiice kfiriadeufor invisible* items, bnly shhw a margiSdof ■ telout £29.000,000 iu ‘oiir favour, Vet •••toe probability ia that .t^is-scetratry, - .-with returning“ Confidence, has added , effhatifetiaily to. its sopnewhat, depleted ittocks, 'especially during <the. latter ' fisgrt-y»fi *he year. - Aa> analysis'' Of shbws, as Mi- Good“wfe are'cerisaialy regaetMjFtw our . position in tod fidldtof .uitejinational .trade,' had although the 'vpiurMiS'/'of our -exports fe’to-day tlian ; m -1913, yet car percentage- of Vh'e'-.-woiflrt’S total,exportuiSap is probahly.as great, if* not-greater than, be-fore.-the wan” * - At PARITY? - V 4il-, these favourable features suggest* that it may -'hot be long before sterling is once more-quoted at parity with the dollar, arid Wheh this position is reached the question of restoring our free -gold market will more deli nitely arise. In this connection. Mi Goodenough considers that it is of the greatest importance 'that there should no an early return to a free gold market for London, but he emphasises the need for “caution and the necessity of providing sufficient Safeguards against the possibility of having to i evert to restrictions On gold, or to impose unduly high rates for the protection of our gold ■- reserves. Tlie gteat safeguard against the mismanagement of the old position is that the dangers which might result if such mismanagement occurred are so widely recognised. In connection with the question of facilitating the return to a gold standard by the various coun tries of the world, the Genoa Conference recommended that at a suitable time, an association of central banks, not necessarily confined to Europe. • should he formed. The purpose of tern | convention would be to centralise and co-ordinate the demand- for gold and so avoid those wide fluctuations in its purchasing power which might otherwise result from toe simultaneous andcompetitive efforts of a number of i countries 'to\ secure -metillje i reserves. It was further suggested that the convention should embody tome moans of

economising the use of gold -by maintaining reserves in the form of foreign balances, such, fer example, -as the gold , exchange standard, or an international clearing syktem. It may be that some arrangement of this Sind will ultimately be necessary in order that the value of gold may he kept reasonably constant, as it would be .very unfortunate if a redistribution of the World’s gold supplies were so- mishandled as to cause sharp variations in prices and- in consequence involved serious dislocation to trade. Difficulties of this kind, however, would in all probability he only of a temporary character, as when once toe redistribution had taken blade and only normal stocks were held by all countries, the danger of' serious fluctuations would he Appreciably diminished. FLUCTUATING CURRENCIES Oh' OTHER COUNTRIES. Although when a free gold market has been established in this Country British traders may still he handicap, ped by the fluctuating currencies of other countries the piobability is that once England has returned- to gold, a number of countries Will adopt a similar course, and ah conditions generally become more stabilised and the advantages of a gold standard ate mote elear'y demonstrated, the circle of gold standard countries should gradually widen. • .The conclusion would seem to he that, although before a free gold market is actually established many fat-, tort will have to be given the fullest* consideration, among the most important of which is the • question of out future Currency arrangements, the prospects of the removal of - c he tesirictiona on gold exports are much more favourable than they have been for a long time past. While. Mr Good, enough expressed the opinion that the , return to a free gold market should not be unduly forced, since it will certainly follow thy economic factors now working in our fa.vouf, he- amphasised%fhe desirability of returning, subject to proper safeguards, to a free gold market fig soon as possible, for he stated, “a free gold market- for London is the surest guarantee for stability in world prltes and for confidence, heth of which are essential to good trade.” . He considers that cooperation with America is mportant, hut emphasised that we haye . over of cipltsl invented abroad, notwithstanding the great sacrifice of foreign inVestmenfe which we made for the pur* Ppse of carrying on the war, and that these investments and our export trade together ate the best guarantee for ou t being able to maintain a free gold rjjaricet when once it. has bees estfcbTH® PURCHASING PARITY. It »■ Sometimes urged thfet it would be undesirable' for this country to return to a gold standard until toe disparity between the British.ami American index numbers has -been removed. This argument, however, teems to, attach to index ntimbers for too much importance. It is true, that if fe free gold market is to be maintained, it is essential that the relative purchasing power Of dollars fend sterling, calculated on the basis of p. par exchange, should be -approximately-equal, but it ie practically impOssMei to decide in the abstract What the existing purchasing parity actually. is. Calculations based upon index numbers alone -are apt to create a very wrong irirpressioh. In the first place, so many index Cumbers exist arid their results frequently differ to materially, that' it is difficult to decide which particular index numbers, should be selected. In addition, most index numbers cover wholesale commodities generally, whereas, for toe purpose of estimating a purchasing parity, only, commodities entering into international trade should he taken into account. Mr Goodeno-ujto. in his recent speech to the Shareholders of. this bank, pointed out tool it is possible that at tnfe mopient the real purchasing .power of the pound, may be higher than Would appear from a comparison of Index numbers, whioh he stated can only be an approximation, because their preparation involvea very precise statistics covering not only the correct commodities, but accurate alloWahces. for the relationship Which each commodity bears to total. exports. tt is obviously impossible to prepare index numbers which are unchallengeable. It is noticeable that a country's index numbers. WhCh prepared by ih- ] dependent parties, rarely agi-ee, and, owing to the different bases adopted, the disparity is apt to he much Wider when different countries are concerned, even when the actual .prices are on a cowvmort level. Further, the bulk of British exports consists of manufactured goods of very. diversified kinds and Qualities, and if index numbers, based upon standard commodities, can only, be an approximation, it is still more difficult to establish reliable index numbers Covering the Whole range Of a country s manufactures. IndeX numbers must also be affected by atic-h factors as the cost of transport and other charges iA respect. of the .movement qf -goods and also by such influences as tariffs, PRICES AND THE ACTUAL RATE. A study of the movements .of exchange and prices eihee toe LondonNew York exchange Was decontrolled in March, 1919, makes it quite Cleat' that while changes in the relative price -levels -are, over a long period, reflected in tlie exchange quotations, yet "toe index numbert afford only a vefy. approximate guide as to what the actnal rate should be at any given moment. In an amended table, figures covering export commodities and commodities generally-arc given separately and while, in theory, the actual exchange Should tend to approximate more Closely to the purchasing parity calculated on tile export index numbers, the purchasing parity, calculated on the general index numbers, is, as a rule, much nearer to-the actual rates ruling from time to time. How approximate the results -based o.u index numbers must be, is indicated by toe fact that in April, 1920, when, according to export trices, tlie purchasing parity stood 1 at .72, the average rate of exchange during that month was 3.931, while Oh the ether hand, in October, 1922, the purchasing parity was 5.32 and ihe actual rate was only 4.43 J. Eurther. be-tween-January and October, 1922, the purchasing parity advanced from 4.27 to 5.32, but the actual rate moved oflly from 4.22 to 4.43 J. Taking the figures prior to April, 1924, three distinct tendencies are revealed. In the first period, extending from the date of de-control Until December, 1920, toe exchange was, with