THE GOLD STANDARD.

Otago Daily Times, Issue 19476, 11 May 1925, Page 14

THE GOLD STANDARD.

TO THE KDITOIt. Sin, —Your lending article in Saturday's i.-isue on the amotion of gold deals with a subject which very few understand, and upon which tho highest authorities are iar hum unanimous. J.o llie aveiage reader tne gold standard is a mystery. One of tlie main reasons why the subject is so obscure is that the currency forms the main centrilugal toree in our industrial and Commercial B>stem and cannot be understood or explained apart from tho objective wJuch the function 01 the currency must fulfil—a lact winch shows us that a comprehensive acquaintance with economic science is necessary in order to understand clearly tho function oi gold. In your leading article your say: 'An important question is the iulluence of the gold standard on the general level oi prices. Any sharp fall of prices would undouDtedly handicap business and increase unemployment. ' Again you say: "It would be idle to deny that the situation is without its risk. These . statements evidently rest upon the cognition of the governing iulluence exerlea uuon prices by the volume oi currency in circulation. btou anticipate an injurious influence from a fall in prices from a complete restoration of the free circulation oi gold, and presumably .it is for the same reasons that Mr Churchill fixes the demand for gold at 100 ounces to counteract this adverse influence. But a little reflection will show us that these conclusions aie not well founded. In tho first place, the general price-level is maintained solely by the volume of currency in circulation, prices rising when the volume is abnormally increased, and falling when it is abnorma..y decreased. Tho active factors which bring these changes about are, however, not controlled by tne gold standard which under the free circulation of gold does not reduce the volume of currency in circulation, but rather tends to increase it. As the restoration of the gold standard does not involve a reduction in the volume of currency in circulation, prices cannot be affected in the direction you anticipate. It has further to be remembered that the function of gold as a standard of value is something totally different from the function of gold as a medium of exchange. Inspecting it as a circulating medium you very correctly state: "There is nothing to be said in favour of restoring gold as the egncral medium for internal business transactions." This phase of the problem can, therefore, be dismissed from further consideration. As you state, "The function ot gold is through the maintenance of convertibility to put a check on the issue of paper money, and through freedom to export and import to stabilise the exchange rates." It is this part of the problem that claims public attention. It is claimed by the authorities that the British monetary system rests upon a gold standard or foundation of gold. Nothing could be further from the facts. If such was the case there would have been no necessity to stop convertibility. The facts are that previous to the suspension the actual amount of gold in circulation was only 1J per cent., with a gold reserve approximately 20 per cent, against £IOO of liability on the part of the banks. Obviously the free operation of the gold standard previous to the war had no controlling influence in preventing the issue of paper money, as tho general level in world prices had shown a steady rise during the 10 years proceeding tho war when convertibility was free. Light is urgently wanted to show us in what manner the gold standard operates as a check upon those who are responsible for an over issue of paper currency, and youiquotation from Dr liarle Page is significant of how eminent authorities have different mental conceptions. This makes you wisely remark. "The position will require constant watching The necessity for 'managing* a currency does not disappear when its gold basis is restored."—l am, etc., W. Sivertsen. May 10.