“GOLD AND PRICES.”

Otago Daily Times, Issue 19952, 20 November 1926, Page 26

“GOLD AND PRICES.”

PROBLEMS OF THE FUTURE WORLD SHORTAGE ANTICIPATED. Written for the Otago Daily Times. By Hartley Withers. Are we faced with a scarcity of gold, and if it happens, will it mean falling prices, and do falling prices necessarily spell general depression and bad times? These arc questions that touch all of us nearly, and they were discussed fully by a very brilliant array of economists and banking experts, who lately gave evidence before the Indian Currency Commission. The volumes of evidence and appendices in which their views are set forth have. been published by His Majesty’s Stationary Office, and contain a mass of interesting and divergent information on the point. The question arose, because the commission had to decide whether it should recommend India to adopt a gold currency. On the evidence, the commission, though unable to arrive at any definite conclusion as to the future relation between supply and demand of and for gold, decided against a gold currency chiefly because of the risk of a prolonged period of steadily falling commodity prices throughout the world, unless great’ economy is exercised in the use of gold both as a commodity and as money. This view has been impressed on them by evidence received from Professor Cassel and Mr Joseph Kitchip. The latter, whose researches into this subject are well known to all students of currency matters, estimated in a memorandum which lie put before the commission that the balance of gold available for monetary purposes in the 10 years to 1934 must be expected to be much below the £54,600,000 and £49,400,000 of the two quinquennia to 1914, while the needs of the world will be much larger than then. In his oral evidence he described what will, in his opinion, happen in consequence, unless great economy is exercised in the use of gold. “You will,” he said, “have a long period of falling prices, reduced prosperity, and a lower standard of living and everything that, goes with it.” On the question of the gold supply few will care to question Mr Kitchin’s authority. Ou that of its consequences, those of ns who remember the period of falling prices which culminated in 1896, may venture to suggest that the result was not quite so black as Mr Kitchin paints it, on which point more anon. Before wc consider the consequences let us look further into the possibility of gold scarcity. Granted the prospective diminution in supply, there are two methods by which its effects can be modified so that scarcity does not appear. One is, the diffusion over the rest of the world of the great surplus of gold which has been accumulated during and since the war by the United States; the other is by a modification of the policy of central banks with regard to the structure of credit that they are prepared to base on a given quantity of gold, The first method has this weakness, that expert opinion in the United States is by no means unanimous as to the extent of the surplus. In fact, Mr G. E. Roberts, some time director of the U.S. Mint, and now vice-president of the National City Bank of New York, seems to deny that there is any surplus at all. He admits that since the outbreak of the war the United States has received approximately 500 million sterling, but lie maintained that the “outstanding credits and liabilities of the banks have increased in corresponding degree.” Fortunately, doctors disagree. Dr Sprague, Professor of Banking and Finance at Harvard, said that “in total wc have something between 1200 and 1500 millions (he was talking in dollars) of gold which might be withdrawn from the United States without necessitating credit contraction and lower prices.” Here we have a difference of something like 300 millions between the opinions of two well-qualified experts, but it is reassuring to note that the more optimistic Dr Sprague appeared to have the support of Mr Benjamin Strong, Governor of the Federal Reserve Bank of New York. As to the second method, there can be no doubt that much can be done by central banks in the direction of co-operation and pooling of gold stocks by which they would be enabled to economise in the use of gold and to base a larger credit struc-. turo upon their reserves. Mr Keynes, in the course of his evidence, argued that “the world’s demand for gold is just what the world chooses. ... It is just a

matter of taste how much of our gold we choose to make useless. . . . There is no rhyme or reason behind the present arrangement. It is a matter of taste and convention.” Thus we have plenty of distinguished authority for .the view that even if the annual output of gold falls off and the industrial and hoarding demand for It continues and even increases, there need not be enough scarcity of it, for monetary and credit purposes, to cause a continued fall in prices. And even if a continued fall in pric.s happened, need it involve the reduced prosperity and lower standard of living that were assumed by Mr Kitchen as its inevitable result? Some of us who arc fleeced with high prices might argue that a fall would rather tend to raise our standard of living; and it is known that in the time of the fall last century wage and salary* earners profited by it because prices fell faster than wages and salaries and the fall in interest rates which accompanied the fall in prices enabled a great conversion scheme to be carried out, to the relief of the taxpayer.

It may bo granted that rising prices tend to stimulate enterprise, but economic progress was by no means killed during the period of the fall. In fact, Professor Gregory was prepared to maintain that it was then considerably greater than it is now, and was inclined to say that some currency authorities, in arguing for the stability of the price level, have rather overlooked the point that is stabilising the price level, some mechanism has to bo devised to give the consumer the benefit of lower prices which increased production brings about.” It is indeed pleasant to find someone remembering the claims, or the needs—for he never has the pluck to make a claim—of the poor old consumer.