THE OTAGO DAILY TIMES WEDNESDAY, NOVEMBER e, 1929. MONETARY POLICY.

Otago Daily Times, Issue 20867, 6 November 1929, Page 8

THE OTAGO DAILY TIMES WEDNESDAY, NOVEMBER e, 1929. MONETARY POLICY.

The monetary history of 1929 is again illustrating in a striking way the close interdependence of all countries that was inevitably due to the establishment of the gold standard. The causes of the recent changes in the British bank rate are, of course, complex, but in the first rank of importance must be placed the rapid growth of American industry, encouraging a Stock Exchange boom, which, exaggerated as event's have no doubt shown it to be, could not have displayed,, the prolonged vitality that so much' astonished observers everywhere had it not been based on a real expansion of production. With this factor was associated the unwillingness of Americans to continue lending abroad on the magnificent scale of recent years. Tariff barriers impeded the flow of imports which normally would pay for American exports, and when foreign investment, the other method of maintaining the balance, was also checked, it was inevitable that the value of English and other European currencies in terms of American currency should fall, and that there should be a strong tendency to send gold to America to square the account. The Stock Exchange boom at the same time encouraged the flow of short-term balances to Xew York, where high interest rates could be enjoyed from loans to brokers, and this further stimulated the flow of gold to America. Under the pressure of this large outward movement of gold, the Bank of England raised its discount rate on September 26 to 6J per cent.—a high level which had not been touched since 1921. The effect of the change was to make London a relatively more attractive place of investment for persons who had liquid cash balances at their disposal. This no doubt to some extent diminished the volume of such funds available for speculation in Xew York, and, either for that reason

or because the Federal Reserve Board, which had been severely criticised for its inability to deal with the speculative outburst, was at last able to makn its influence effective, or perhaps merely because the boom had already gone too far and reaction was inevitable, the upward movement of American share values came to an abrupt conclusion, and the cables were filled with details of frenzied Wall Street excitement. Such feverish activities are liable to attract more attention than they deserve. The gains which speculators believed themselves to have made were often largely paper gains, and the dramatic losses, also, were often paper losses. The more important effect is that Wall Street no longer acts as a magnet drawing short term loans from abroad, and to that extent the pressure of the demand for American currency which sent gold from London to Npw York is relaxed. This no doubt partly explains the unusually rapid effects which the high bank rate has already had—so rapid that after only five weeks the Bank of England was able last Thursday to announce a reduction to 6 per cent. The outward movements of gold, it is said, have not entirely ceased, but they have been drastically checked, and as the dollar exchange, which previously stood well below 4.85, has now risen to nearly 4.88, it is certainly no longer profitable to move gold from London to America. The result, it may be hoped, will be an expansion of commercial and industrial activity in Great Britain, all the more active because the newi and more favourable credit situation appears to have been unexpected. Technical discussions of gold movements and discount rates are seldom much more intelligible than technical discussions of other subjects, and it is to be feared that they do little to explain the real significance of gold reserves, or to dispel the view that there is some magical efficacy about gold which makes it essential for every self-respecting country to have a stock of it, even if no one, except three 'or four bank officials, ever even sees it. An intelligent Martian might indeed be excused for failing to understand the childish practice of moving pieces of metal about, of which no one ever made any use, from countries that were reluctant to let them go to countries that were not particularly anxious to get them. Further study-would, however, show the Martian that there was rather more involved than appeared at first sight. The gold standard possesses, indeed, a double significance. First, it maintains practical stability of exchange between countries whose currencies have a gold basis, and this is obviously a great advantage to Great Britain, since foreign trade plays such an active part in her economic life. Secondly, while it does not ensure absolute stability in the value of money, it does ensure that such changes as occur shall be gradual, linked as they are with changes in the supply of, and the demand for, gold. Further, because it is now possible to control the demand for gold, the gold standard holds out some hope of real stability of prices, in the future. It is only because they are instruments in effecting these more general and fundamental purposes that movements of gold deserve study. With gold entirely withdrawn from private circulation, the most important demand now comes from the world’s central banks, and, as their standards of reserve requirements are largely conventional, joint action, which would make possible the maintenance of an appropriate relation between the demand for gold and the supply of it, is an objective at which bankers are being encouraged to aitn. Hitherto, indeed, they have shown a regrettable shyness in taking effective steps for cooperative action, and the increased bank rate in September was partly due to the independent policies pursued by the Reichsbank and the Bank of France. There is, however, some reason to hope that this hesitancy will disappear and that the new Bank of International Settlements, set up by the amended Young Plan, in connection with which the first meeting of the organising committee took place in Brussels six weeks ago, will provide effective machinery for translating into action the idea that currency control is no longer merely national, but has become an international task. Such action is indeed possible merely through the unofficial exchange of ideas by the central banking authorities, and it may not be without significance that the reductions of the British and German bank rates last week synchronised almost exactly.