DOLLAR AND POUND

Otago Daily Times, Issue 21987, 23 June 1933, Page 3

DOLLAR AND POUND

COMPETITION IN DEPRECIATION? A SWEDISH ECONOMIST’S VIEW. When Great Britain in 1925 returned to the gold standard a higher value for the pound sterling was chosen than would have corresponded to its internal purchasing power. The result (writes Professor Gustav Cassel in the Manchester Guardian) was some disadvantage for Great Britain in her 'external trade, her exports, being hampered and her imports artificially encouraged. On this ground the return to the gold standard has been very much criticised, and no doubt this criticism in some cases has been rather exaggerated, However, the British nation has become accustomed to look upon a high external value of the pound as a serious evil. This evil was increased both in actual fact and in the views of the public when France, in the middle of 1928, put her currency on a gold basis at a parity considerably below what would haye corresponded to the internal purchasing power of the franc. France derived some temporary advantages from this policy. The result was that other countries were induced more and more to regard a high external value of their currencies as a nuisance, and’ this feeling naturally gained particular strength in Great Britain, where the disagreeable effects of over-valuation became still more accentuated.

Such was the situation when Great Britain, in September, 1931, was driven off the gold standard. As a paper standard the pound sterling from that time had to share the general under-valuation resulting from the widespread distrust of paper standards. The dollar quotation of the pound sterling hot only sank below the gold parity but even fell considerably below the purchasing power parity of these currencies.

In England this low quotation of the pound was received with favour because it gave British industry a better position in international competition. The nation eventually took the view that its monetary policy ought to be guided by the aim of keeping the external value of the pound below the level corresponding to the internal purchasing power of the currency. When confidence in the British monetary system had been restored the international valuation of the pound naturally tended to rise at least to the purchasing power parity. British industry and trade looked upon this development as thoroughly prejudicial, and demanded that every effort should be made to prevent it. THE UNDERVALUED POUND.

Under such circumstances the Exchange Equalisation Fund was established in connection with the Budget of 1932. Officially the only purpose of this fund was to prevent undue short-term fluctuations in the external value of the pound sterling. As, however, the pound sterling at that time was considerably undervalued, efforts to stabilise exchanges were bound in effect to tend to maintain that international undervaluation of the pound that had come to bo regarded as an important weapon ,in the trade policy of the country. As a matter of fact, the pound was prevented from rising on the international exchanges to a value more in the neighbourhood of its purchasing power parity, and British producers accustomed themselves to looking upon the undervaluation of the pound as a most important element in the foundations of the new British commercial policy. This view was shared by the world at large. The difference was only that other countries, particularly those remaining on the gold standard, looked upon the undervaluation of the pound, as a serious drawback for the development of their trade, An undervaluation of a currency is in its nature one-sided. The other side of it is naturally a corresponding over-valuation of other currencies in terms of tire first currency. If other countries should endeavour to depress the international quotations of their currencies below purchasing power parity the result could only be a general struggle, with the gravest dangers for the stability of the world’s monetary system. The experiences of the following year were to prove this obvious truth in a most disastrous way. Endeavours to lower the external values of the currencies became more and more general, and contributed greatly to that final breakdown of the world’s monetary system which we are now witnessing. When, the United States went off the gold standard the usual reasons for such a step were absent. The country had the largest gold reserve in the world, it was a creditor country with a surplus balance of trade, its short-term debts had mostly been repaid, and it could be exposed to demands for gold from the outside world only to a very limited extent. If the country wanted a moderate internal inflation it could easily have accomplished that without abandoning the gold standard. A rise in the American price level. would no doubt have caused an export of gold, but such an

export was desirable in the interest both of the United States and of the world at large, as it would in all probability have been followed by a rise in commodity prices all over the world. No doubt the old idolatry of gold .reserves played a part in the United States decision to abandon the gold standard. Rather than release some hundred millions of her huge gold reserve she prohibited the export of gold, and thus sacrificed the gold standard for .the protection of which the reserve had been kept! It is a story that had become familiar from a series of examples set by other countries. Still it is clear that another motive played ail essential part in the decision of the United States to. go off gold. This, motive was a desire to bring down the external value of the dollar and thus to get rid of the over-valuation of the dollar which had been felt in the United States as a serious drawback to the country’s commercial relations with the outside world. More particularly it was felt to be important in the interest of the United States that the dollar quotation of the pound should be brought up from the abnormally low level at which it had been artificially kept. So sie United States -went off the gold standard, and the world’s monetary system was thrown into a confusion far exceeding anything previously known. NEED FOR STABILISATION.

In the light of this experience everybody should now see what disastrous consequences arise out of .the endeavours to ke«4> the external value of currencies below their internal value. Such a policy is obviously incompatible with any stability in the world’s monetary The first prerequisite for restoring such a stability is therefore a definite and sincere agreement' between all countries to refrain from any endeavour to depress the external value' of their currencies below purchasing-power parity. This is the first and most important concern of the World Economic Conference with regard to monetary as well as to commercial policy. It is obviously impossible even to discuss a restoration of normal conditions of international trade if we cannot start from the assumption that international exchanges will be left to find their natural equilibria in accordance with their purchasing-power parities.

The first step in order to bring about more normal relations in the world’s monetary affairs must naturally be an agreement between the United States and Great Britain to refrain for the future from any competition in lowering the external value of their currencies and to let the dollar value of the pound sterling settle at a level compatible with normal trade relations between the countries. Of course this level cannot be fixed until both countries Lave decided to what level they wish to raise their interna! prices. In this question their polled is parallel, and there should be no difficulty in attaining an agreement ns to the desirability of raising price levels and afterward stabilising them. If this can be done the problem of finding an adequate level for the pound-dollar exchange can be solved, and must be solved, if these great countries %re to be able to supply the pecessary basis of stability for the reconstruction of the world’s monetary system.