FINANCE AND TRADE

Southland Times, Issue 19546, 9 May 1925, Page 10

FINANCE AND TRADE

THE' GOLD STANDARD (From our Financial Correspondent.) WELLINGTON, May 6. The British Empire is now back to the gold standard, and it may be worth while considering what this means. Somtf people no doubt, fancied that with the reversionto the gold standard there would immediately follow a rise in prices and a substantial reduction in the exchange rates and that sovereigns would at once be put into cirJ culation. None of these things have hapj pened in New Zealand so far, but there i will certainly be some changes and move- ; ments presently. There is high authority | for the statement that the two desiderata i of trade are stability of prices and stabii lity of exchange. Before the war when Britain was on the gold standard stability ; of prices was sacrificed for stability of exi change. Gold is the anchor of values, a sort ‘ of leash which holds the economic system in cheek. Gold has no inherent power of , restraint; we could get the same results with any other metal or thing which pos- | sesses, or could be invested with the same ; qualities, but gold is by common consent ; and long usage the metal which most satisfactorily represents the ideal standard of value. It is denied that gold is actually a standard of value, because the value of gold ‘ does fluctuate, that is the quantity of commodities that a given sum of gold will buy ' varies, but the movement in gold values is slow and imperceptible at any rate, the variations cannot go beyond the boundaries. With the forced abandonment of the gold standard during the war, the world entered upon a period of unstable prices and unstable exchanges. It was this instability I that made trade so extraordinarily difficult, ' and so extraordinarily risky.' [ The return to the gold standard means : the lifting of the embargo on the export of ■ gold and will enable international balances | to be settled in the yellow metal should j that be necessary—already the Bank of j England has been drawn upon for £397,000 I by Switzerland, Holland, India and Egypt. Shipping gold from one country to another I involves a certain cast, for there are freight, insurances, packing and incidental charges, also interest on the money for the time it is in transit—this is known as the gold point, the point at which it is more profitable to ship gold than to effect transfer by voucher, that is by telegraphic transfer or by bills on demand or other method—the exchange by voucher under normal conditions should rule below’ the gold point, and should therefore be fairly stable. Stability of exchange means less hinderance to international trade and financial relations. Exchange stability is in the nature of a convenience which adds to the efficiency of importers and exporters. The reversion to the gold standard does not meet with the approv:4 of all economists and financiers—Sir Frederic Wise, a ; financial expert described it as a gamble j and likely to benefit the United States alone. Mr J. M. Keynes, the eminent economist wrote very strongly against the scheme in February last, and in his article which appeared in the “Nation and the Athenaeum” he said:—“The removal of the embargo amounts to an announcement that sterling is at parity with the dollar and will remain so. I suggest that the right order of procedure is to establish the fact first and to announce it afterwards, rather than to make the announcement first and to chance the fact. He was of opinion then that steps should be taken to achieve parity by raising the bank rate and checking foreign issues. As a matter of fact the bank rate was raised a few days after the article appeared but that was done because the Federal Reserve Bank of the United States raised its re-discount rate'to check inflation, and the effect was seen in March when there were a succession of crises on the Stock Exchanges, there was a slump in wheat prices, in corn prices and in hog prices, and probably in other food prices also. | The return to the gold standard although ; extremely desirable places a very serious responsibility on the Bank of England which i is the custodian of the British gold reserve, I but we may safely assume that all the safei guards that human foresight could suggest 'have been provided, and it was perhaps a { masterly stroke Lor the bank to have aci cummulated in America the whole amount ’ required this year for the discharge of Britain’s debt to the United States. With this out of the way, it is merely necessary to provide for the requirements of international trade and finance. New Zealand like Australia has joined Britain in this venture and one wonders what advantages or disadvantages will accrue as the result. The exchange rate, London, or New Zealand, will no doubt be reduced, but the banks, in the Dominion are not likely to make pronouncement on the subject until some

definite decision is reached by the banks in Australia. Our banking system is closely linked with, and dominated by that of Australia. jour of our banks are controlled from the Commonwealth, the National Bank of New Zealand is controlled from London, and it is only the Bank of New Zealand that is controlled locally, but it would be unfair to expect the Bank of New Zealand to £ct independently of the other banks in so important a matter. New Zealanci*exporterg, and that means the great body of producers wall benefit by any reduction that may be made in the exchange rates, but importers who have enjoyed preferential treatment will be called to pay a fair rate. The disturbing feature of the present situation is the probability that borrowing in London by overseas Governments and local bodies will be discouraged. If Australia and New Zealand are permitted to borrow freely in London, the credits thereby accumulated would, under certain circumstances, enable thenf to withdraw gold from London and thatfis just what London financiers wish to see prevented. Those who are expecting to see prices of primary products advance as the result of the reservation to the gold standard are likely to be greatly disappointed. The price level in Britain must be kept down, at all events, it must be kept below the level ruling in the United States otherwise a further advance in the bank rate must result and that would be detrimental to British trade and industry. In the long run when the necessary adjustments are effected it will, be found that Britain has taken the wise course in reverting to the gold standard, for the moral and psychological effects must be far reaching and beneficial. SELLING COMBINATIONS One of the effects of the war was to give producers of foodstuffs and certain raw materials an entirely fictitious idea of values. War prices were artificially high prices, for there was only one buyer for such commodities and this buyer possessed a long purse. The slump of 1920-21 gave the producers a shock and aroused them to action. Since then producers in New Zealand and Australia have organised what may be termed selling combinations, atjd the Wool Committee and the various Control Boards set up in New Zealand, and the wheat pools, Meat Council and Wool Couni cil in Australia are illustrations. In Aus- . tralia the wool brokers, finding the price iof wool falling promptly curtailed the I volume of offerings by 50 per cent, and I now there is a suggestion of abandoning the [sales fixed for the current month. The | Adelaide sales have been actually postponed ! because of the heavy falkin values and the ; absence of substantial buying orders. For i years the rule was for producers to meet the market, that is to sell at the best price offering on the day of sale, but now the j policy appears to be to hold prices above i the natural level of open market values, j and to eliminate the speculator. It is a i well-known fact that no matter how high I the price of wool, or meat, or butter may I be many farmers will persist in demanding higher. At the present time there ' is wool in the stores of New Zealand, and [which must be held in store until November i next which could have been sold at good i prices during the season but which now | would fail to realise within several pence the prices previously offered. The limitations of ! offerings and curtailment of shipments rej stricts the free competition sellers and j the buyers are harassed and hampered in : their business. Selling combinations like j buying combinations aim at extortion, and I anything in the nature of extortion on ; either side must, in the long run be harmj ful to both., A natural balance between the two is desirable, and that natural balance can be preserved only by free competition :on the part of both sellers and buyers. ; Organisation is one thing and “extortive | combination” another. There can be no obi jection to organisation if it means placing 1 the products in the most attractive way : before the greatest possible number of ; buyers, but extortive combination for the ; purpose of restricting supplies and elimin- : ating personal control of "personal property !is not legitimate organisation. The absolute i control proposed to be gxercised by the i Dairy Control Board is nothing more than lan attempt at extortion by combination, ■ and the scheme involves a dangerous usI urpation of power. The efforts of the Dairy 1 Control Board under absolute control will : be directed towards maintaining high prices, | or artificial prices, and the method will be •by withholding supplies when prices fall, i and thus creating an artificial shortage and ; forcing up prices. This policy may succeed ' for a time but in the long rUn it will end jin failure.' An unnaturally high price cur- ' tails demand as fewer people can afford to i buy. There will be a “maintained price” ! working against an ever-increasing supply, accompanied by a diminishing demand. Absolute control in theory, and on paper appears very attractive but as it means extortive combination it is bound to result in failure, if not in disaster. The men selected to control the marketing of butter have not the knowledge, the commercial training or the breadth of vision to make a commercial"' success of a highly ; hazardous scheme.