BRITISH EXCHANGE

Taranaki Daily News, 10 June 1932, Page 3

BRITISH EXCHANGE

THE EQUALISATION FUND

DEFENCE OF STERLING. CHECK TO SPECULATION, A feature of the British Budget presented on April 19 was the announcement that a fund of £150,000,000, to be known as the Exchange Equalisation Fund, was proposed. The Chancellor of the .Exchequer, Mr. Neville Chamberlain, explained its purpose in the course of his speech. Mr. Chamberlain said that there had been a great loss of confidence abroad, which had led to large accumulations of liquid capital. The effect of the transfer of this liquid capital was to exercise a very disturbing influence upon the exchange, particularly upon the sterling exchange, which was no longer linked to gold. The tide of liquid capital had been setting very strongly in toward the shores of Britain, which was flattering to their vanity, but was sometimes a serious embarrassment to trade, and was apt to give rise to dangerous development. Nobody could say with certainty that the ebb might not set in presently, and therefore he had been driven to' 1 the conclusion that if they were to avoid violent and perilous fluctuations in the currency and to enable the country to function effectively as the main international centre of the world, it was essential to, hold adequate reserves of gold and foreign exchanges to meet a sudden withdrawal of short-dated capital and repel these speculative movements.

“I propose,” continued the Chancellor, “to wind up the old Exchange Account, and to use the assets as the nucleus of a new account to be called the Exchange Equalisation Account. “I propose to ask the Committee to give me powers to borrow up to £150,009,000 for this account. The details of assets in the account will not be published, but they may take various forme, either gold or sterling securities or foreign exchanges. That will give us a very large extended power of purchasing exchange. CONTROLLING FLOW OF CAPITAL.

“The new powers, combined with the powers already possessed by the. Bank of England, upon which the main responsibility for the management must continue to rest, will enable us to deal far more effectively than we have done hitherto either with an unwanted inflow of capital, or, if the alternative should again rise, with an outflow of capital from this country.” After explaining various technical points connected with the use of the fund, Mr. Chamberlain proceeded: “I may be asked, supposing that the power is given to the Government, will that be the final end to the fluctuations in the exchange, will that mean that the exchange will be kept at a fixed point, or, at any rate, that it will be maintained in a fixed range of value. “I am not going to give any such assurances. When you consider the economic’ disturbances which are still occurring in the world, and of which we probably have not even now felt the worst, it' is perfectly useless to pretend that we can hold our exchange where we like, independent of anything which is going on around us. “On the other hand, we can say this, that those who are charged with the conduct of our currency will be much better equipped in the future with this power to maintain the currency steadier than they have been able to in the past, and that to that extent we shall see a great advance. “There is another question: Will these transactions involve the Exchequer in any loss or in any considerable loss? It is a very conceivable possibility. We do not know what is going to be the future of gold prices. We do not know what settlement will be reached as regards reparations or war debts and other matters which are now disturbing the world. NO EARLY RETURN TO GOLD.

“These uncertainties rule out any possibility of our being able to return to gold immediately. We do not know when and in what circumstances we may return to gold. If in the long run we were to return to gold in such a way that the pound stood at a higher gold value than the average level at which purchases of exchange had been made, the transaction would inevitably lead to a loss. “This is the possibility, but it is not one that should deter us. We are merely seeking safety from an accounting point of view and we shall have to proceed exactly as we did in an earlier period, when we suspended the gold standard, between the years 1919 and 1925. “(But the pound, allowed substantially to take its own course, will be liable to fluctuations of every seasonable movement of trade, every outburst of speculation and every change caused by developments abroad. The problems of the present time are altogether different from those which faced us immediately after the war. In. my judgment the risks entailed by uncontrolled fluctuations of currency to-day outweigh the possible loss of the transactions I have mentioned.”

Commenting on the proposal as a whole, the Financial News of April 20 said: “The violent swing-back of the pendulum of popularity in favour of sterling which has taken place in recent weeks has made it very clear that only by the possession of very large resources is it possible to prevent violent fluctuations in the exchange which, if left unchecked, might easily have undesired reactions upon the price level. There is no doubt that, as it is, the Treasury end the Bank of England have had to engage such resources as were available for the purpose pretty deeply in the effort to stave off a dangerous rise in sterling. The present provision will furnish an ample reserve for such further action as may be necessary; its very existence will no doubt have a restraining influence upon the noble army of international currency speculators. NEED FOR MONETARY POLICY.

“Mr. Chamberlain was undoubtedly wise not to commit himself to the maintenance of sterling at any precise level and, from the point of view of the moment, he was right in saying that the present position of war debts,, reparations and other matters, ruled out any possibility of an immediate return to the gold standard. It is, indeed, unquestionable that while world gold prices are falling, as they now are, at the rate of something like 2 per cent, per month, we cannot afford to hitch on to gold again. But at the same time we must keep it well in mind that in the present stage of monetary civilisation no international standard except the gold standard is possible, and that it is more to the interest of this country than of almost any other that freedom of international exchange should be quickly re-established. We certainly, ought not to go into the Lausanne Conference without a predetermined monetary policy.”