ECONOMIC CYCLONES

Taranaki Daily News, 3 May 1933, Page 7

ECONOMIC CYCLONES

AMERICA’S PRESENT CRISIS PROBLEMS CONCERNING SOLVENCY THE OUTLOOK FOR THE DOLLAR. There are cyclonic storms which ravage an area, pass on in their destructive track—leaving a lull— only to return with unabated violence, said the Economist of March 11 in an editorial on the latest American crisis. Of such a type is the economic cyclone which now for three and a-half years has been circling with devastating efforts around the world. For this week’s financial breakdown in the United States, which has left the greatest economic unit in the world temporarily without a banking system or means of payment for the ordinary business of life, derives directly in sequence from the collapse in Wall Street during the autumn of 1929.

That collapse, marking the beginning of a catastrophic fall in the value of securities and—still more important—of commodities, raised a storm-wind which, sweeping across the Atlantic, fell first on Germany and Central Europe, and then, in the “crisis of confidence” which ensued, drove England off the gold standard. Wheeling in its course, the storm has now re-crossed the Atlantic, leaving behind it a Continent impoverished yet struggling to carry on amid the wreckage, and has revisited the centre from which it first sprang. The cyclonic circle is complete. However great may be the powers accorded to Mr. Roosevelt, they can hardly exceed in scale the magnitude of the problems which he has to solve, said the Economist, It is a truism of banking experience that "panics pass.” But in the situation which faces the American Government the problem of restoring confidence in the safety of savings deposited with the banks is complicated by the fact that so far as we can yet judge, none of the various means proposed for increasing the volume of available currency surmounts the cardinal problem of solvency—-the crucial fact that many thousands of the 20,000 banks which up to last week-end were functioning in the United States are in plain truth bankrupt, since their assets have become unrealisable or have shrunk disastrously owing to the slump. This problem of solvency, we suggest, Is the touch-stone of America’s present crisis. The crisis, that is to say, differs essentially from that in which England was involved in September, 1931. Our trouble was caused by the recalling of foreign funds on a scale which we could not meet either from our gold reserve or from quickly realising assets. In America’s predicament there is no question of a flight of foreign funds menacing the stability of the currency. The root of the trouble is domestic and, given a remedy (which does not impair confidence in 'the currency) for the internal banking weakness, the dollar is not directly menaced. But when we lay our finger on the banks as the seat of the disease, we should do well to bear always in mind that—apart from weaknesses in the characteristic structure of American banking with its multiplicity of independent units—the solvency problem has its origins simply and solely in the catastrophic fall in the price level. Unless and until there is. a recovery in prices, the task of completely “unfreezing” America’s banking system is ultimately insuperable. OPPOSING INFLUENCES. Does this mean that President Roosevelt will follow an inflationary course as the only road out of the impasse? Time will show. He is clearly being pulled by opposing influences. There are those of his advisers who would persuade him to follow conservative “sound” lines and limit assistance to “credit-worthy” banks, even though the irretrievable failure of the remainder spell a long period of reduced purchasing power, shrunken business activity, and a further fall of prices in the United States. For the moment, this is the line he is pursuing. Others, backed doubtless by strong agrarian influences, would have him act more boldly along "expansionist” lines and endeavour to achieve, by means of a “controlled inflation,” the recovery of prices to a point at which most of the banks’ now unrealisable assets would be again made good. Vast issues for the whole world turn on his choice of policy, for unless he manages to steer his course successfully between the Scylla of a renewed contraction which will press down the level of gold prices to depths yet untouched, and the Charybdis of an inflation so extreme that confidence in. the dollar is shattered, and the currency of the United States—pulling down with it ultimately all the remaining gold currencies— plunges into violent depreciation, the whole world seems likely to be the sufferer. THE GOLD STANDARD. Discussing the outlook for the dollar, the Economist, also of March 11, said: It seems probable that for a long time to come, if not permanently, the United States will forgo the luxury of a free internal gold circulation or the complete convertibility of her note issue and will adopt a gold bullion standard such as was in force in Britain from 1924 until 1931. As regards external gold payments, which are a necessary condition if the value of the dollar is to be fixed in relation to gold, there are several reasons on technical grounds for thinking that these will be resumed at a fairly early date. The American crisis is purely internal, and the United States still possess a favourable balance of payments. Again, heavy foreign sales of dollars were made during the last few weeks, so much so that outstanding foreign sight claims up-4 on New York are estimated at only about one-sixth of American stocks of monetary gold. Probably the world to-day holds fewer dollars than it requires for normal business purposes. This is, of course, surmise; but if it is true and if some measure of confidence is restored, or, indeed, if alternatively, steps could be taken to control the exportation of Am-erican-owned funds from the United States (though this would be very much more difficult to arrange in America than in, say, Germany) there is no technical reason why there should be any immediate depreciation of the dollar. “This is a long way, however, from saying that it will, in fact, be possible to permit unrestricted movements of gold. It is clear that new currency will have to be issued in substantial quantities, and if its issue were to coincide with a further loss of gold, distrust of the dollar might be aroused both at home and abroad and the Government may be unwilling to run this risk. “Again, if the American public are to be denied the use of gold, the Government may find it politically impossible to permit the free withdrawal of gold upon foreign account. Finally, whatever is the outcome of the crisis, there is no doubt that it will profoundly affect both America’s internal and external economic relations, and it may be considered prudent to retain means of control until it is possible to see what changes are taking place. “Thus, on the whole, we look for the prohibition of the internal circulation;of gold, coupled with the regulation—though not necessarily the complete prohibition

—of external gold movements for at least some time to come. Even though America remains nominally on the gold standard, this system, will widen the limits within which the dollar may fluctuate in relation to gold and other gold currencies, and introduce a new element of instability into the exchanges of the world. If disturbance is to be minimised, there will quickly be need for close collaboration between the banking authorities of New York, London and ‘Paris,’’