The Timaru Herald. MONDAY, APRIL 27, 1925. FINANCIAL TUG-OF-WAR.

Timaru Herald, Volume XCVIII, 27 April 1925, Page 8

The Timaru Herald. MONDAY, APRIL 27, 1925. FINANCIAL TUG-OF-WAR.

Bitter experience should, prompt Entisli acutedmen , and bankers to move with tiie utmost caution in the face of American ui'gmg's tor a return to tlie gold stauuaru W iietiier the Imperial Go-vern-meiil* was actuated by lofty idealism and a ekaracteristio determination to play tlie game in connection with, the arrangement made for the repayment of Jiriain's war indebtedness to the United ‘States as well as the efforts of the Allied and Associ-ated-Power's to restore economic peace in Europe, the stern fact remains,, that Britain is paying dearly for the aid she is rendering m putting Germany on her feet, and accepting tlie llawes Plan. Whenever the , rate of exchange with the United [States moves against Britain, and until tne recent speculative recovery, sterling has moved disagreeably in favour of the dollar —the burden, of Britain’s tribute to-'the Bhylocks of the United States would be increased. Late in February, the steadiness of stelling - exchange gave London a advantage over New York, with the result that balances'' were being transferred to London where the 4 per cent, bank rat© made it more profitable to deal with London tnan .with New York. As a counterblast, tlie Federal Reserve Bank of IN cw Y ork on February 27 advanced the re-discount rate from 3 to 31 per cent. It should be explained that the Federal Reserve Board re-discount rate is the equivalent of the London Bank rate. In view, of the fact, however, that a low re-discount rate in New York, invariably strengthens sterling exchange', thus giving British currency.’ an appreciated value in America, some pounter-move on the part of American bankers - was inevitable. Twice? last year the Federal Reserve Bank re-discount rate was reduced, bringing it down from to 3 per cent. The second reduction - took place m August, and had .an immediate and powerful effect upon the sterling exchange. As a 1 matter of fact, sterling rose 5 cents immediately alter ■_ the- second reduction, and continued to rise up to J anuary. One of' the principal reasons for the, rise was the fact that it became more profitable for surplus money to be employed in London, and'a good deal was transferred /from New York to England. This was ono of the principal ( causes _ of the sterling exchange going up. Later on. sterling was ' improved greatly by the hope that Britaifi would immediately 'return to the gold standard. For some weeks, prior to February, as is known, the'sterling rate had been weakening. The rise of the Federal Reserve Bank re-discount - rate was designed, it is clear, to turn the tide of investment from London to New ,York. After a momentary excitement', however - , the money markets , fairly promptly readjusted themselves to the new outlook. It was soon made clear that; the Bank of England intends to maintain London money rates above the New , Yorif , level, and thus prevent such a removal of balances from London as would tend to - depress sterling exchange. Hence the reason for the raising of the London' bank rate. The Bank of England, in view of the desirability of helping sterling to parity, decided , at once to demonstrate beyond all, doubt its determination to keep foreign balances in London and protect sterling exchange. But the raising of the London Bank rate from 4'per cent, (at which it had stood since July 5, 1923) to 6 pea - cent., even to meet the move of the- American bankers, imposes an additional burden upon British industrial development and commercial activity, while adding - very largely to the nation’s interest obligations. A 5 per cent. Bank rate means, for example, that an extra 1 per cent, will have to- be paid on the £800,000,000 of floating debt of the Imperial Treasury, and this works out at £8,000,0001 It is now admitted that the first result of the Dawes Plan has been the flow of British capital to Germany, which has been of enormous benefit to German manufacturers, while British manufacturers hampered by the heavy taxation imposed by the Imperial Government to provide war debt repayments to the United States, and thei additional burden of having - to pay a higher rate of interest for their development and accommodation loans owing to intensified financial activity in New York, are thus doubly handicapped in ' their struggle against the subsidised industrialists of Germany. Meanwhile the gold standard controversy increases in keenness and even bitterness, banking and financial views being frequently represented as antagonistic to industry and the wagei-earner. Some of the more independent journals have gone so far as to use phrases- like ' “ Britain dragged at the wheels of tho American gold chariot.” The- cry, of alarm of the- Federation of British Industries as- to tho taxation which Britain’s policy involves cannot bo disregarded. Moreover, attention is being drawn to tho late Mr Wilson’s pledge that “The United States seeks no indemnities and no material compensation for sacrifices wo shall freely give.” It would appear, however, that Britain is being made to pay the

war debts of the world; in any case, to-day Britain alone of all the Powers that fought in the war is paying a gigantic indemnity as a reward for her people’s sufferings and triumph. Having regard then, to all me circumstances, it is hot (surprising that even serious critics who uphold the gold standard _ ure nervous about Britain’s readiness to make so drastic a change.