STERLING EXCHANGE

Waipa Post, Volume 44, Issue 3178, 17 May 1932, Page 2

STERLING EXCHANGE

BRITAIN—OFF GOLD: ON ITS FEET. In the course of a striking article on "The Prospects of the Sterling Exchange!.," which appears as the leading article in the current Yale Review, John Maynard Keynes the eminent English economist adds some interesting facts to the reasons which led to the British fall from the gold standard last September. In general the story is now weli known. The war gave rise to a tremendous volume of debt contracted when all currencies save the dollar ; were " off gold." When the time came around to stabilise their currencies, or to unite them again with gold, all the nations, with the exception of those in the British Empire, elected to cheapen their currencies. Since debts are contracted in the currencies concerned and not in gold, the effect was to cut down the debts. Thus a French 1000-franc bond issued before the war is now worth only as much gold as was then represented by 200 francs. A German pre-war bond is worth practically nothing. But; by stabilising her pound in 1925 at its pre-war parity with gold, Great Britain affirmed a mountain of debt which in government bonds alone amounted to twelve times the pre-war figure. This was paying for the war with a vengeance. Ie Mr Keynes's view this was the fundamental reason that made Great Britain go " off gold " last September. It is a view which many people shared before the events of last year and which is now rapid'y becoming commonplace. The immediate cause flowed out of this excessive revaluation. In order to maintain the pound at pre-war parity in order to resume its position as a lender of investment funds abroad London had to exploit its "immense reserves of credit and prestige to build up a vast burden of short-term liabilities." This means that money was attracted from foreign banks, foreign speculators and foreign businesses so that Britain could have as if the world was just the same p'ace as it was in 1913. But it made the pound sterling extremely vulnerable. While Great Britain's loans were tied up in bonds and equities, her borrowings were Withdrawable on or near demand. The position disturbed economists like Mr Keynes and it was undoubtedly at his institgation that the Macmillan Committee, of which he was a member, made an estimate of the short-term liabilities outstanding. The estimate reached .the great total of £400,000 - 000;, a testimony of vulnerability the significance of which was not lost on the banking world. In the circumstances, the raid on

' the pound sterling of last year could not help but be successful. as M. Rist, the French economist, says, the pound went down fighting like a good soldier. As money was withdrawn,; the British, in order to meet it, mobilised their own short-term loans abroad, a good part of which was frozen as hard as their immense reserves in foreign long-term loans and investments, and borrowed £12.00Q,000 in Paris and New York. But the effort seemed equivalent to the task of filung a Danaides jar; there seemed no bottom to the foreign money that could be withdrawn from London. Now we know the reason. Great as was the Macmillan Committee's estimate of London's short-term liabilities* it was nowhere near the mark, Mr Keynes estimating trat ill told the amount must have been in the neighbourhood of £800,000,000, or twice the estimate! Being "off gold" means to most people that a country is on an uncer- ! tain basis. Mr Keynes, who is a critic of the gold standard takes the contrary view; he calls the British action a " step off on to firmer earth." Commenting on this a leading Ameri.can journal says that whatever one's views on this subject may be, there seems no doubt as to the truth of Mr Keynes's description. Observe, to take just one example, the way that London has reduced its short-term debt. "I surmise" says Mr Keynes, " that between June;, 1931, and February 1932" Great Britain may have repaid approximately half of r: r total short-term liabilities —an amount somewhere between £300000,000 and £400,000,000. This is apparently in addition to the 75 per cent repayment of the !oans from Paris and New Yorlc. contracted to p.ug the pound. An extraordinary feat.