ECONOMICS

Wanganui Chronicle, Volume 77, Issue 82, 7 April 1934, Page 4

ECONOMICS

•THE GOLD STANDARD,’ in Theory and Practice, by R. G. Haw-I trey (Longmans, Green and Co.), pp. 1 248. By way of preface it must be said that everything that Mr. K. GHawtrey writes is worth reading, anu i thinking about. Mr. Hawtrey has now . brought up to date his book on “The i Gold Standard” so as to include recent ■ events since England has left the I gold standard. The reader who lights shy of the ! algebiaic formulae so loved by Pro j fessor Pigou and Air. Denis Robertson} need have no fears of Air, Hawtrey, j He writes for the average, intelligent reader who is not equipped with a fourth dimensional knowledge ol mathematics. It is possibly because oi this excellent facility for elucidation that Air. Hawtrey has made such impression on the thought of his own time in monetary matters. His is a fresh mind and a fresh pen and the two combined, together with a com mendable industry, have resulted in some excellent books being published. The gold standard is first explained by the author of this present volume, then he proceeds to show how it work.-. Having demonstrated the working ol the system, he reveals its essential weakness, namely the inability on the part of anyone to enforce the rules t. the game. Mr. HaWtrey considers that France and the United States oi America wrecked the gold standard because they refused to play the gold game. Air. Haw trey has a line ability to recount recent financial history in an ordered sequence which enables the reader to piece together the. scrappy events which he sees recorded in the cabled news from London. Of Britain ’s return to the gold standard, Air. Hawtrey asserts that “When we turn to the actual course of events, we are left in uncertainty whether the restoration of the old gold parity did or did’ not make costs excessive in re iktion to world prices. Trade depression and unemployment did indec 1 continue, but the world price level was itself changing The value of gold in terms of wealth was rising. ’’ He blames the policy of the Bank of England for the continuance of the depression in England. “Early in 1925, confronted with the approaching restoration of the golG standard and with the need to raise the value of the pound up to parity, the Bank of England put the bank rate up from 4 to 5 per cent. That is a high rate Long spells at or above 5 per cent, (says, ten weeks or over) hardy ever occurre 1 (since 1867) otherwise than at times of great trade activity. . . . Whether a discount rate counts as high or low depends on the state of business at the time. When demand is expanding, and prices are rising, a rate of 6 or 7 per cent, may hardly be high enough to check the enthusiasm of borrowers intent upon transactions promising a high profit. When demand is stagnant ci shrinking, and prices are falling, the holding of commodities involves a loss which may more than eat up the normal commercial profit, and an apparently low rate, 3 per cent, or less, may fail to tempt borrowers to come forward. At a time of excessive activity a high bank rate is imposed to check the rise in prices. That is an incident of the trade cycle. But to apply a rate suitable for such a situation to a state of depression is to put the brake on when going uphill Given so violent a reversal of previously accepted practice, what calls for explanation is the remarkable moderate effect as measured by the fail of prices.” The fall of prices was the resultant of t.he policies of London and New York. The latter relaxed credit while the former restricted credit. In 1928 America had reverted to the level of prosperity which obtained in 1925 while Great Britain failed to emerge from the state of depression. In 1928, however, the Reserve Banks’ policies in America changed to restriction and the year 1929 saw restriction growing more and more severe in America. By this time the factor of France started to make itself felt. “The Bank of France is narrowly circumscribed in regard to the character of its aspects. Apart from any exceptional powers it can only invest in bills of exchange conforming to certain strict conditions, and in advances upon gilt-edged securities on which the practice is to charge substantially higher rates. The supply of these assets is never vey elastic. The transactions of the type that give rise to the bills are not easily expanded. The great French banks arc accustomed to rely on their holding of bills eligible for rediscount as tne.r principle liquid resources, and are reluctant to reduce them. Consequently when a gap has to be filled in the assets of the Bank of France it is apt to be found that gold is the only asset with which it can be filled.” Increases in the demands for currency, therefore, caused the Bank of France to attract gold at a time when the world was in need of currency expansion and the result of the " three policies was, of course, a contraction of ci edit and a downward run of prices. “The French absorption of gold was due once more to the liquidation of trie Foreign Exchange hold by the Bank < f France. After the end of June, 1932, little more of the liquidation remain'd to be effected, and the inflow of gold into France practically ceased. The purchases of securities by the Federal Reserve Bank of America still continued until the beginning of August and the net effect of the heroic effo s at reflation in America was the creation of redundant cash in the hands of the member banks in the form of deposits at the Federal Reserve Bank u excess of requirements to the amount of some 250 millions of dollars. Prices started to rise modestly but ‘To say that the corner liad been turned an i the vicious circle broken would be t > assume too much. 'Pho fact is that t e policy of reflation was placed at a serious disadvantage by the adheren e of the United States to the gold standard.’ “The breakdown of Ihe gold standard has brought instability into the exchanges and these are a very real obstacle to the traditional organisation of international trade. Whi e stability of exchange has been sacrificed with the gold standard count rit -, England has preserved it with Iml , most of the colonies and several oth r countries. Adherence to the gold st: • - dard confers the advantages of sta! * rates of exchange with the United States and the Franco-Flemish group. But with nearly all the other countries

that have maintained gold parity those advantages are merest illusion. The 1 very trade that gold parity is intended Io facilitate is ruthlessly crushed by * the exchange restrictions on which the ( maintenance of a nominal parity de * pends. Even France herself, the most 1 noted exponent of the gold standaid. < though she has not imposed restrictions 1 on the foreign exchange market, has 1 resorted freely to intensified protec- I tion. ’' Mr. Hawtrey considers that it would ( be premature and unwise to link any 1 currency to gold at the present time, i when the value of gold is utterly out < of equilibrium and is destined prob- 1 ably for several years to be the piay- •< thing of contending forces which no 1 one can foresee or measure. i “It follows that, for some years at < any rate, the countries that have bus- f pended the gold standard must be con- i tent with paper currencies detached I from any metallic basis. What then/’ he asks, “should be the monetary policy during the interval i” His answer to this is, “If the advantages of equilibrium, that is to say, of industry being remunerative and fully employed, arc to be obtained, the value of the unit in gold must be varied whenever the value of gold in goods varies, so that the value of the unit in goods may be kept stable. This is precisely the plan advocated by Mi. Keynes. ‘Practical difficulty may well be found "n estimating the price level. If regulation of credit were successfully directed to keeping the official wholesale index' number close to a prescribed level, this would probably be a very good approximation to stabilisation. But it would be impel- ' feet.’Price index numbers, therefore, will not be the sole guide. The price-level instead of being kept fixed, will be adjusted to the wage level, and must rise or fall as real costs of production rise or fall.” The author writes very convincingly and makes out a good case from his point of view. But a note of caution might well be sounded, in that the piobabilities of estimating the effects of changes in this world with anf degree of accuracy are not particularly bright. Any credit expansion in general would, therefore, accentuate the dislocations where production was continued beyond the needs of the consuming public. This world goes forward by leaps and not in gradual growth. The frequency of experiments being carried out in similar directions leads to discoveries which all of a sudden alter the trend of trade. Crises are the quick pruning of the economic tree and credit control designed to maintain stability would lengthen the process of pruning and would, in all probability, cause a depression psychology to be of longer duration. It is not too often emphasised that the price levels of the war period and after were, in the light of the history of prices during the previous century, abnormally high and this abnormal rise would naturally create abnormal alterations in the economic structure. When the developments in regard to internal combustion engines, gramophones and wireless are taken into account it is difficult to see how a crisis of sorts could be avoided. That the credit policies pursued by the various countries have accentuated and extended the depression there can be no doubt, and the pity of it is that there still seems to be small prospect of the gold standard game being played according to the rules. Therefore, a policy of temporising, to meet conditions as they arise is the only monetary policy open to the British authorities at th c present time. Mr. Hawtrey is always informative and always thought provoking, and very persuasive. The 1933 edition of “The Gold Standard” is a very, very valuable book.