CURRENCY PROBLEMS.

Waikato Times, Volume 110, Issue 18393, 29 July 1931, Page 10

CURRENCY PROBLEMS.

QUESTION OF EXCHANGE. GOLD THE ONLY PROVED MEDIUM. ! NEW ZEALAND’S POSITION. One of the most notable features of the present economic situation is the interest now generally shown in problems relating to currency, gold, silver, and exchange in their more technical sense (says “Scrutator” in the New Zealand Financial Times). We have creators of the “hew economics” coming forward with currency schemes “based not on gold but on tlie national wealth," which are guaranteed to inaugurate an economic millennium. These Ideals, in so far as they have any definite meaning at all, seem to finalise in proposals to cure our difficulties, which are largely self-inflicted, by inflation, and the subsequent scaling down of contracts involved in the process, notwithstanding lessons fom tiie recent past of the folly and misery entailed in such policies. Similar considera- i tons attach to such vague -suggestions as an international paper money. It should be obvious that none of these proposals has the slightest chance of acceptance in a world whose more important countries have laboriously but surely fought their way back to a curency anchored to gold values. If silver could not maintain its place when it was worth four limes what it Is to-day, how can it hold its own or win back to acceptance now that it is worth less than one eightieth of the equivalent weight of silver? Gold displaced silver because the modern w'orid needs a money metal of high economic density-, embodying considerable value in small bulk. Gold Mobilisation. Similar objection can be taken to the complaints of the “immobilisation” of gold by France and the United States. This is admittedly unfortunate, and has a depressing effect on the price level of the world; but it is not so much a cause of the fundamental trouble as an effect, and would therefore show- In its essential features under any monetary system. The drain to France is in part due to the demand from the peasant classes for actual gold for hoarding, a characteristic French trait, and one which has stood the country well in times of national peril in the past. This demand has caused a trickle of goid through the French banks into the possession of the small farmers, and while it may. be a minor constituent of the drain, there are other factors at work. During the French currency disorganisation considerable French balances were sent to London for safety, and have now been withdrawn. Basically, however, the French, after their unfortunate experiences with Russian investments in the past, aro disinclined to make foreign investments, and so the balance of accounts is bringing bullion into the country. France is relatively independent of Imports, but does a heavy export trade, and draw's much tribute still from foreign loans. If this does not come in goods it comes in gold, or credits convertible into gold, it is the opinion of French banking circles that a higher discount rate in the London market would have retained much of this gold, or would attract much of it back. The American Gesture. In the case of America, the disturbance of the balance of accounts is primarily responsible for the gold flow, coupled with the policy of the Federal Reserve banks. America holds the world in fee, tries to extend overseas the market for her massproduced commodities, but seeks by her tariff to exclude the imports that would meet the debt for goods and interest. This absurd policy has now broken down, and forced the United States Into a qualified moratorium, not as a “generous gesture,” but merely to protect themselves from the utter bankruptcy of their overseas debtors and the consequent repudiation. In any case, these causes are deeper than the currency system, and would have produced similar troubles, and probably worse troubles, even if there were no gold standard. To blame the gold standard for the troubles of the world Is largely, but, we admit, not entirely, like blaming the barometer for the bad weather. The gold standard can hardly be the cause of our local troubles, as far, at all events, as they originate within the Dominion, because we abandoned the gold standard in 1914, 17 years ago, and have never since restored it. The return of Britain to the gold standard took place in 1925, and the depression that lias struck us only originated a couple of years ago. The troubles of the world are due mainly to trade rather than defect of production. The productive powers of the world are now greater than before the war, but owing To currency disorganisation, re-grouping of national units, splitting up of former States into smaller parts, pressure of war debts and socalled reparations, international animosities embodied in excessively high and constantly moving tariffs, and general unsettlcment, trade has not been able quickly to mark out new well-deflned channels. Prloes and Currency. It is true that prices have steadily fallen recently, and' that this is in great part a currency phenomenon, but the trouble has been due not to the gold standard, hut to the dropping of it in the war and post-war years, the resulting inflation of paper money, and its subsequent deflation. The wo,rid has ironed out a bulge in its money system, and this is naturally reflected in prices. Allowed to function normally, price oscillations under a gold standard are conclusively shown by experience, and not mere theory, to be less than similar fluctuations under any alternative standard, so that, if gold is permitted to function normally, without ill- | advised tinkering, it works fairly well. Wo cannot blame tho gold standard for rosults that flow from Interference with It, and yet this Is precisely what many aro doing to-day. The Economists and Causes. It is also a mistake lo say that economists are hopelessly at variation among themselves as to the causes of the present world economic situation, i Economists are often bitterly criticised j by persons who never trouble lo read wltal they say, and who would usually I he in capable of passing a valuable or j valid opinion. As it happens I hero is 1 substantial agreement among leading 1 economists as to the diagnosis of tho

economic difficulties of Ihe time, though they differ in emphasis. Mosi would agree that gold money can give two valuable services that do not seem obtainable, in practice, under any conceivable alternative currency system. In the first place, it ancho.s the volume, and consequently the value, of money to something with a real cost of production, and, therefore, capable of objectively standing on its own feet. It may seem irrational to subject the world’s price level to the vagaries of gold mining, but in any case gold-production is now comparatively steady and calculable, and mining production is surely more stable than the shifting currents of political expediency or democratic fallacy. If we desert gold, the only practicable alternative Is paper money, variable In volume by political pressure. This would fluctuate more widely than gold values. In the century up to the outbreak of the war the maximum price swing under gold standard conditions was about 40 per cent., over a period of about 22 years, whereas when gold was deserted and the warring nations turned to paper, the swing was 300 per cent, over a period of six years, of course, the war had much to do with this. Still, Ihe comparison is striking, and ominous for those who would desert gold for paper. Gold and Exchange. A further decisive consideration in favour of gold is that it does give I mi international par of exchange by constituting an internationally acceptable money commodity. If the gold standard is descried the foreign exchanges become very erratic, and may soar to ridiculous heights, a matter very damaging to a country such as ours, that lias a very heavy foreign Irade per head and that has lo find over £8,000,000 in gold values for interest abroad every year. No currency innovator lias yet explained how ills pel scheme will provide an acceptable medium of foreign exchange, since it could not he adjusted lo 111? money systems of foreign countries ~n a" different basis.. Under a gold standard the exchanges cannot go be-

yond the cost of transport of gold. Tn New Zealand, at the present time, they are greatly in excess of this figare, a fact which considerably complicates Government remittance, raises the cost of imports and the cost of living, and gives an unearned bonus to our exporting interests at the expense of the general community. New Zealand’s Folly. We are really blaming the machinery of exchange for troubles that have arisen out of our ovyn folly, extravagance and incapacity. New Zealand should be in a good position to-day. From the middle 'nineties until a few years ago we were able to sell increasing volumes of produce at rising values, and we were one of the few countries that derived some direct economic benefit from the war. Apart from war debt, our publlo commitments could have been much less than they are, but w-a piled up one loan on another, and employed the proceeds partly In sustaining a standard of living that our own resources did not Justify, and partly In constructing publlo works, many of which have proved useless, duplicated, or otherwise burdonsome. This was done by all political parties under irresistible pressure from a debauched and low-grade electorate, devoid of economic knowledge or national self-respect, and demanding mass electoral bribery out of funds raised on the security of the public credit, whether the expenditure was really worth while or not. .Private Extravagance. In addition, there was much private extravaganoe and duplication. On many occasions the loaders of finance have pointed out how every form of business was overdone, and how wo have many more establishments In every department of economic activity then Is warranted by the volumo of business offering In a community of 1,500,000. When this debauch came to an end it was seen that we had heavy debts.

' with little In the way of real reserves or assets to set against them. In one view our business is over-capitalised in the sense that we have too many units for the job; in another it is under-capitalised, in the sense that it leans too heavily on the banks, pays out too much in dividends, fails to plough in reserves, and works too much on borrowed money and too little on subscribed capital. Rationalisation is urgently demanded in such vital industries as the freezing business, dairy production, and the stock and station business, where duplicated facilities mean consequent waste. The Financial Times is a 40-page monthly magazine for private circulation only. As New Zealand's financial monthly it publishes articles on the financial and business problems of the day, written by leading business and professional men, economists and bankers. Readers desiring to be supplied with a copy each month should send their name and address, together witn annual subscription of £1 is, to the secretary, New Zealand Financial Times Company, Ltd., Box 1307, Wellington.