MONETARY STABILISATION

Waikato Times, Volume 118, Issue 19639, 27 July 1935, Page 13 (Supplement)

MONETARY STABILISATION

(Current Problems.)

A MONTH AGO, the Belga, that is the Belgian Franc, went off gold. Since then there has been renewed concern In regard to the future of those countries still on gold—France, Holland and Switzerland—which are the only countries which can now be described as legitimately on gold, for countries, like Germany, where exchange is rationed, are not really any more' on gold.

This concern has resulted In new talk of stabilisation, and a few weeks ago Mr Henry Morgenthau, the Secretary of the United States Treasury, said that the President \yas willing to negotiate for the stabilisation of the dollar with the pound subject to there being no restriction on any further devaluation of the dollar If the President should consider such a step to be necessary. To this the Chancellor of , the Exchequer replied that there could be no question of stabilisation unless stabilisation could be maintained.

Some Arrangement of Currency

In fact, the entire question of the stabilisation of currencies has undergone a complete change, as the result of the recent judgment of the United States Supreme Court in the suits known as

“The Gold Clause Case.”

These suits were four in number, and all of them were brought by persons or corporations questioning the right of the United States Government to devalue the dollar, and to pay its debts In depreciated currency when they had been contracted In gold. One case was concerned with a gold bond, J.e., a bond received from the United States Treasury for gold of certain weight and value deposited with the Treasury. By a majority of five to four, and for obviously social reasons, the United States Supreme Court decided in each case In favour' of the -Government, though it qualified its judgment to the extent that It said that, whilst the President had not got the right to devalue tne dollar In the manner In which It had been done, the Act of Congress warranted his doing so. In fact, the judgment practically came to this: that, though constitutionally the President did not have the right, yet, the thing having been done, it was best to leave it alone. . „ .. „ However, the judgment, In the opinion of the leading constitutional lawyers in America, goes a good deal further than that, and It Is clear that It defines one of the Inherent rights of a sovereign legislature to be the power to fix the value of the currency of its own country. The implications of that judgment on the question of stabilisation become at once most important. Supposing that stabilisation was effected and a gold parity agreed upon between the dollar and the pound. Under that judgment there is nothing to prevent Congress at any time passing an Act altering the gold value, upwards or downwards. It is the

Inherent Right of Every Sovereign State

to fix the value of its currency, and no agreement can take away from a sovereign State that right; least of- all could it he taken away from the United States where Congress lias so often overriden a decision of the President. The judgment of tho Supreme Court, therefore, throws the whole question of stabilisation into the melting pot. The effects may be far reaching. It is not possible for the United States Treasury to arrive at an exchange gold parity with the pound sterling, or with any other currency, except with the consent and approval of congress, but It is complementary to -the ruling of the Supreme Court in these gold clause cases that any time the parity agreed upon could be altered by another Act of / Congiess. Tho Idea of permanency, therefore, vanishes. Supposing this Congress agreed upon stabilisation and a gold parity was fixed with the pound. In less than two years time there will be a Congressional election, and two years thereafter another Congressional election. In four years perhaps In two, the entire atmosphere of Congress might be altered, or it might be that some dominant personality like Huey Long, or some fanatical reformer, as Dr Townsend, might come uppermost in Congress or in Congressional circles. Congress could, by a simple Act, abolish the existing parity and establish a new one. It therefore appears to many people in America, ana it has also occurred with considerable force to Mi’ Reginald McKenna, perhaps the leading financier and banker ir f Great Britain, and Chairman of the Midland Bank that all questions of stabilisation of exchanges by establishing gold parities between the dollar and other currencies must be very carefully reconsidered. It will not be possible, m Ills opinion, for gold parities to be the sole deciding factor in the value of currencies. In that dase,

What Is To Take The PFaoo Of Gold? If currencies cannot be stabilised solely on gold', then the alternative basis must be commodities. This Is recognised by Mr Reginald McKenna in the last issue of the Midland Bank circular. We, therefore, come back to the proposal that has been put forward so many times during the past quarter of a century when depressions in various countries and this last depression across the whole world ihave thrown doubt upon the gold standard. The commodity dollar, or the commodity pound, Is known by various names. It has been called the “rubber” dollar, the “fluctuating” dollar, the “isometric" dollar, and it has staunch supporters in the American economist Fisher Irvin, Dr. Warren, who is one of Roosevelt’s advisers, whilst even Hartley Withers, the most eminent and perhaps the sanest of all the British economists, has expressed the opinion that it will be the ultimate solution of the world’s currency troubles. What does a commodity dollar, or a commodity pound, mean? Let us take an example. A grazier has a property

GOLD STANDARD : COMMODITY CURRENCY.

Bankers Are Very Conservative People,

upon which there Is a mortgage of £IO,OOO at 6 per cent., Involving an annual payment for interest of £6OO. He produces, say, 180 bales of wool. When wool was worth £2O a bale a few years ago, the proceeds of the sale of 30 bales of wool was sufficient to pay this £6OO interest charge. But, when wool dropped to £8 per bale, it requned 75 bales of wool to pay the same Interest charge. This was due, of course, to tlie fall in the value of commodities and, therefore, the increase in the purchasing power of the pound. The cost to the grazier in his production goods was increased by 150 per cent. . , ‘Examples like this could be multiplied infinitely, ana they all tend to indicate that the great need of the world at the time when the depression was approaching, and its great need to-day, is

which will afford the justice as between borrowers and lenders and between sellers and buyers. The suggestion at the back of the commodity dollar, or the compensated dollar, or the fluctuating dollar, or the rubber dollar, or pound, is based upon the theory that supply and demand of an article do not control its price. The controlling factors are four and not two. They are the supply and demand of the commodity to the supply and demand for gold, the variations in price being caused- by the supply of wheat, or wool, and the demand for gold. The rubber dollar then proposes to establish a currency redeemable in gold, but the weight of gold in the dollar or pound is to vary witn the index number of wholesale prices of commodities. If the wholesale price of commodities rises, say, 5 per cent., then the weight of gold allotted to the dollar, or the pound, would equally rise 5 per cent. If tlie index figure of wholesale prices of commodities fell 6 per cent, there would be a decrease of 6 per cent, in the weight of gold allotted to the dollar or the pound. This rubber quality, this elasticity, this compensating fluctuation, it is claimed, would he to

Keep Currency Stable In Relation’ To Commodities. The dollar would have a fixed commodity value and a fluctuating weight in gold. Consider the case of the grazier above,. In 1926 the mortgage would have cost the grazier 30 li’ales of wool a year. In 1932 it would have cost him 75 bales -of wool. If the rubber pound, the fluctuating pound, had been in existence, the gold weight of tlie pound would have declined with the value of wool, and the grazier would still have had to find only 30 bales of wool to pay his debt. This compensated currency is, in fact, a ‘commodity currency. It is a form of isometrical currency. The unit of money would be the unit of purchasing power, not the unit -of weight ol‘ a metal for which nobody has any use except to bury it in the bank vaults. There is no doubt there is a great deal to be said for tho idea of the commodity dollar, and politicians of the Lang type and economists of the Douglas type would have done their own reputations, and the people whom they aspire to assist, a great deal more good if they had paid serious attention to what is, after all, a practicable device rather than in* the sensationalisms in which they have engaged. This problem of the rubber dollar is one which is coming to tlie front, as the Midland Bank in Britain and the Chase Bank and other institutions in America are beginning to recognise. A lot of people, of course, recognised it long ago, but

and no doubt their book-keeping might have to be adjusted to the new -circumstances. At the same time, there is nothing in the compensated dollar, beyond the inconvenience of change, which is going to affect the financial institutions at all seriously. We can see by the manner in which currencies have been devalued internally without affecting the position of the banks at all. If it is right to fluctuate exchanges \ln order to maintain stable purchasing power overseas, there cannot be any great difference between fluctuating the internal currency for the same purpose. It is only hide-bound conservatism that has prevented this type of currency reform being seriously considered before now. The fact that so eminent a financier and banker as Mr Reginald McKenna definitely slates that the time has-come when the matter will have to he considered is sufficient evidence of its importance. It lias to be considered, because the judgments of the .Supreme Court in the United States in the gold clause cases have definitely decided that there can be

No Permanent Stabilisation On Gold as between the United States and any other country for the reason that it is within the American Constitution, and the inherent right of every sovereign State, to vary from time to time, as circumstances may dictate, or as Congress may decide, the gold content of its currency unit. One further remark we may add. It is from a financial letter from London. The long run tendency of currencies, as governed by the exchanges, is to keep them fluctuating approximately at a rate of exchange determined by the purchasing power parity. The general idea is that exchanges are at a natural rate when a unit of currency, as for example the pound sterling, or the dollar, will have the same command over goods in one country as in another, in Britain as in America, in France as in Germany. Purchasing power parity is the aim of the exchange equalisation funds being operated by so many countries to-day, and purchasing power parity is the sole purpose of the fluctuating pound, or dollar —the commodity currency.