EXCHANGE FUNDS

Waikato Times, Volume 121, Issue 20231, 28 June 1937, Page 6

EXCHANGE FUNDS

The decision of the British Government to increase the Exchange Equalisation Fund by £200,000,000 will create widespread interest. It will mean that the authorities, acting through the Bank of England, will have at their disposal a fund of £550,000,000 for the purpose of protecting sterling in the money market. A week ago a member of the House of Commons asked the Chancellor of the Exchequer to estimate the total of British short-term obligations to overseas creditors in relation to the gold available as a reserve against them. The question obviously was prompted by the lesson learned when Great Britain was forced off the gold standard. It has been estimated that over £200,000,000 of these short-term obligations were then withdrawn in the course of six weeks, seriously reducing the gold reserve and overseas currency holdings. It was decided to create a fund that would be used to stabilise the position. The expressed aim was “to buy and sell currencies, keep sterling stable and prevent disturbance by speculators.” The plan was regarded as the most important attempt ever made to secure currency control, and it has been so successful that it is expected that the fund will become a permanent feature of the monetary system. In 1933 the fund was increased to £350,000,000 and sterling was wonderfully steady in the money market, more so than some of the currencies linked to gold. In the following year the United States authorities created a similar fund at Washington, and France later adopted the same policy, so that tho agreement reached last year whereby the three nations undertook to co-operate for the stabilisation of exchanges was made possible. The resources now available to tlie group are so immense that no speculative element could expect to make any headway, and the latest extension of the British funds will further strengthen the position. Short-term money has been flowing into London for some time. The movement is generally more marked when conditions on the Continent are disturbed, and apparently the Government has concluded that the reserves available against any sudden withdrawals in large amounts must be increased. There is, however, another possibility. Gold has been produced in increasing quantities, and has been flowing into the United States. The Federal Reserve Bank has taken action to immobilise much of this gold, in order to prevent any marked advance in prices, and it is just possible that the development at Home has been influenced, to some extent, by the same considerations. It was reported recently that the two countries mentioned had reached an arrangement with the Soviet for control of the export of Russian gold. Prices are firming, but the authorities, supported by the leading economists, are anxious to prevent any violent movements. A steady trend is desired, and for that reason much of the new gold is not being used as the basis for huge increases of credit. Not long ago the British Chancellor stated that the growth of reserves had covered any increase in liabilities, so that the need for the larger fund may, to a great extent, be duo to the necessity for taking gold off the market.