THE GOLD PROBLEM.

Auckland Star, Volume LX, Issue 229, 27 September 1929, Page 6

THE GOLD PROBLEM.

Something of a sensation has been created in the Money Market by the decision of the Bank of England to raise its discount rate from 51 to 6£ per cent. This step cannot be described as unexpected, for financial conditions have been pointing in this direction for some time past. As a result of the sudden collapse of a speculative boom in the United States' five or six weeks ago, the New York Federal Reserve Bank rate rose from 5 to 6 per cent, and the financial pressure there naturally reacted on London. Since then heavy shipments of gold from London to America, France and Germany have brought down the Bank's holdings of gold to a point considerably below the minimum level of £.150,000,000 recommended by the Cunliffe Commission. But no doubt the additional strain thrown on the Money Market by the Hatry failure has provided the final argument in favour of raising the Bank rate, and to-day the rate stands at the highest figure that it has attained for the past eight years.

| It must be remembered that in attempting ito regulate discount and interest rates in the Money Market by varying its own rate of discount, the Bank of England has to provide against demands for gold from two distinct sources. More gold may be required to supply a sound basis for the extension of credit and the enlargement of the currency at home, and at the same time more gold may be needed to oalance our trade accounts and satisfy foreign creditors who have money on call in London. For, quite apart from the natural outward drift of gold to liquidate an adverse balance of trade, London has to pay the penalty foxits reputation as the world's one free gold market. Five weeks ago France and Germany together drew £1,700,000 in gold from London in 24 hours, and this at a time when the Bank's reserve of gold was abnormally low. Such operations necessarily mean financial embarrassment to the Money Market, and the Bank of England, which can usually control tho situation by modifying its discount rate, has raised it to make the Money Market a more attractive centre for the investment of foreign money, and thus to check the outflow of gold.

It is generally recognised that the financial power of the Bank of England and the prestige of London as the world's financial centre are involved in this maintenance of a free market for gold. But such privileges have their disadvantages, and many leading financial authorities at Home are now expressing grave doubts as to the wisdom of maintaining a system which may be so easily deranged, and may in that case react so injuriously upon British finance, commerce and industry. The "Financial Times" lately quoted a protest from a London banking firm against the policy of our commercial rivals —"America neutralising gold and Franco and Germany sucking it in and retaining it with an apparent disregard for business interest." A few weeks ago Professor J. H. Jones, of Leeds University, ' discussed the financial situation in the "Observer," and predicted that the Bank would speedily be forced either to raise its discount rate or to let its gold reserve fall below the margin of safety. The rise in Bank rate, said Professor Jones, "would intensify the difficulties of British industry" by limiting credit, while it would not actually prevent the export of gold or regulate the level of prices. Under the circumstances the financial experts appear to see the best chance for a satisfactory adjustment in co-operation between the great banks in the leading financial centres, and even in London the arguments for an international bank on the lines suggested by the Young Commission are beginning to find favour, in the hope of ensuring a more equitable, distribution and circulation of gold. As the "Financial Times" puts it, "the whole combination of events stresses once more the vital need for that co-operation of central banks which the Young Report described as essential to the stability of the world's credit structure."