The Dominion. MONDAY, OCTOBER 24, 1910. "THE FINANCES OF WAR."

Dominion, Volume 4, Issue 955, 24 October 1910, Page 6

The Dominion. MONDAY, OCTOBER 24, 1910. "THE FINANCES OF WAR."

Ma. Edgar. Oeanmond,.;F;S;S., in an article in the Quarterly Review] has revived'. the agitation 'for an adequate gold reserve in London. In April last Me. Crammond, lecturing before the members of the London Institute of Bankers on "The ' Finances of War," said there was one aspect of the question of national defence, which did not seem to have been fully considered, namely, the supply of credit in time of war. After .reviewing the effects- of- the Franco-Prussian War, the Boer War, and the Russo-Japanese War,; and pointing out'that, they .afforded, a very poor test as to the ability of the international credit system to stand the strain which would be placed upon it by a great European war in which Great Britain would bo one of; the belligerents, he went on to say i; "It must be remembered that, financial considerations constituted a safeguard .for the preservation of' peace, the _ importance of which-it would be impossible to exaggerate. .'-11 l our own credit system were threatened with 1 collapse it was certain that'; ; the credit system of -all countries dependent upon it, that was to say, of all the great countries of.ithe world, would bo more or less, involved. :All the powers;of finance would, therefore, be exerted in favour of peace." This very fact,. it was further pointed ' out,, brought into prominence another danger, and that was that - might be brought to bear upon tho Government to accept some glaring breach of international law rather than risk the tremendous consequence which might follow its repudiation. His articlo in the; Quarterly< .Review y l-mehtion of .which was made in a cable message on' Saturday, is •• ho doubt on the same lines. The Times agreed with Me. . < Ceammond .'_ and advocated a war reserve in addition to a stronger banking reserve. : Germany possesses; a war. reserve, .specially .ear-marked. There lies in tho Julian Tower at Breslau six millions sterling in gold, part of the indemnity.; of £200,000,000 paid by France after tho close of the sian-War. ■ ■;■."-.-.

The strengthening of the gold re-, serve has,been repeatedly urged, and such eminent bankers,as' Sir 'Felix Schuster, Mr. Huth Jackson, and the late Mr;' Spencer Philmps have advocated the matter, but so far, nothing has been done, for the subject is not quite as easily dealt with as appears on the surface. The Bank of England keeps the central gold reserve of the one money market in which any form of credit instrument is immediately, convertible into gold, and so has co be ready for any emergency that may. arise. Numerous suggestions have been made for strengthening the gold, reserve. It has been suggested that the Treasury should keep a reserve against its banking liabilities to savings bank' depositors, or by the Government repaying its debt to the Bank of England in gold, or by the establishment of a.national gold.reserve at the expense of the taxpayer, or by an issue of £l notes.against gold, or by the amassing of a special reserve by the banks to. be deposited at the Bank of England under special safeguards to be touched only, in times of need. The point that is overlooked in these suggestions is that the gold mustbboo o obtained from outside. 'To indulge in an ordinary banking_ transaction would not secure the additional gold, for it would be merely taking itout of one pocket and putting it into another. Gold reaches London every week principally from the Rand, and every Monday it is dealt with in the bullion market. A certain proportion is always taken by "trade for ■ use in the arts and in commerce, and the rest, if there be no competition for it, goes to the Bank of England, which pays 775. 9d. per oz. for _ it. When thoro is competition, foreign buyers tako part or all, and sometimes the bank bids rather, more than its statutory price though it rarely bids higher than 775. 10?, d., which is the rate at which gold is coined into sovereigns. But gold is best secured or retained, not by bidding for it in the bullion market, but by influencing the foreign exchanges through the discount rates current in the open market. This operation is now in evidence. The bullion reserve of the Bank of England has been drawn on rather heavily recently, and to check this outflow on the one hand, and to attract gold on the other, tho minimum discount rate of tho bank has beon raised from 4 to 5 per cont, and tho open market rato has advanced in sympathy. If the 5 per cent rate is not high enough tho bank will make further increases until its object la achieved. Not-

withstanding this it is apparent that the metal reserve in the bank must bo increased, and ultimately it may be found that the "security issue, amounting to over eighteen millions sterling, will be converted into gold, that is to say, the right of the Bank of England to issue notes against £18,000,000 of securities will be abolished. The British. Government must pay its debt in gold, or some other method must be found for making the note issue of the bank a pure gold basis emission, and not as at present with a part of the issue on a security basis.