CURRENCY PROBLEMS AFTER THE WAR

Dominion, Volume 12, Issue 84, 3 January 1919, Page 5

CURRENCY PROBLEMS AFTER THE WAR

AN IMPORTANT REPORT

FOREIGN EXCHANGES AND TRADE BALANCE

The British committee: appointed last January to consider the problems arising in oonnection with currency and the foreign exchanges after, the war recently presented a first interim report, which . was published as a Parliamentary paper (Cd. 9182)., Lord Gunliffo is the chairman of the committee, and the other members, all of whom sigh the report, are-.— Sir Charles Addis, Hong-Kong and Shanghai Banking Corporation;, the Hon. . Rupert. Beckett, Beckett and Co.; Sir John Bradbury, K.C.8., Secretary to the Treasury; Mr. G. C. Cassels, Bank of Montreal; Mr. Gaspard Farrer, . Baring and Co.; tho Hon. Herbert Gibbs, Antony,Gibbs and Sonsj'Mr. W. H. N. Gosclien, chairman of the Clearing Bankers' Committeu; Lord Indicate; Mr. .R. W. Jeans, Bank of Australasia; Professor A. ,C. Pigou',,' Cambridge University; Mr. G. F. Stewart, F. 5.1./ ex-Governor- of tho Bank of Ireland; and Mr. William Wallace, Royal -Bank of Scotland. ;. - The main conclusions of the committee are summarised as follow: Before, the war the country possessed a complete and effective gold standard. The provisions of tho Bank Act, 1814, operated automatically to correct unfavourable .exchanges and to cheok undu.e expansions of credit. • • •' During-tho*war the conditions necessary , to tho maintenance of that standard have ceased to exist. The main cause has been the'growth of/credit due to Government borrowing from the. Bank of England and other banks for war needs. The unlimited ■ issue of currency notes has been both an inevitable, consequence and a necessary condition of this growth of credit.' In our opinion it is imperative that after the war. the conditions necessary to the, maintenance of an effective gold standard should be restored without delay. Unless the machinery which long experience has shown to be the only effective remedy for an adverse. balance of trade and an- undue, growth of credit is once more' brought into play, there will be,.grave- danger of a progressive credit expansion'which will result in a foreign drain of gold menacing the convertibility of our'noto issue and so jeopardising the international "trade • position of the country. The pre-requisites for; the restoration of; an .effective gold' standard are:— . (a) The cessation of Government borrowing as soon as possible after the war. We recommend; that,at the earliest possible moment an adequate - ranking fund should be provided out of. revenue, so that- there may be a' regular. annual reduction of banital. liabilities,- more '-'especially.' those which constitute the floating debt. ' : (b) The recognised - machinery, namely, the raising and making effective of the Bank of England discount rate, which before ~ the war. operated to check a foreign -drain of gold ,and the speculative oxnansion of credit in this country, must be ;kept. .in working order. This, necessity cannot, and should not, be evaded by: any attempt to continue, differential rates for home and foreign- money after the war. ' . (c)/The> issue of fiduciary notes should, as; soon., as . practicable, once more be limited ,by: law, and the present, arrangements ..under, which deposits -at the Bank of .England, may be exchanged for legal tender currency Without. affecting . the reserve of .the banking department should .be •,terminated. at the ■ earliest. possible moment.. ' Subject to -transitional/arrangements as. regards currency notes and to any special arrangements in .regai;d to Scotland and Ireland which we may have to propose'when we come to deal-.' with the '.riuesHons' affecting those part? of the United Kingdom, we recommend that the note issue/{excent ae .rega'tds'existing is=U(«l should be "•iti'-elj-' in the .hands Of the Bonk Enirlapd.' . The, notes should be nayable in London ohlv and ohonbl be l°gal tender throughout tho United : Kingdom. , Control of Nnt>! Issue. ' 'Ais' regards "'the" control of "the 'note issue, we mako the . following observations':— / . (1) While the obligation 'to: pay both Bank of' England 'notes and' . currency iiotes in gold on demand should be maintained, it, is not necessary .or 'desirable 'that there should be, any early resumption of the internal circulation of gold coin. ,' ' (2) While the import of goid should be .free from all restrictions, it is convenient that-the Bank-of England should have cognisance of all gold exports, and 1 we recommend that- the export of gold'coin or bullion should be subject to the condition . that such coin and.bullion has been obtained from the bank for the purpose. The bank should be under obligation to supply gold 'for export in- exchange 'for its notes.' -■> ■ •;- ' '• (3) In 'n'ew. of the withdrawal of gold from circulation, we recommend that the gold -reserves of the country should bo held by one central institution, and that all 'banks should - transfer' any gold now held by them to the Bank of England. Having carefully considered the, various proposals placed befovs ns as regards the basis of the. fiduciary note issue, we recommend'that the principle of .the Bank Charter Act, 1841, should be maintained—riamely, that there should be a fixed fiduciary issue, beyond which notes should only be issued, in; exchange for gold. ■ The separation of the - Issue and Banking Departments of the Bank of England 6hould be maintained, and tho weekly return should, continue to be published in its present form. / We recommend, however, that provi-' sion for an emergency be made by the continuance in force, subject to stringent safeguards (recommended in the body of the report), of Section 3of .the Currency and Bank Notes Act, 1914, i:nder which the Bank,of England may, "'ith the consent of. the. Treasury, temporarily issue . notes in excess of the legal limit. We advocate the publication by the banks of a monthly statement in a prescribed form. Wo have <ionie to the conclusion that it. is not practicable li> fix any jirecise figure for the fiduciary note issue imme. diately after the war We think it .desirable, therefore, to fix tho amount which should be aimed at as the central gold reserve/ leaving the fiduciary issue to be settled ultimately at such amount as can ,be kept in circulation without causing'the central gold reserve to fall below the amount so fixed. We. irecommend that the normal minimum of the central gold leserve to be aimed at should be, in the first instance, ,£l5O millions. Until this amount has been reached and maintained concurrent-ly-with a satisfactory foreign exchange position lor' at' least a year, the .policy !of cautiously reducing the uncovered note issue should be followed. When reduc-, tions have been effected the actual maximum fiduciary circulation in any year should become the legal maximum for the following yenr, subject only to-the | emergency arrangements previously reI commended. When the exchanges are working normally on the basis of a minimum reserve of .£150,00(1,WW, the position should agnin be reviewed in the light of the' dimensions of tho fiduciary issue as it then exists. We do not recommend the transfer of i-the-existing, currency note issue to the Bank of England until tho future dimensions of the fiduciary issue have been ascertained. During the transitional period tho issue should remain a :Goverumont issue, but now notes should be issued, not against Government securities, but against Bank of England notes, and, furthermore, when opportunity arises for providing cover for existing uncovered note 3, Bank of England notes should be iified for this purpose also. Demands for new- currency would then fall in tho normal way on the banking department of the Bank of England. AVhcn the fiduciary portion of the issuo has been reducod to an amount which experience shows to be consistent with the maintenance of a central gold reserve of <£150,000,000, tho outstanding currency notes should be retired and replaced by Bank of England notes of low denomination.

Seventy-five per cent, of the wealth of America is in the hands of families receiving incomes of .£IOOO or less. Over 100,000 women are employed on Prussian-Hessian railways in Germany, as against only 10,000 before the war.