CURRENCY AND BAD TIMES

Dominion, Volume 13, Issue 31, 31 October 1919, Page 7

CURRENCY AND BAD TIMES

CONSEQUENCES OF INFLATION

A BANKER ON CONTROL OF NOTE ISSUE

fMr. F. C. Ooodehougli, chairman of Barclays Bank, in a letter in the London "Times," draws attention to the connection between an unrestricted issue of paper currency and bail limes, fie states that a reform oi the present currency system is undoubtedly tho lir.it step to be taken towards improving the present unsatisfactory economic position, and makes definite proposals with the object of raising the purchasing value of the pound.]

As has been appreciated by the people of. this country at various periods in our history (he writes), there is a direct connection between debased currency and bad time,?.

The present system, by which currency lioles may be issued without restriction, is analogous to an unlimited nower to overdraw with a banker. When an individual is spending largely in excess of his income the ejercise of such a nower to overdraw his bank account has. in the first place, the effect of eating away his capital, and if persisted in results at last in liankruptey. Should the power to overdraw be withdrawn' in time, the individual will be thrown back on his own resources. He will be compelled to live within his income and to do without many things which he desires because he has not the wherewithal to pay for them. This comnulsorv abstinence should prove an incentive to healthy effort, and result in a genuine prosperity, based on thrift and work.

T his is much the position of the' nation at nresenl. for it is. becoming increasinglv ' evident: that we must begin to live .within .our means or face serious consequences; to do this we must, amongst other things, boldly abolish Ihe facility bv which mainly we are enabled to live beyond I hem, in other words, we must restrict the issue of currency notes. , It would seem that unless something is done to restrict our currency note i"sue we shall find the ability to increase our output hampered by growing cost of production, coupled with diminution of capital, far. when the right to' issue curreiicv poles is possessed by a Government which lias control over the public purse. th:-n. in effect, that Government mis the noiver to. raise a levy from the reople whenever they rre under pressure tor money; such a levy, though having all tne aoprarance o.* cheapness, is, in fact, the most expensive of all forms of finance. A volume of currency which does not coincide with the productive power of the community raises prices and increases the cost of production, both .of which affect adversely the foreign exchanges. A reform of. the present unsatisfactory currency system is undoubtedly the fir«'t step towards making both ends' meet and is essential to increased, production. Now. in order to make a beginning, it should be compulsory by law to maintain a gold backing of, say, 10 per cent, of the amount of currency notes outstanding from time to time during a given period. By increasing the amount of gold and by reducing the total of notes' in circulation, the ratio of gold to notes could be. gradually increased so (hat if might reach, say, 20 per cent, by a fixed da.e. then .10 per cent., and so on. Ultimately the whole issue could be put on a permanent and satisfactory basis. Our currency will thus gradually again become an asset as formerly; instead of largely ; a liability, as now. At the present time, because of the inherent weakness of our currency system, an .artificially created increase in • the value.of money fails to net on the exchanges or to produce liquidation in this country, and to relieve the demand for currency. But, with a note issue limited in,its proportions, the customary rules .would, operate so that a demand for currency would be accompanied by a natural' increase in the value of money, bv which means the foreign exchanges would he improved and liquidation accomplished. If, in (he interim period, an increased demand for currency should arise which could not be checked by recognisrd methods, then under drastic regulations- an emergency currency could be created, bivcd upon sound principles r.s regards' vaV:. Quite' probably "this necessity woi.V never arise, especially if coinci-dentr-'Uy determined efforts are made to check unproductive expenditure, for the beneficial effect on all expenditure of a restricted currency issue would operate to reduce the demand for notes. It i= 'true that the total of coin and bullion at the Bank of England is higher than iast year, and that currency nefes and certificates outstanding have fallen from .£310,440,001) on August 6 to .E",30.5)')2.f1nn on August 27. while .f;230,0O0 Bank of England notes have during the same month been placed to redemption account.

Nevertheless, this is th" result-of more or less haphazard methods, and with the adverse balince of trade and the deficiency in the Budget it is''difficult to see by what .means the Government will make both ends meet.

A-matter of such vital importance as (ho power to issue currency should not renmin in the uncontrolled discretion of those who are responsible also for spending—the two offices are incompatible.