MANAGED POUND

Dominion, Volume 32, Issue 151, 22 March 1939, Page 14

MANAGED POUND

Britain’s Methods

PROGRESS SINCE 1931 The operation of the Exchange Equalization Account occupied an important place iu the speech of the chairman of the Midland Bank Ltd., Mr. Reginald McKenna, at the annual meeting in Lon don recently. Mr. McKenna traversed the financial history of the last two years. the building up of large foreign balances', in London during 1936-37, and then, as the European outlook became threatening, the transfer of those balances to other centres in about nine months, "The withdrawal of the exceptional foreign deposits accumulated in recent years’ has not. materially diminished the importance of London as a centre for financing world trade,” Mr. McKenna said. "But far more noteworthy is the fact that, contrary to all previous experience, the transfer was effected without any rise in the bank rate. There was no monetary restriction to aggravate the shrinkage of internal business which was already taking place as the universal falling away of 1938 developed. "I could quote many examples to show how, under the gold standard, external influences caused grave disturbance to internal trade. The vulnerability of the money market to external influences was extreme, and was due mainly to the statutory obligation to maintain the pound sterling at a fixed gold value. Today the Central Bank is no longer under this obligation, There is freedom to allow the rate of exchange to swing more widely and, bj judicious purchases or sales of gold as foreign balances increase or diminish, to take the weight of great international movements of funds without affecting internal trade credit. "The Exchange Equalization Account is an essential part of the machinery for regulating monetary conditions. Let me observe, however, that no monetary mechanism can of itself perform the numerous and complicated tasks connected with the control of currency and credit. Gold Still has a Part to Play. “The simplicity, the almost automatism, of currency and credit control under the gold standard has been highly praised. But at what cost to trade and industry did the system operate?” Mr. McKenna asked. “The bank rate might have to be raised when internal conditions required not restriction but expansion of credit—as. for example, last year, when the outflow of gold would have led to severe credit restriction at the very time when confidence was already shaken and enterprise languishing. ‘‘lt must not be overlooked that the departure from the gold standard is by no means the same thing as the abandonment of gold as an instrument of monetary policy. Gold plays and will continue to play an essential part in tlie exchange relations between countries conducting the bulk of international trade. ‘‘But for us it no longer plays a govern, ing part,” Mr. McKenna continued. “The great achievement of monetary progress since 1931 is the discovery that our domestic business can be protected against extraneous developments with which it has nothing to do, and for which it is not responsible, and that we can expand or contract credit according to internal needs. To this extent at least we have become masters in our own house.”