HOPES AND FEARS

Evening Post, Volume CXII, Issue 79, 30 September 1931, Page 10

HOPES AND FEARS

OFF THE GOLD STANDARD

NEED FOR CAUTION

TO AVERT TROUBLE

(By Telegraph.) (Special to "The Evening Post.") PALMERSTON N., This Day. "The suspension of the gold standard by Britain has, in certain sections of the community, raised quite extravagant hopes, and equally extravagant fears in other sections. The position really is that the .suspension will be a good thing for England and for us if the situation can be controlled. If it cannot bo controlled it will be disastrous." Tins was the comment made by Mr. D. O. Williams, Massey College economist, in an address in Palmerston North, yesterday. The experience of the war had taught every nation to fear the danger of inflation, said Mr. Williams. The experience of post-war years had taught the nations to fear equally the crushing effects of deflation. The gold standard was looked upon as a salvation for the currencies of the world, but tho price which we had paid for the protection against inflation had been excessive and had brought us all to the verges of bankruptcy. Tho abandonment of the standard destroyed the protection ■we had against inflation—or rather, we might say that the standard had not been equal to the strain of providing that protection. Tho only thing that stood between England and accumulating Inflation, with all its dislocation, was tho power that the central bank might have to control the credit situation. The question might be asked: Why not inflate? It must be admitted that a certain amount of inflation would be, for all of us, a splendid thing. The trouble with falling prices had been that some prices had remained high. The benefit of rising prices would be that those' costs which earlier had refused to fall would also fail to rise, so that rising prices would bring about a new adjustment between receipts and costs. HORNS OF DILEMMA. Therein lay the basis for the present optimism in connection with the gold standard, for money no longer being tied _to the value of gold, . was free within the discretionary control of the banks to initiate and support a higher level of prices. The danger, however, of rising prices was that when once begun they could not be stopped except with great difficulty, so that at the moment we were on the horns of a dilemma between the desirability and necessity of moderate inflation on the one hand, and the danger, on the other hand, that inflation would escape control. Dealing, with the effects of departure from the gold standard in England,, Mr. Williams said in the meantime it was good for some and bad for others. The present effect on the • London moneymarket was obviously bad. London as an_ international clearing house had built its greatness on the certainty that all claims on it were equivalent to claims on gold. This was no longer so. Tho loss due to the suspension of the gold standard was a loss of financial business and a, blow to the prestige of London, So long as sterling was not linked up with gold, its value would be independent of gold, and foreign investors in sterling could not, in the meantime, be certain of the future value of the sterling. They would, therefore, be chary of anything but speculative investments in sterliag. _ Unless sterling could be stabilised m such a way as to command universal confidence, London's future as a money market was worth nothing The inescapable logic of events, therefore, suggested that -every endeavour would be made to return to gold under some system or other. _ To English mannfacturers the present situation was equivalent to a gift from the gods. It cut two Gordian knots for them. It meant that their competitive sterling power against other industrial countries which remained on the gold standard w#s enormously increased. This was so because at present there was no rise in, English manufacturing costs equivalent to the fall in the external value of the sterling. Foreigners upon the gold standard could now purchase English manufactures at much less net cost to themselves. This was the reason why British industrialists welcomed the suspension with hoots of joy. HO PERMANENT ADVANTAGE. It must not, however, be imagined that this advantage was a permanent one. The fall in the value of the pound in England would sooner or later be accompanied by rising prices, and therefore rising costs of production. The first effects were already to be seen in the rising prices of raw materials imported into England for purposes of manufacture. Imports from countries remaining on the gold standard necessarily cost England more, but even in the case of imports from countries that adhered to the sterling English manufacturers would, in their optimism, be willing to bid higher prices. Some margin of their present profit on the exchange situation would, therefore, diminish. Foreign buyers, eager to buy at such cheap rates, would also be glad to pay as promptly as possible- for fear that the sterling would depreciate still further. This would set up a strong demand for the sterling, and so help to support, if not raise, its value. For the Empire, assuming that the Dominions retained tho sterling, the depreciation of sterling was equiva- . lent to an additional discriminatory tariff aganst all countries retaining the gold standard, such as France and America. TOO HEAVY A PRICE? The danger inherent in the abandonment of the gold standard was that we would have cut ourselves off from the international money system, and would have to depend for the stability of our money upon the wisdom and power of our banking institutions. If they were unequal to the task, the pressure that would be brought to bear on them by industrialists would set in .motion the cumulative forces of inflation which, once fully in process, were difficult tc arrest. If'not arrested, the end was financial chaos and the ruin of whole classes of helpless people. If this was the price we might be called upon to pay for our present escape from the crushing weight of depressed prices, it was too heavy. At the same time, a return to gold on the same plan that had operated since 1925 committed us to no happier a future than the prospect of low and perhaps falling prices. Somewhere between the imponderable risks of uncontrollable inflatiou and the subjection of the world to the gold standard in its present form there must lie an alternative which could more effectively utilise gold as the universal basis. Obviously the solution between the two extremes must lie in more effective utilisation and control of gold itself, and it was to this task that international cooperation must bind itself. Clearly, the world was not yet ready to abandon gold. "We have found ourselves incompetent to control gold itself, and, a fortiori, we are even more remote from the successful management of a currency which 5s not in some way tied to a cominodityj" the speaker concluded,