IDLE GOLD

Evening Star, Issue 19661, 14 September 1927, Page 15

IDLE GOLD

RESERVES BUST Hew TO USE MONEY In olden days, when traders bad to carry abroad gold with which to buy, a happy thought occurred to a number ot shrewd Dutchmen (writes Sir James M’Cay, in the Sydney ‘Sun’). They foum.ed tho Bank of Amsterdam, in the year 1609, agreeing to issue, in exchange for gold and silver deposited with tho bank, certificates of tho deposits, which a merchant could carry and offer to his continental vendors in payment for his purchases. The fame of the bank soon spread, and its certificates became as acceptable in trading circles as tho gold they represented. Then one of the earliest great bank frauds was perpetrated. A group of officials of tho Bank of Amsterdam, observing the course of events, realised that as gold and silver were constantly being deposited with tho bank, but not so constantly withdrawn, there was always a large quantity of coin and bullion lying unused in tho bank’s vaults. This offended their Dutch business instincts, and they took to issuing certificates on their own account against tho bank’s reserves. After a while the fraud was discovered, and the ingenious but dishonest practitioners punished; but the experience proved tho fact which is the basis of all modern banking, that a bank entrusted by its customers with their money has always, on a balance, more in hand than it is usually called upon to pay out, and can with perfect safety lend that balance at interest, and make profits therefrom. NEEDS Of GREAT WAR. Ah first sight it may scorn a far cry from Dutch rascals of the 17th century to Australia’s gold reserves in tho 20th, but as a fact the connection is close and intimate. Before the Groat War Britain and Australia both hud “ the gold standard ” ; (hat is, every 'holder of a Bank of England bank note or an Australian bank note could present Ids note to the Bank of England, or to the Commonwealth Bank, and receive gold in exchange. Tho currency was “based on gold,” and could always bo changed into gold on demand. Then came the Great War, winch produced many resells. Of these not (ho least was flic withdrawal from circulation of the gold within each community, and fhc substitution therefore of paper currency. The. gold standard was do facto abandoned. Tho necessities of tho most expensive war of all time made it inevitable that gold was too important to bo used lor internal currency. Foreign countries would not accept payment in local paper; the gold was required to pay for purchases from thorn; ami gold, from being tho basis of a national currency, became the basis of international exchange, and remains there. In theory one can still demand a sovereign for a Commonwealth pound note; in practice, it is extremely difficult to get it. In Great Britain gold is still obtainable in exchange for notes, but with limitations, which make, the right useless for every-day local purposes. You can get gold for notes at the Bank of England, provided you ask, not for sovereigns, but for liars, each of which contains 400 ounces of line gold. Each is thus worth about £1,675. Gold in England has thus become international; it is no longer national. £-18,000,000 STORED.

la Australia the position is analogous. Tho trading banks bold gold reserves which in amount are about £21,000,000, The Commonwealth Treasury holds about tho same amount of gold. These £48,000,000 Ho untouched in many strong rooms. Some trading banks want to keep their own gold reserves for themselves, and not within reason, for, though at present the situation is safe, there are possible political developments in respect of banking which might easily involve all hanks in a colossal debacle. But, apart from that, the dealing with Australia’s gold reserve is easily capable of improvement. The Australian Government and the Australian banks have between them forty-eight millions. Tho Australian nolo issue is also £48,000,000. Centuries of experience have shown that much less than 50 per cent, of gold reserves will maintain public confidence in the issues of paper money. People do not want gold for notes, lor home use, as long as they know gold is available, not as £ for £, but in the proportion in which it is usually asked for Hence there is at least £25,000,000 of stored gold in Australia, earning nothing, which could be earning. AUSTRAL]A’S PROBLEMS. Yu-dralia lias its own exchange problem, which, simply stated, is that m the wool and wheat seasons British and foreign buyers pay, for Ihe moment, in cash. At other times of tho year Australians buying abroad also pay, for (he moment, in cash. If the gold resources are pooled, and held hv iho Commonwealth Bank, winch keeps £20.000,000 or £25,000,000 of them m London, then when Australians arc paying over to Englishmen they will pay m Australians buying abroad also pay, for the moment, in cash. If the gold resources are pooled and held l.v the Commonwealth Bank which keeps £20,000,000 or £25,000,000 of (hern in London, then when Australians arc paving over to Englishmen they will pnv in Australia to the Commonwealth Bank, which will pay out for them in London. To do this the Commonwealth Bank must have resources in Londfti. Of such resources a void reserve is the chief. On such occasions the Australian gold in London goes out, or is pledged as security for the disbursements. YVlien °on the contrary England is paying Australia for its wool and wheat, Englishmen pay to the Commonwealth Bank in London; the gold comes back, or is released from Ihe charge on it, while the Commonwealth Bank in Australia pays out to the Australian creditor. Some of the gold is needed here to protect the note issue; the balance is of most service in London,