THE GOLD STANDARD

Hokitika Guardian, 13 November 1925, Page 4

THE GOLD STANDARD

AN ECONOMIST’S REVIEW. In the section devoted to Economic Science and Statistics at the recent meeting of the British Association. Mr K. G. Tlawtry read a paper upon “The Gold Standard and the Balance of Pavments.” in which he examinee! the relation of an adverse balance ol payment to gold movements from a theoretical standpoint. In managing a, .r„ld standard, it was essential to have regard to the underlying causes of till adverse movement of the exchange which culminated in an export of cold in order that, if the circumstances so required', steps might be taken to counteract thuse causes in time and prevent an undue loss ot A country might lose gold either because its own monetary unit was being depressed in value by an excessive expansion of credit, or liecause the monetary units of one. or more foreign countries were being rinsed in value bv a contraction ot credit. Products he divided into two classes nanielv. foreign trade products (those which were, or might he, exported or imported) and home-trade products (services of various kinds and commodities used in the country). When the currency was depreciated by a credit expansion, the world prices ot foreign-trade products at the fixed par of exchange became ton low in relation to the people's purchasing power, 'loo many of these artificially cheapened goods were bought and had to be paid for somehow. To correct that tendency and stop the efflux ol gold, there was needed a contraction of credit sufficient to withdraw the redundant purchasing power and restore the wealth-value of the currency unit. Much more serious was the case where t .|„.re was a severe credit contraction in another gold-using country. F.o- ---■ fore the war that used to happen every few years. The gold-using countries, as a group, used quite regularlv to allow credit to expand to - an excessive extent. Then when ■ their gold reserves threatened to tall , short of tl".' legal requirements they . hastily took steps to contract credit. often at the cost of precipitating a

panic. One of the advantages ol an international gold standard was that it eliminated exchange risk and facilitated that financing of seasonal exports. The firm ess did not really require any gold movements. The temporary discrepancy between exports and imports "could he just as well covered hy credit instillments, it the exchange market possessed them or was ill a position to create them. In the great crop-producing countries, besides the seasonal disturbance of the exchange due to the export of the crops, there was also a seasonal disiurlmnro ot the currency due to the piierlv domestic business of paying lor them. It the currency law took no account of the big seasonal increase in the active ciicidatioii of specie and paper H-’s caused, and no allowance was made lor large fluctuation in surplus hank reserves, there would he a seasonal disturbance of credit. Such a disturbance in the balance of payments was properly met. by a suitable adjustment of credit. Mr llawtre.v poinied out t.bal tlie subject treated in bis paper bad special importance tor Britain owing t 1 ( the magnitude and leading position nt the English financial market, Ihe international side of the London financial markets had suffered in some respects from the instability nt the exchange while the gold standard had been in abeyance. Tbe rest.oralion ot t lie gold standard was likely to bring with it, among other things, a revival ot the hill on London. If international trade was, in the near I tit lire, to he financed hy means of hills drawn oil London accepting houses and luniks. there must he an export of inpilnl. Ibis luisiiie>s brought with it a certain accretion of balances on deposit in London. blit these were small compared with the amount of credit: granted by the London money market to external liorrowers. The pressure would be I fit rather in the money market than in tic* exchange market. It tin* money market could absorb the additional bills there would l*e lit lie or no pressure on the exchange. On the other hand, there was a tendency, manifest before the war. for foreign central banks to hold sterling bills ol exchange and other marketable assets in London as part ot their currency reserves in place ol gold. One effect of I lie I mica-cd il I the exchange standard was likely to be ( •> throw into relief the special position ol the two principal gold markets—London and New Vork. hears were sometimes expressed that the predominant position in currency policy would he|,,ng to New Vork. The Americans held a disprpnrtinnately great gold reserve. Tf they chose to employ that 'reserve in support of a credit expansion thoy could no doubt exercise tin overpowering influence in other goldstandard countries, ft might become almost impossible lor those countries to counteract Ibe expansive tendency by absorbing the gold. But there was little prospect of America doing nnyt biny of the kind. 1 u fact, the avoidance of an undue credit principle wits •it present the leading princinle of their currency policy, bin long as I hat was sn their redundant gold supply was nothing but an embarrassment and a source of weakness, impairing the efficiency of the control ot credit hv the Federal Reserve system. An argument more to the point was that American financial markets were on so vast a scale that movements which to New- Vork'were relatively slight, would he serious disturbances 'in London. Not only was America richer than Great Britain, hut the purchasing power ol money there was less, so that the disparity in nominal values was even greater than in real values. But relative wealth was licit the only factor. London was a banking centre not for Great Britain alone, but for the greater part of the world, and in America itseif business was sensitive to British credit conditions. A very substantial portion ol American crops was exported and marketed in Europe, and these exports were financed in their later stages mainly in London. In the regulation ot credit in America, the financing ot the crops played a predominant and often a decisive part. A substantial part of American imports, even from countries other than England, was also financed at some stage by London. In American hanking the financing of producers prodnminted ; in British banking the financing of merchants. American hanking was nearly confined to American business; British hanking extended to the business of the whole world. Tn both respects British power over world credit was likely to he the greater.