A MONETARY STANDARD

Hokitika Guardian, 4 September 1930, Page 8

A MONETARY STANDARD

(Auckland Star.)

Our previous comments on the relation between price levels and the gold supply have suggested to a correspondent that if gold is sometimes inconvenient as a standard of value, it ought to be possible to dfevise some alternative currency which would facilitate exchange without causing either inflation or deflation, with all their abundant evils. The idea has occurred to a great many people, particularly in Times of commercial and industrial depression, but the problem is by no meatus so simple as it may appear at first sight, nor is the remedy so easy of application. “What is the good of gold as a standard of value?” asked our correspondent. The answer is that at n very early stage in the progress of mankind there arises the necessity for “a medium ,of exchange and a measure of value;” This medium is currency, and almost all natural pro*ducts, and even many manufactured articles, have been used ns money from time to time. But gold, because it is beautiful and relatively indestructible, has always been acceptable to both primitive and civilised peoples and- experience hap -proved that it combines more merits and fewer defects than any other substance that has- ever been employed to act as money—that is, to measure relative values and to promote exchange.

This brief survey answers our correspondent’s question in part; But we have already noted that The use of cold as currency carries with it certain serious disadvantages. For gold, taking it ajs the typical money of the modern civilised, world, represents the demand- for goods; and it follows that, if the supply of gold, or of money ibnsecl upon it, should decline as compa-reTl with the quantity of goods offered in exchange, prices in general meet fall; whereas if. the amount of gold or money based on gold in circulation should increase, prices in general must rise. Thus the use of gold, renders inevitable some of the evils associated with Deflation on the one hand and Inflation on the other. It is a great mistake to imagine that the precious metals are, peculiar in this respect. But the supply of gold cannot be increased suddenly, in response to an increased, demand for it, nor will gold currency wear but quickly or depreciate rapidly in metallic value. Therefore gold, with all its disadvantages, makes an exceptionally good, reliable and stable form of currency. But it must be remembered that in modern times the exchange oi goodls is conducted chiefly by means otf paper currency and documents, and this has caused many people to lose sight of the fact that, in normal circumstances, the modern world has held its paper currency firmly bon rid in some fixed relation to gold. One exceedingly important effect of the “convertibility” of banknotes and other paper currency has Ibeen that the issue of paper money lias 'been thereby restricted and limited, much to everybody’s advantage. The history of the over-issue of “inconvertible” paper during the Great War. and the disastrous-consequences of the inflation thus occasioned, points clearly to the necessity for establishing some definite relation between the amount of currency in circulation and the underlying foundation of gold. But the impossibility of ever converting or cashing the countless notes issued during the war, and the hardships inflicted on the whole world by the process of deflation, when various States attempted to restore the gold standard, raised fresh doubts- as to the necessity for regarding gold a r the world’s -sole standard of value, and suggested to the experts the conceivability of a paper currency which might supersede gold altogether. Even experienced economic thinkers dike ,1. M. Keynes have dis cussed seriously the relative, merits and defects of such a system. It is (sufficient here to say that its issue and use would require close co-oper-ative action between the banks and other financial institutions throughout, the world on an international scale providing for an adequate supply oi money when goods increased and a reduced volume of currency as the supply of- goods declined. Such a system is, as we have said, conceivable ; but it is so far beyond the range of practical politics that the civilised world still permits itself and its hope of prosperity to depend largely upon a purely casual and fortuitous supply of gold.