The Guardian And Evening Star, with which is incorporated the West Coast Times. FRIDAY, NOVEMBER 7, 1930.

Hokitika Guardian, 7 November 1930, Page 4

The Guardian And Evening Star, with which is incorporated the West Coast Times. FRIDAY, NOVEMBER 7, 1930.

GOLD AND PRICES. A period of business depression and falling prices always raises questions as to the .possible, responsibility of die monetary or banking system. This is natural enough says a New Yojk Banking Journal, for it iis agreed that the supply of money ( or credit is a very important factor in modern business and in prices. However, it i« far from being the only important factor. One of the chief merits of the gold standard is that under its workings the supplying of currency and credit is regulated automatically to the maximum extent, instead of by the control of any arbitrary authority. The supply of new gold comas from the mines, and mining is free. It is distributed among the countries ’by tho currents of trade and the play of economic forces, with tire general result that the distribution tends to he in accordance with the economic development of the countries and their ability to use it or command it. Inasmuch as the r.cKWllJulated stock of monetary gold is very large in comparison with the annual additions, the total available supply changes but little from year to year, and it may be assumed that price-changes that are properly ehaigj able to gold will take place gradually rather than suddenly. Formerly, and down to the outbreak of the Great gold coins were a common form Of money in circulation in many countries, but since the war this is no longer the case. In nearly every country during the war gold 'vent to # premium over paper money and was gjtffeered into 'bank reserves, the pnbjie became accustomed to handling

paper money, and the economy of using gold as the basis of paper money, 1 instead of as a circulating medium itself, led to the permanent adoption of this system everywhere. Formerly, also it was common for numerous banks in a single country to exercise the function of issuing currency, and to carry reserves of gold or other lawful money in their own vaults against note issues and deposit!;; but now the policy is generally adopted of, restricting the function of issuing currency to central banking institutions closely related to the national governments. These central banks of issue hold the consolidated banking receives and give stability and elasticity to the credit situation by their ability to rediscount paper for the hanks doing business directly with the public. These developments, which have come gradually in the evolution of banking, have greatly increased the volume of bank credit based upon gold, and therefore the importance' of bank credit as a factor in prices. They have increased the potentiality ot gold, but the influence is manifested through the volume of hank credit, which is subject to independent fluctuations, sometimes very rapid and violent, Thus, although the gold supply is ultimately related to prices, its bearing upon them is not direct and immediate, but rather remote, and subject, to the play of many influences. Confusion seems to exint in the minds of many people regarding the importance of the volume of currency or money in circulation. It is not uncommon to have a decline in the volume of outstanding currency cited as a cause of business depression, or declining prices, whereas it is only a result. This confession of currency with the whole body of credit or purchasing power in circulation happen-e-1 in the first place, no doubt, by confusing “currency” with “money,” for it is agreed that the supply ol “money” has a relationship to prices. Here, however, there is more confusion, for when “money” is spoken of in the money market it is usually bank credit rather than gold or paper money that is referred to. The price of money in the market ip the price of bank credit, and it is the supply and use of bank credit, not the amount of currency in circulation, that influences prices. The fact is that currency nowadays is the small change of the business world. It is wanted for payrolls and in the ietail trade but more than 90 per cent ol the aggregate of payments are made with bank checks. If a recipient rlesirrfs currency, he will have the check cashed, hence currency-flows into and out of the banks daily to suit current demands. It is an automatic movement, wholly controlled by the public, and reflects the activity of business, but the volume of deposits against which checks may be drawn in far more important than the \olurne of currency In circulation. Furthermore, there is another factor related to the pituatiin, to-wit, the volume of bank loans, for most of the deposits result from loans; and still another factor, upon which both leans and deposits are dependent, .via.: the gold reserve, The structure of bank credit rests upon the gold reserves. If the reserve is ample, loans may be mad, deposits will be increased, purchasing power will be put in circulation, and incidentally, to the extent that lawful currency is wanted for payments, it will automatically flow out from the bank deposits. Bank credit is now the currency in common use, whether circulating by means of private checks or printed notes, Deposits and currency notes are inter-convertible.