NATIONAL FINANCE

Hokitika Guardian, 4 December 1931, Page 2

NATIONAL FINANCE

£By Scrutator in N.Z. Financial Tirm-s) i , ' THE GOLD STANDARD. | •> . .... • . - ■ i It is a well known fact of everyday j 'discussion that the economic welfare i of" New Zealand depends on happen- ! ings in Britain, notably that our prosperity is governed by the level of prices for primary produce ruling in the London market, because that in a great measure determines our national ■income. Since, moreover, we are a f heavily importing country, and ihave an annual sum of between eight ancf nine millions sterling to find for interest abroad, we are also greatly interested in the rate of exchange, or remittance for 'funds, that is, on tue. relative value of New -Zealand money .as compared with English money, because to pay our way # we have to convert New Zealand values here into sterling values in London. In these • circumstances it is .desirable that ne •■should know as clearly as possible the probable effects on our economic life of the British abandonment of itne gold-standard. J i A ; s it happens, though these problems are considerably discussed by • Business men in general, and somewhat vague terms, they are not clearly understood. Until one is clear as to what the gold standard is, how p»rfl of exchange are determined, liow tno •juice of gold A ia fixed, and how gold sterling and prices are theoretically plated, it' is impossible to reason with any accuracy on the important questions involved, or make intelligent -forecasts of the future. It is proposed here to state shortly tlxe es- ’ sentials of the problem, so that the. probable , effects' of what is happening in tfie world of money on our general prosperity, and notably on the prosperity of our farmers, may be ascertained with some precision. •'

/ WHAT IS THE, GOLD STANDARD?

f It may be said .that the leading economic powers of the world, including, until a month or so ago, Britain, are on tire gold standard of currency. This does not-/mean- that their circulation consists of gold coins. As a matter of fact, metal has ceased to he employed for actual circulation in the modern world, where the exchange function is undertaken bv cheques for large amounts, and by hank notes and /token coins of .inferior''metal for small amounts.: It- may he said with substantial,'accuracy that the gold standard exists in a country where the Ultimate standard of value is a fixed weight of gold of a definite degree of fineness, and where appropriate and

effective steps are taken to see that the actual circulating medium does not depart in value from the ultimate standard prescribed. If this condition

of affairs is effectually secured, the gold standard in some form or another can be said to exist, even if paper notes or token coins are not freely exchangeable at will info the standard inetal. PARITY OF PAPER MONEY. It is usually considered that the best method of securing -parity of the papier money with its nominal gold equivalent, which is the essence of the gold standard, is to prescribe that paper money and token" coins can be exchanged freely into gold, or gold paper money and tokens, at the par rate, that there should be free and unlimited coinage of the standard mei-at at the prescribed par at the option of all holders of gold, and also that there should be no restriction on tne import or export of gold in bullion or coin, and no prohibition on rtne melting of gold coin. These matters, though important, are, however, really devices for carrying out and ensuring the existence of the gold standard, and not part of the definition, inr example, the gold standard will exist | when paper money is convertible £ for £ into soveriegns at the option of the holder, which was the pre-war form of the standard in England. It iiiay, however, take the form knowil as the gold bullion standard, in which paper moliey is not individually convertible, but. under which the central hank undertakes to -sell gold at the mint ratio in exchange-for paper money, hut in bars of a defined weight and fineness, and not in coin. As a still further variant, the paper money may be kept at par by free exchange, not into gold at home, hut into drafts on a foreign centre which will pay gold. If paper money is kep at par with its nominal gold equivalent. ( by whatever normal means, the gold standard in

some form exists. When the paper money is no longer so maintained at gold equivalence, the gold standard has broken down. I THE PRICE OF GOLD. This leads naturally to the next problem, the price of gold. Many business men have been puzzle* for some years to note that while commodities generally were falling in price, gold remained unvairiable, and •they have been still further puzzled ■to note that after standing steady

for years at the fixed price of £4 4s 114 d per pure ounce, it lias recently pimped on the market to about £-5 6s 9d Why, it is said, should the v.alue of gold remain fixed in a world of change;' and from that ignorant persons go on to refer darkly to finan-

cial conspiracies to maintain the value

of the metal. As a matter of fact, gold in a standard .country cannot vary in price; because gold, measured in terms of itself, must stand at the same figure, a statement that applies to all commodities whatever. Under

the gold standard the measure or values is gold, and gold as valued in gold must necessarily remain steady in price. That, price is- really the result in a very simple fashion of the coinage regulations governing the weight and nurity of the sovereign. The English Mint laws prescribe that the sovr ereign shall be a coin of gold of ilie weight of 123.27447 grains troy of gold, and 22 carats of 11/12th,s. fine, that is, with one twelfth -alloy, the value of which may be neglected. Now, an ounce of gold weighs 480 grains troy, and a sovereign weighs 123.27447 grains troy. It therefore follows by simple arithmetic that an ounce of gold coins into 3.894 sovereigns. Since

there is no charge at the British Mint for coinage, this is equivalent to saying that an ounce of standard gold 11/12ths. fine is worth £3.894 or £3 ].7s 10-id. This apparently fixed price of gold is nothing hut the fixed weight of the sovereign. Since, moreover, it is the price of- gold 11/12ths. fine, if we- want to- get the price or pure gold we multiply by 12 and divide by 11, and get £4 4-j llid, the normal fixed price of pit-re gold per ounce.

As long as the gold standard is maintained intact gold cannot vary appreciably from this price, because if it got dearer, people needing gold for export or otherwise would cash their paper in sovereigns or bars an the central bank at par. In other words, as long as the Bank of England wa-s bound to sell gold in unlimited quantities in exchange for legal render paper at £3 17s 10-.’d per standard ounce, there could be no variation. A few weeks ago the clause of the Gold Standard Act, 1923, .compelling the hank to do this was repealed, and persons possessing legal tender credits m England no longer have the right to turn them into g;old at par. It speedily became- clear that- paper credits were excessive relatively to the gold basis, and English paper money, no longer being convertible into- gold, depreciated in terms of gold through relative excess and lack of correspondence with the gold basis.

In these circumstances paper money, once the shield of the gold conversion is withdrawn, tends usually t-o fall in value through excess issue. Gold, being no longer tied to paper by automatic inter-conversion, becomes a commodity like other things, and, measured in paper money, fluctuates in price. This is why since the abandonment of the gold standard a few weeks ago the value of gold has fluctuated

so much. At the Mint par gold is worth 84s Hid, whereas the last quotation, in paper money, is 106 s 9d. Since the gold lias not altered, it is obvious that the- paper has varied, and depreciated from its parity by the difference between the Mint rate of 84s llid and the ciirrent market rate of 106 s 9d. In other words, business men may take this deviation of current- gold quotations from the par of 84s llicl as a fa-irly close- approximation to the extent to which sterling is- depreciated in terms of gold. The spread or difference is a value barometer for gold, which, of course, stands at zero when the gold standard is in effective operation.

T.te idea that the value of gold is fixed at an “average cost of' production,’’ or ally other level is an absurdity, though widely prevalent. There' is no average cost of production of gold, and cannot he from its very nature. The price of gold is fixed by the Mint weight, but the value depends oil the price level, and is the reciprocal of that price level. If, for example, it is ascertained that the price level over a given period has fallen by 20%, that is, stands at 4-Stlis of its former level, this is equivalent to saying that gold has risen in value by 6-4ths, or ‘25%. A rise in the general price level means a fall in the value of gold, aiid d fad iii the world price level means a rise in tile value of g-old, as long as world prices are on a gold basis, as they are to-day. Whether it is right or desirable that they should be is a question we are not at present discussing. THE EXCHANGE RATE. The depreciation of sterling also means a variation in the rate of exchange between England and countries that remain on the gold standard. Remittances between countries on that standard are governed by a so-called mint par of exchange, which is determined by the relative amount of pure gold in the standard coins into which drafts are ultimately convertible. For example, the sovereign contains 123.27447 grains of gold 11-12ths fine, which is equivalent to 113 grains of pure gold, while the dollar contains 25.8 grains of gold 9-10ths fine, or 23.22 grains of fine gold. If 113 is divided by 23.22 the result is 4.866, which is the par of exchange between Britain and the United States, and which means, when both are on the gold standard, that a pound sterling is equivalent in pure gold weight, and therefore m value, to 4.866 dollars. In these conditions a person wishing

to convert sterling into dollars to meet a claim in America can get exchange at the rate of 4.866 dollars for his £, but when the gold standard is departed from, if the paper is allowed to depreciate, it becomes less valuable in terms of gold, and Will btiy fewer gold dollars, or claims on gold dollars, than before... At present, for example!, the London ekchahgei on New York is quoted about 3.92, which means that in remitting to America in sterling divorced from the gold basis a £ will buy only 3-92 dollars, and not 4.866 as formerly, This difference is also an appropriate index of the degree of depreciation of sterling from its nominal gold parity. It also means that people with deposits in sterling made before the fall from the gold standard, who now -withdraw them to a gold standard country, will lose ai considerable portion of their capital, the loss being determined by the extent of the departure of English paper sterling from. gold. EFFECTS ON BIPORTS AND EXPORTS. The general effect of sterling depreciation on imports and exports is thus clear. If sterling falls by 20% from its gold equivalent, there will be a tendency for the general price level in England, measured- in depreciated paper money, to rise. This rise will tend to be about 25%, not on any existing price level, but on the prices that would have ruled had gold not been abandoned. In other words, there will be a tendency for British prices, internally, to be about 25 per cent, higher than they would otherwise have been. Still, the import and export position depends primarily on the exchange quotations. Imports from America, for example, must- be paid for in dollars, ,and since fewer dollars now go to the £, it will take more pounds to make a remittance. This will discourage the import business, because the exchange premium, .and interest and profit on it, must be passed on, and (that will raise prices and discourage consumption. On the other -hand, a British manufacturer, exporting to America will be paid in dollars, and these dollars are much more valuable in terms of sterling; in which his costs are (assessed, than they previously were. He can therefore either tret more profit on his existing export turnover, or can afford, owing to the exchange -premium, to cut dollar prices and get a bigger share of the business and increase turnover. This result is possible only until internal costs in Britain, for wages and interest, adjust themselves to the new price level; but that adjustment may be retarded and perhaps indefinitely delayed, and while the maladjustment persists, exports are encouraged and imports discouraged by the ..effects of remittance costs and receipts. THE EFFECT ON NEW ZEALAND. The .immediate effects of the depreciation in sterling are favourable to the Dominion, especially as they are combined with a continuance of the existing exchange depreciation between us and London oi about 10 per cent.. against our own currency. Our debt to British creditors is in sterling, and not in gold, so. that if sterling falls relatively t-o gold, as it has done, we have to produce so much less gold values to meet

our interest bill. The effect of the depreciation is almost certain to lift the price level for our exports ill the London market, and the result for us is equivalent t-o a rise in world prices. As a debtor country we benefit by the depreciation of the money in which oin' debts are measured. The result is that a less proportion of our export surplus will have to be earmarked for payment of interest in London on pmnic and .private debt domiciled in that ceirrie The relief .will ultimately show itself in the • form of a higher, sterling value of our national income, and an im provement of our London balances. This, if* other factors do nob intervene should mean an. improvement in the London bal-rtic.es of our Banks, and a fall in the exchange premium between here and London, - reducing or eliminating the premium on which primary producers lay such stress at the present timo

INFLUENCE OF LOAN. Other factors however may complicate the situation. There is for-example the volume of loans raised abroad. For many years we have been in the habit of supplementing our national income by large Loans raised in the London market oil the security of (the public credit. In spite of all pretences to the contrary, these have iii effect been employed as part ef -the national income, and have helped td replenish our London balance's and sustain the London New Zealand exchange rate. If this volume of borrowing is considerably reduced, -alid the indications point that way, the relief '-to our balances L hu,s brought about will either be eliminated or greatly reduced, and that may prevent our exchange from righting itself or going back to par. All it hat can be said in this connection at present is that immediate indications would seem to foreshadow a fall in the exchange premium, but one cannot be certain.

COUNTER-BALANCING THE

ADVANTAGE

lit must be borne in mind that the benefit which farmers derive as exporters from depreciated exchange is paid for in the first instance ■ not by buyers abroad, but from the corresponding increase in the cost of our imports resulting from the premium paid on inward shipments. The farmers are at the moment enjoying a special exchange tax, a sort of informal export bonus, at the expense of the community. As far as they pay increased prices for goods or services as a result of the exchange depreciation, the advantage is cancelled out, but it takes some time for this to happen, and in any case their items for wages and interest are certain to lag behind, leaving them a somewhat indefinable advantage out of the -situation for an indefinite period. As it happens this gain is io f special advantage to them at the present time. Prinia facie they will get a double benefit, that of the higher prices likely to riue in London because of the fall in the value of sterling, and the additional bonus dUe td the depreciation of out own exchange by about 10 pei’ vent, as compared with British money. It should he noted that we have now suffered a doubte depreciation of our money. We were 10 per centpoorer than sterling when sterling was at par with gold, and we are still at Ifche same sterling discount jiiow that sterling itself has slipped about 20 per cent. It is /not 'a question of whether we shall go in for exchange depreciation and inflated paper money. We have Both to a considerable extent-, and any iurther depreciation would be a serious danger td our stability. Whether the new situation in Britain will work for our long run benefit- may, however, be doubted on a number of grounds. There the further consideia.tion that the departure from the gold standard may seriously curtail the earnings of British finance, and drive much valuable international financial business to th'e gold centres in New York or Paris, thus reducing tUe earning power of Britain and restricting purchasing power. So many factors affect -the situation that it almost defies analysis, and cannot be predicted with confidence. One may be sure, however, that mere juggling with currency units cannot in the long run make for either certainty or profit in world indust) y and commerce, primary or secondaiy. An adjustment to a lower permament level of real income in the Dominion seems inevitable, notwithstanding any temporary or incidental advantages that can be snatched for the moment out of the fall of the gold standard in England.