CENTRAL BANKING

Hokitika Guardian, 22 September 1932, Page 7

CENTRAL BANKING

FUNCTIONS DISCUSSED. . JDNIXIN, August 3. •In the monthly-reviewof Lloyd’s Bank, Professor Gustav Cassol contributes an article on the functions of central, banks. > He writes Ewer since thia war -a growing scarcity, of gold has threatened the world wjth the conisequience of a,continuous lowering of commodity prices, resulting In a .general economic depression. The' anionnt'of-new gold required to be provided etejich year '• for the - purchasing' power of gold to he maintained at a constant .level increases in proportion to the rapid economic progress of the ' world, whereas ; aii already.insufficient production is expected to be reduced Very considerably tlui'mg the next two decades. The only conceivable means of preventing this calamity is a systematic nduetien of the mono* tary demand for gold. The golf? economising policy that I have advocated ever sine© 1920 contains two factors. First, the use of gold coins as a circnilar medium should be abandoned. The second measure of securing economy in' the uoe of gold consists in a reduction of the central banks’ requirements of gold reserves. . Under the leadership of the Bank of England this policy hats undeniably attained very valuable results, an d it seems quite certain, that without sue’ deliberate efforts the present situation would have proved /very much more troublesome. ... . A great ques. tion presents itself as soon as we haw chosen the stability of the genera 1 level of commodity prices as the aiir of monetary policy; what means ha a central bank for regulating the pur chasing power of its currency? Tin answer is that a central bank has s< to regulate its rate of discount, that it will ia.t any moment correspond t r the actual situation of the i capita market of the country.

By this Professor Cay.sel means that if the Bank rate is kept lower thsr iis proper, the- market will go to tK Bank to obtain that which cannot b supnlied out of current savings. Thus an artificial purchasing power womb 1 he created, with inflation of the currency. Tli© reverse would take plarr f the Bank rate aver© too high. Rer’ savings would then be used to repa; hank advances, causing deflation. But’ these faults could he avoided by 1"©ins Bank rat? at a level coiespondnr to tli© situation of. the capital market