THE OTAGO DAILY TIMES SATURDAY, MAY 9. 1955. THE FUNCTION OF GOLD.

Otago Daily Times, Issue 19475, 9 May 1925, Page 8

THE OTAGO DAILY TIMES SATURDAY, MAY 9. 1955. THE FUNCTION OF GOLD.

The cabled reports from Loudon leave the nature of the machinery by which the gold standard is being restored a little obscure. It seems, however, that the British Treasury is, very wisely, attempting to take som£ stops to control the supply of gold, on which the price level will depend, and thereby to meet the criticisms of those who feared that a sudden return to gold would force prices down and postpone the revival of British industry. The most important immediate consequence of the re-establishment of the gold standard is the stability which, it introduces into the exchange relations with other gold-using countries, especially the United States. It can, of course, do nothing permanently to stabilise the

exchange with countries like France, which are still using depreciated paper. It thus substitutes certainty for uncertainty in an important field of external trade, .and, as business men will now be able to concentrate their attention entirely on matters for which their training and experience have made them well fitted, instead of being distracted by exchange fluctuations of which they may understand very little, this change may reasonably be expected to have a .favourable reaction on the general tone of businessThe confidence or the distrust which, business men feel is seldom based entirely on purely rational grounds.. But, even if the good effects which some of them anticipate are without any objective basis in the nature of the industrial organisation, the mere fact that they do anticipate them may serve to some extent to convert their expectations into realities. A more important question, however, is the influence of the gold standard on the general level of prices. Any sharp fall of prices would undoubtedly handicap business and increase unemployment, and because Mr Snowden fears that this may be the case he haa criticised Mr Churchill's decision as premature. It would be idle to deny that the situation is without its risks. A to the pre-war price level is probably impossible, but if it were possible it would be very undesirable. The majority of those who support the restoration of the gold standard as a practical measure would immediately revise their opinion if it could be shown that it would lead to any such general fall of prices. Tbe reason for urging people not to insist on using gold in ordinary transactions is that any such general change in the-monetary habits of the people would, by increasing tha demand for gold, increase its value, and thereby depress the general level of prices. No doubt this is the reason why the Bank of England is not required to give gold in exchange for notes unless quantities of at least 400 ounces are demanded, —a measure proposed by Mr Keynes last March. It is indeed rather paradoxical that the first provision in the Act restoring the gold standard explicitly deprives the small holder of notes of the legal right of demanding gold in exchange. The right is one which in form he has never until now ceased to enjoy, though it has long ceased to be effective. But the function of gold is, through the maintenance of convertibility, to put a check on the issue of paper money, and, through freedom to export and import, to stabilise the exchange rates. There is nothing to be said in favour of restoring gold as. the general medium, for internal business transactions. It is not easy to forecast the future trend of World prices based on gold. It has been calculated that before tha war an annual addition of 3 per cent, to the world’s accumulated stack of gold was necessary to meet the normal demand for industrial purposes and at the same time to prevent a fall of prices. As the output in recent years has been rather less than this, it is feared that there may be a steady fall in prices as a result of an insufficient supply of currency. There are, however, large stores of gold lying idle in America, which now holds 45 per cent, of the world’s stock of gold money. The release of the American surplus may serve for some years to compensate for any deficiency in the output of the mines. There are some who think that the habit of using paper has become so firmly ingrained during the last ten years that the demand for gold will be permanently diminished. Accordingly they fear that the restoration of gold will mean an undue increase in the supply of currency and a rise of prices, with all the undesirable social consequences which that involves. Perhaps when the experts disagree in this way, it is reasonable to conclude that for some time at any rate the movement of prices in either direction will be small. But we may certainly follow the cautious, if unheroic, example of the Commonwealth Treasurer, Dr Earle Page, who sagely observes that “it will be interesting to see the effect of the new’ basis on prices.” For the position will require constant watching. The necessity for “managing” a currency does not disappear when its gold basis is restored. It is possible that the immediate results of the recent changes will be scarcely perceptible, and we need not anticipate any startling alteration in general world conditions. New Zealand will probably benefit through the restoration of exchange fluctuations within narrow limits, though it would certainly suffer in the event of a general decline in prices. There is, however, little to justify the crude view that exporters “lose” and importers “gain” so many shillings through the rates of exchange which at present exist. It is the beginning of wisdom in monetary science to realise that, in the absence of a common standard, the “pound” in Great Britain and the “pound” in New Zealand have nothing whatever in common except the name, and it is no more astonishing that the value of the New Zealand pound should be greater to-day in terms of British currency than it was before the war, than that the value of the French franc should he less. It is quite clear that, if prices in Great Britain fall, the New Zealand exporter will not be any better off as. a result of a return of the exchange rate to par than he is now with the rate on London quoted at a discount. The restoration of the gold standard is only one stage, and perhaps a risky one, in the development of a sound currency policy, and is not its final conclusion. There is nothing inevitable about its operation, and oven before the war it was never really automatic. “At the best it was only an automatic signalling apparatus,” and the smooth working of the industrial machine depended on the skill of those who interpreted the signals. The United States has never abandoned the gold standard, but in recent years it has been “managing” its currency on a quite unprecedented scale. Instead of leaving such action to the discretion of a single State, however powerful and wealthy, the next step should be an international organisation to regulate the supply of gold and thereby stabilise the general world level of prices.