POUND STERLING

Rotorua Morning Post, Volume 2, Issue 368, 1 November 1932, Page 3

POUND STERLING

WHAT IS IT? SCOTCH JUDGE DISCUSSES AN INTERESTING PROBLEM. NO INTELLIG IBLE REPLY. ✓ (Published by Arrangement with the N.Z. Farmers' Union, Auckland Provinee.) "I yienture to propound a financial problem which at present puzzles a good many thoughtful people. ' So I find, but I find also that it do,es not puzzle a great many people, not because they really understand it but because they have never realised that there is any puzzle... The puzzle is just this. A pound note is a, piece of paper. It has no intrinsic value. If it has ceased to be an obligation to hand over so much* gold, what value does it retain? asks Lord Sands, the well-known Scotch Judge, in a letter to the "Scotsman." "Barter is, of course, the primitive form of exchange. By and by it is found convenient to use coins, not, of course, as counters, but as metal having so much value in commodities. Still later paper comes in. Paper is doubtless a symbol or counter, but it is a counter, the valuef of which depends upon its being an obligation on the part of those who issue it to, hand over in exchange for its return so much gold or otber precious metal. "Now I shall figure a still comparatively primitive society in which there is but one- bank. This bank issues paper notes, each note being an obligation of the bank to pay so much gold. But the despot who rules th'e land, for reasons of his own, probably very wicked ones, for he may have appropriated all the gold himself, releases the bank from any obligation to xedeem its notes in gold. "It seams obvious that in these circumstances the notes would be waste paper. It is just as if the bank were hroke. Apart from the obligation of the bank to redeem in gold the notes represent nothing at all. It would be useless for the despot to decree that the notes though irredeemahle must he accepted as payment. That has alw.ays failed. People will not part with their goods for this paper, but will revert to barter. What is the Pound Note. "The puzzle is why this does not operate on the large scale in a great modern community. Apart from the obligation to redeem in gold, what is the pound note? It is said to be an obligation of the bank. But ari obligation to do what? If I take it to the bank what will the bank give me for it? isothing, except perhaps two other pieces of paper — two halfsovereign notes. "One is told that this pound note, this piece of paper, is still legal tender. But legal tender of what? Of one pound, one is told. But what is one pound if it does not represent so much gold? Doubtless if I am a debtor to the bank or to the Treasury hehind the bank and I tender so many notes in payment I may claim a discharge of the debt. But comparatively few people are debtors to the Bank of England, and, severe as is taxation, man cannot live upon his ahility to pay his taxes. "Now, I have put the question — What is the pound note if it does not represent an obligation in gold? — to a great many people — members of Parliament, publicists, bankers, etc., and I am hound to say I have never received a very intelligible reply. The usual answer is that the pound note relpresents the credit of the Bank of England, or the credit of the Treasury, or the credit of the eountry. Credit to do What? "But when I have pressed the matter further explanation or analysis ha's failed. Credit ?i Good! But credit to do what? Credit is quite unintelligible if it does not represent some obligation. One might be as rich as Crqesus, but if one were to issue bonds binding oneself to 'do something' on their presentation, I am afraid that the credit of these bonds would be nil. "Unfortunate as was Job in his counsellors, I have dismissed them, and I have tried to find my own solution. It may he quite unsound, and, if sound, it is doubtless familiar to economists, but it is certainly not generally understood, and this is my apology for advancing it. "At the moment when the gold standard is departed from, the whole community are debtors or creditors in sterling. The paper pound remains legal tender. Tbs aebtor, if he is so fortunate as to possess it, can use it to satisfy his debt. The creditor cannot say — 'This is less valuable than it used to be.' A is the creditor, B the debtor. B has goods. C has pound notes. To ohtain these notes so as to pay his debts to A, B sells his goods to C for so many notes. Therefore the pound note still has value in goods or as a purchasing power. "This theory depends foi* its successful application on the condition that the. issue of the notes' by the Treasury or the bank is restricted. If notes become more and more plentiful, B will demand more for his goods. in this "way the value of the pound may be said in a sense to depend up-on the credit of the bank or the Treasury in so far as it depends upon noninflation. A Supposed Understanding. "So far the matter may perhaps be plain. But the doubt which suggests itself to one's mind is whetheri such a solution can be of indefinite duration. This doubt suggests the further doubt whether the theory I have advanced is not inadequate, and whether the value of the paper pound, unafteeted in this eountry, affected, butj still substantial in foreign exchanges, does not depend upori a supposed understanding that the suspension of th'e gold basis is temporary, and that the credit of the eountry is pledged to its ultimata restoration. Faith in Return. . "It may be that both the explanations have ,a measure of truth, and that th'e paper sterling still retains substantial value, because in this eountry in payment of interest and debts it is legal tender, and because of faith in eventual return to the gold standard. "Th'ese causes might iaccount for sterling's retention of value; the

causes which will lead to its recuperation are obscure, and seem to depend upon the flow of gold in relation to the balance of trade. But for the past experience it might he thought that as the gold basis became more and more remote and debts contracted on that basis were paid off the paper pound would tend to sag more and more. "The paper pound now stands at some 13s 6d on the foreign exchanges. Until this inconvertible paper comes to be worth 19s 6d or thereabouts there can be no thought of return to the gold standard. Doubtless a great aceumulation of gold in the bank would hasten the process. But how is the gold to be obtained with sterling at a discount? It would seem to. oe a disastrous process to buy gold with depreciated sterling in order to restore the gold standard, seeing that the depreciated sterling so parted with would, when the gold standard was restored, at once become redeemable in gold. "It was the flight of'gold in anticipation of the departure from tbs gold standard that precipitated the crisis. A Parisian who in August last exchanged in London £10,000 in sterling for £10,000 in gold could now with this gold buy back some £15,000 in sterling. Similarly the Bank of England, if it now wanted that gold back, would have to pay £15,000 in sterling (i.e., its own notes) for it. Let it lock this gold away in its coffers, and when the gold standard is restored the bank will be compslled to part with it for £10,000 in its own notes. , Meantime, therefore, the bank must wait before it can replenish its store of bullion.