THE GOLD STANDARD and its Relation to PROSPERITY

Radio Record, Volume V, Issue 18, 13 November 1931, Page 7

THE GOLD STANDARD and its Relation to PROSPERITY

By

WM.

MACHIN

A talk from 3YA by the General: Manager, Canterbury Farmers’ Co-operative Association.

« « « This means that the dragging, creaking wheels of Britain’s trade are turning again more easily. It means more orders, more employment, 3? a bigger turnover .. . aprofitinstead ofaloss ...

FRIEND of mine in Australia has his life insured in e: an English Company which has no office in Australia, and his annual premiums are £100 pay- ’ able in England. Recently he

went to his bank in Melbourne and: asked them to pay this £100 in England for him. They asked him for an extra £30-£130 in allat which he was aghast. what He found, however, that if he could get hold of 100 gold sovereigns in Melbourne and could get someone to carry them to London for him this would meet his difficulty-but he could not get any sovereigns! Australian notes were no help to him, for he found that he had to send £130 worth to pay his £100 in England. Then he tried to get English banknotes, but he discovered that while there were a few people in Melbourne holding English notes they would not sell them for less than a 30 per cent. premium because so many people were bidding for them that this premium was easily obtainable. Someone advised him to buy some wool and sell it again in Londou. He did so, and soon he had £100 lying to his credit in a London bank. But he then found that he could sell that £100 in London for £130 in Australian money to someone else who wanted to make a payment of £100 in London, so his own payment of £100 cost him £130 after all. TR is the kind of thing that happens between two countries when the exchanges get out of gear as they have done between Britain and Australia, to the disadvantage of the latter by 30 per cent. This adverse rate of exchange between Australia and London, however, adds 30 per cent. to the gross income of all the Australian exporters who sell butter, wool, meat and other produce in London. Thus if they get 10d. per lb. for their wool in London, by the time this 10d. is paid to them in Australia it becomes 13d. So this has help to make up to them a little of the big fall in the prices of their wool, butter and other exports. . . The same thing has been going on in New Zealand, but our rate of exchange here has not shown such a wide disparity-it has only .xeached 10 per cent., so each 10d. paid to us in London for what we Well there has only become 11d. here in New Zealand. But this also cuts the other way. When we buy a hundred pounds’ worth of goods-say, woollen cloth or artificial silk-in England and come to pay for them we have either to use £100 which we have already in London or ‘to pay into a New Zealand bank £110 for a credit of £100 in London, so the cloth

costs us £110, and in Australia it costs £130 to import. This is the explanation of an adverse exchange rate on London of 10 per cent. in New Zealand and 30 per cent. in Australia, and it naturally results in these countries importing less goods to avoid the disadvantage of paying heavy exchange premiums and _also,. moreover, in trying to export in greater quantity in order to gain this premium.

Another painful result is that interest on the money this Dominion has borrowed from people in England, which has to be paid in London costs this 10 per cent. extra in exchange, so

that on the £8,000,000 of interest our Government now pays annually in London we have to find an extra £800,000, and this large extra amount must now be paid by the New Zealand taxpayers. So the net result is that our total receipts from all our exports to Great Britain-say, £35,000,000 worth last year, are increased by 10 per cent. because the exporters are able to sell this money in London at this premium-some to importers, and some to the Government, and some to others who have urgent payments to make overseas like my friend with his insurance premium. The farmers thus get back a little of the big fall in their prices, and everybody else-more or less -contributes to make it up. Now this has been going on all over the world during the last year or two. The Argentine, for instance, has had an adverse exchange of 40 per cent., so her exporters have been helped much "more than the exporters of New Zealand and Australia. (Imported lamb worth 7$d. in London. Assume all equal in price-Argentine, Australian, New Zealand-the Argentine exporter gets 104d., Australia 93d., New Zealand 84d.). MPAKE Britain’s exchange with France! Before the War this was 25 francs to the £1. It fell to 50 then to 100 and more, and in 1925 it was stabilised at 125 to the £1. This was a fall from par to 80 per cent. Belgium’s exchange fell to 172 francs to the £1, a fall of nearly 86 per cent., and Germany’s mark fell from 20 to the £1 to a wheelbarrow-load to. the £1, and finally to nothing. The British £1 itself depreciated during the War in relation to other currencies, and when in 1925 sterling stood at about 18/-, Britain by a great effort brought it back to its parity with gold of 20/- and resumed paying out gold in settlement of international balances on demand. When Britain did this-much too soon as we all now think -she gave other countries with depreciated currencies a great opportunity of competing with her, and she lost a lot of trade, particularly to France, Germany and Belgium. For instance, 4.86 American dollars would then buy £1 worth of goods in England, but in France they would buy 125 francs’ worth of goods, and the £1 would buy 125 francs’ worth, and until prices rose to 2a hich level in France

she was a cheap country to buy in because of her depreciated currency and adverse exchange, and she consequently did more trade. Because of this she could buy wool in Australia on level terms with Britain, but could sell her finished cloth in Bradford cheaper than Bradford could make it. Now, however, a new situation has arisen in Britain. So long as (Concluded on page 8.)

Who holds the Gold?

Gold-holdings of the Central Banks and Governments of the United ‘Kingdom, France, Germany and the United States, showing the variations since the beginning of 1931. -By courtesy of ‘"The Economist."

% International Exchanges ~ (Continued from page 7.) Britain met her balances of obligations| in gold, her £1 was at par, but a few weeks ago she got tired of meeting the drain of gold, and the Bank of Dungland ceased to sell gold freely at pav. Consequently sterling depreciated at once, and the £1 became worth only about 8.90 American dollars (yesterday it was worth 3.62 dollars) or 0 French francs or, say, 15/- or 16/egainst the franc and the dollar. What resulted? At once Americans and their customers, and French people and their customers, found they eould buy British goods 20 to 25 per cent. more cheaply, and British business began to hum. The Bnglish newspapers of the first week in October report manufacturers as having been overwhelmed with overseas orders; Some totalling more than they had received for months. Say, an American arrives in London with his dollar draft and finds he can get a £1 note for 3.62 dollars instead of 4.86 dollars; he saves the difference on each £1 worth of British goods, so he buys from England more freely. Conversely, however, the British buyer has to give a £1 for only 3.62 dollars in buying from America, so he buys less American goods and American trade suffers. Triangular Operation. [t works out in a very interesting fashion when the exchange is triangular between three countries. Sup-’ pose a New Zealand farmer buys some American tools costing 4.86 dollars in America, payment for which is to be made in London. This farmer sells a Jamb in London for £1. He could sell that £1 in London to the bank for about 22/-, payable in New Zealand, but he pays for these tools instead. The £1 is meantime only worth, say, 3.62 dollars, so he loses 7/- on his exchange through buying American tools paid for in London with money he could have profitably transmitted to New Zealand, Present Results. Now what is the present result of all these exchange movements. In practice Britain is getting more orders and selling more goods. She has a 20 to 25 per cent. advantage in selling to countries whose currencies are still fixed on gold. This means that the dragging, creaking wheels of her trade, retarded by the depression, are turning again more easily. It -means more orders, more employment, a bigger turnover on which to spread heavy overhead costs, a profit instead of a loss per unit of turnover.

The, Bradford wool journals of a month ago are quite excited about what they call the spectacular advance in wool values and the activity of the September sales in London which were extended by two days because the market was so good. A correspondent in the "YVWool Record" says :- "The departure of Great Britain from the gold standard has lowered the international value of our currency and increased the sterling value of commodities. The immediate effect is to discourage imports and by making our manufactured articles cheaper in

other currencies bring export orders to our mills. Large orders for yarns have been placed with home trade spinners becaused imported yarns can no longer compete. This means increased activity in British mills." It certainly means a disadvantage in the prices of some of Britain’s imports, as it is equivalent to an import duty, but on balance she will gain largely meantime. Rising Prices. {Z is true, however, that prices will tend to rise in Britain, and thus the purchasing power of wages and salaries and other incomes will be reduced in proportion, but purchasing power will only give up a little of the great advantage it has had during the rapidly falling prices of the last two years. In January, 1930, butter was retailing at 2/2 per lb in Dngland, Recently it was only 1/2 retail, so there is room for some increase in prices without hardship to anybody, especially as wages are much higher in England now than they wer pre-war. . Moreover, times of rising prices are | usually times of nrosnaxity-Noathing

succeeds like success"-and this movement may give an impetus to British trade which is cumulative, and which may continue and grow with the assistance of other factors which may be brought into play. Really what is happening on this exchange question all round the world is a little mild inflation-and inflation which is devaluing money to a lower ratio than goods, and the way this is coming about is keeping control and robbing inflation of its great dangers.

MacMillan Report. ‘THE recently issued British MacMillan Report repeatedly stresses the great desirability of a large rise toward the price level of 1928, which the report considers would command widespread though not universal approval, The exchange movements which I have mentioned appear to be working toward this to some extent in some countries, though of course prices are still a long way from this 1928 level. Our present abnormal exchange problems are teaching us a great deal about the necessity for balanced trade relationships between nation and nation and a common standard of value. Some people say that the gold standard has broken down, and blame this for most of our exchange troubles today. Probably the truth is that the gold standard has been required to do much more than its proper function, and it would be more true to blame the extraordinary results of the war for our present troubles, The gold standard has given the world a common measure for its prices and financial operations. The currencies of the nations of the world have hy cammon consent had a fixed re.

--- lationship to gold, and consequently a fixed ratio to each other, and it has been most convenient that this standard should be the common denominator in all the currencies of gold standard countries; and their price relationships subject to an exchange charge which then need never be higher than what is called the higher or lower gold points, that ts the cost in freight, insurance, and loss of interest of shipping gold for the redressing of adverse trade balances. The Standard. STANDARD of this kind is convenjent and necessary if we are to. have reasonable stability of exchanges, which is most desirable for many reasons; and if we all decided to abolish the gold standard to-morrow, the world would require some other standard in. its place, and such an acceptable standard appears well nigh beyond the wit of man to find. " Adverse and large short date balances which could not be met with gold, because of its maldistribution, mainly through America and France having locked tp the bulk of the world’s supply of monetary gold, are the exciting cause of the present exchange difficulties. of Great Britain. It is an irony that while the sudden outside demands on Great Britain which a't most could only amount to a few hundred millions, were being made in such a manner as to cause her to suspend her gold standard and leave sterling to find its own level, her investments overseas amount to the huge sum of not less than £4000 millions. She is abundantly solvent, although her depreciated currency exchange would make her appear to be financial-

ly weak. . The fact is that the world’s low prices have caught her with abnormally high and unproductive costs and obligations. The same thing has happened to Australia, New Zealand and other countries. . Meantime the slow struggle back to the soundness which is indicated by exchange parity will be accomplished by following the old advice, served up anew by "Punch’-"Spend your pennies wisely, and the-pound will take care of itself."

End of month. United Singdom. France. Germany. U.S.A. * January ...... 139.5 446.9 .... 109.8 .... 880.5 February ese 140.8 2... 450.2 2... %II18 1... 885.4 March ..4.... 144.5 2.00 451.7 oeee 113.7 22.. 892.4 April ..ceeeee 146.3) 1... 447.8 .... 115.9 .... 898.6 May " @eeeseee8 151.9 eeee 447.9 e@eee 117.0 esee 913.4 June eecaccee 163.5 .... 452.7 .... 69.6. «22. 943.8 July .eceeeeee 132.0 °-.... 470.2 2.0. 66.7 ~- 942.4 August eseoee§ 134.3 1... 471.5 2. 66.9 .