23 JULY 1927, Page 22

The Gold Position

Is a Scarcity Impending ?


RECENT purchases of bullion in London by the Bank of France, with their effects on the Money Market, have brought the question of gold reserves into somewhat uncomfortable prominence. The arrangement arrived at between the Bank of England and the Bank of France concerning further purchases has been spoken of as an " armistice." It would, perhaps, be more correct to term it a friendly suspensory agreement. That it was entered into in view of the Bankers' Conference at New York, and that the final outcome of the matter will not be unrelated to the conclusions reached at the Conference, is probable. These circumstances have quickened interest in the inquiry into Gold Reserve and Monetary Policy suggested by Mr. Reginald McKenna, and they prompted the discussion in the House of Commons in the course of which Mr. Churchill reiterated the Gcvemment's opposition to the proposal. To understand the events just summarized it is well to realize that they are symptoms, not causes ; and it becomes desirable to adopt the banker's habit of reading through to the underlying and determining factors. Is the world's present stock and prospective supply of gold enough to enable the structure of credit, national as well as international, safely to be based upon it, assuming the return to the Gold Standard of all the leading commercial countries to begin with, and of every country having international trade eventually ? That is the question, stated comprehensively.


The determining factors are three. The first, admittedly, is the present stock of gold, and prospective annual additions to it, so far as these may be available for purposes of exchange, in relation to the demand for gold for the same purpose. Professor Gustav Cassel, predicting a decrease of annual additions concurrently with a growing demand, forecasts a rise in the value of gold which, owing to its depressing effect on the level of prices, must slow down economic advancement unless means are taken further to restrict the use of gold in exchange operations. But that is a very incomplete view of the matter. The effect of the War was a catastrophic fall in the value of gold—catastrophic because there has never been any fall comparable with it in a like period of time. In part that fall--reflected in the wartime upbound of prices--has since been recovered from. Still, the fact remains that to-day, as compared with pre-War, the value of gold is lower by roundly one-third. Pound for pound, the stock in use for purposes of exchange fulfils to-day two-thirds only of the function it could fulfil in 1913 as the common basis of credit. When increase of production at large has annulled the fall ; when prices are back on the 1913 level ; and when the stock of gold is fulfilling in exchange all the function it fulfilled in 1918, the question of how far, owing to the insufficiency or otherwise of available annual additions, the value of gold may rise above the 1913 level, and prices fall below it, will become one of practical monetary politics. Meanwhile the annulment of the fall, owing to net increase in the world's realized wealth, will take time. A precipitate decline in prices is not in sight. It is not the rise in the value of gold which is the cause of present embarrass- ments ; it is the fall in the value. We can begin to speculate about economic retardation when 1913 prices reappear.


But though this first of the three determining factoii is important, it is of less consequence than the second: The second is the increase in the world volume of active capital. Notwithstanding that it is inseparably associated with increase of production at large, this second factok has in discussion of the question rather remarkably been overlooked. A definition of active capital ai capital invested for the purposes of a return in money; includes issues of public stocks, national and local, as well as the capital of every kind of commercial and industrial undertaking, corporate or other. This is the mass with which credit operations are concerned; and the circulating and liquid sections of the mass are indicated by the aggregates of bank deposits. Aq compared with 1913 there has been an enormous an4 unprecedented growth of the mass ; to begin with; owing to the vast issues of public stocks in most countrio of the world, and in the ex-belligerent States conspicul. ously ; but also owing to the active capitalization an expansion alike of public utility, and of private enters prises. Especially has • capitalization shot ahead id the United States. This immensely expanded capital:: ization, public and private, has, theoretically at least in the countries which have adhered or I eturned to the Gold Standard, to be carried on the basis of gold, and in that direction the theoretical exchange function of gold has taken on an extension far and away beyond precedent.


Inevitably these changes in capitalization have affected the distribution of gold, and of bourse they explain the large grip upon the world's stock taken by the United States. Compared with that grip, plus the Indian demand for hoards, the changes in distribution as compared with 1913 are mere differences in detail. It is the greater post-War changes, however, which have rendered differences of detailed distribution in Europe movements carrying with them an exaggerated sensitive- ness. The prospects as regards this second factor are that capitalization will continue to expand for a good many years to come at a rapid rate.


There remains the third factor, not so important as the second, but not to be overlooked. It is the spread of international trade. Taking the • world at large the prospect, are that trade will be more evenly distributed. Instead of one country—the United Kingdom—an easy first, and the others tailing down and off into nothing, there will be an approach to a more uniform level. The country at the head of the series will not lose positively. Positively the chances point to gain ; but comparatively the country first on the list will be less outstanding. The meaning of this prospect is that international exchange will, in total volume, be a bigger thing. It means, of course, also greater demand On gold as the measure and basis of world values.

The second and third factors point to a greater func- tional importance of gold : the first factor to the reduced present capacity of gold to fulfil the function, although prospective capacity will in due course be restored up to at least the 1913 level.


The problem of coping with actively expansive capi- talization consistently with a free gold market and a free gold circulation is, in this country, an old one. It is the familiar problem of economizing the circulation of gold relatively to the total trade turnover, and by 1913 it had so far been solved by banking devices, notably the use of cheques, that the circulation of gold had in this country been reduced to 3 per cent, of the trade turnover. -That was a very signal achievement, since as regarded 97 per cent. of the business turnover, it substituted for gold--although gold was alone the legal tender currency—a representation universally accepted by the public as beinab as good as gold itself. This in the country's overseas business and investments enabled sterling to be internationally supported where necessary by gold payments to the fullest extent on a comparatively slender central gold reserve. It was the resultant world prestige of sterling which gave the London Bank Rate its commanding pre-War power over international gold movements, not the actual total of the bullion reserve.

Obviously the device of representation is that on which banking practice has everywhere founded itself, and of necessity has done so in the face of expanding capitalization and commerce. Obviously, also, as a matter of necessity, the device has, since the War, been carried farther, for the free internal circulation of gold has in every country of the world been suspended, and representation extended to legal tender currency. Internally everywhere, in brief, representation has become a 100 per cent, affair, and in every country, in order to obviate the free circulation of gold, internal trade has been put upon that foundation of confidence. It.has been the one-and only means of making the world's stock of gold even approachably sufficient for inter- national purposes. To that extent bankers have loyally and without reserve assisted Governments to cope with currency and public credit difficulties.

LEGAL TENDER CURRENCY. • In the circumstances, as internal- trade is upon this foundation of confidence, it is the more vital that legal tender currency should not be trifled with ; and that it Should have, as far as pokiihk, a known, accepted, and steady value. It is because that is vital that the re- ndoption of the gold standard is all-important, even though for internal purposes, since -there is no free convertibility pf notes, it is a readoption on paper merely. It is all- important that the risks of political wangling of legal tender currency should be washed out, for if not, those risks may under these conditions throw upon the structure Of banking and credit, how Carrying the unrelieved burden of representation, a strain it ought not legiti- mately to bear. The credit Structure has been hugely strengthened by the alliances of modern banking ; it has been, as it were, clamped together.; but so long as the base remains dependent on the good faith of governments, and not, as the huthors of the Bank Charter Act sought after, on a gold value bedrock independent of politics, it -must be more delicate.


• So much for the internal -trade aspect. What of the gold basis of international. trade ? Is the world's stock Of gold sufficient to admit of free international gold Movement assuming that the existing distribution of the world's stack will not ore any. large. scale be altered :? Despite the strong supporting effect of the complete representation of gold in internal trade turnovers, and of iiresent-day banking alliances—these being the means by, Which centralized reserves have bedonie practicable— the question does not at the moment-admit of a confidently affirmative reply.

Is them, then; not also a means, for - the purpose of economizing international movements of gold, of project- ing into international transactions an efficient representa- tion analogous to that now applied everywhere in internal trade ? There is such a means, and it is the holding of foreign exchange where it is 'on a parity with bullion. A reserve consisting partly of gold, and partly of exchange fully representing gold, is therefore under these conditions the efficient form of reserve, for if is now perfectly certain that no country setting up to maintain a free gold market has the outstanding and creditor primacy necessary to enable it to assure an adequate reserve of bullion alone.


In this matter prejudgments have to be avoided. It is essential to bear in mind that the ratio of bullion which may be laid down for a composite reserve is a minimum and does not preclude any higher ratio up to a 100 per cent. gold cover which may be judged advisable, practical, and advantageous. While choice is, above the minimum, left between the two forms of cover, the choice being one to be exercised by expert judgment according to circum- stances and conditions, full gold cover is not ruled out. These arc facts it is unwise to ignore. For a great centre of international exchange which is also a free gold market to he obliged, because of the form of the reserve, to work under .a defensive bank rate, is an embarrassment. It is, besides, an arrest of the due evolution of banking practice not to recognize that measures designed to economize the international movement of gold have become a business necessity. There is, besides—although it is not a deve- lopment which can be hurried—the desirability of clamping together the international credit structure by working understandings between central banks. But to enable that to be done it is elementary that reserves should have a recognized common form. - This indicates the case for inquiry. Present conditions are not those of 1913. With the dimensions of capitali- zation what they are, working arrangements arc the feasible plan of financing international trade on a gold value basis—the absolutely essential basis—and at the same time keeping internal trade on a settled and balanced representation of gold values.