FINANCE
BRITAIN'S GOLD HOLDINGS
IN 1931 this country, for causes which I need not now discuss, was forced off the gold standard and our holding of gold in the Bank of England at that time was about £50,000,000, a total which just about represented the extent of our special indebtedness to the United States and France in connexion with temporary credits which had been granted.
Today the holdings of gold by the Bank of England, even valued at the old statutory• prices, is about £327,000,000, while adding that figure to the total held in what is known as the Exchange Equalisation Account, and valuing the combined total at the present price of gold of about £7 per oz., our total gold holding is, or to be more exact was at the end of March last, about L7oo,poo,000. How comes it then that in spite of our departure from gold we should have gained these large sums during the past six years, and what exactly is this Exchange Equalisation Account about which so much has been heard during the last few days ? Those who are already perfectly familiar with the origin and working of that Account will perhaps forgive an attempt to make its origin and its operations clear to those who have no such knowledge.
ORIGIN OF THE FUND.
At the time of our departure from gold in 1931 many of the other countries were still on the gold standard, and while of necessity there was an immediate fall in the value of sterling as expressed in the currencies of the gold countries, it was feared that speculative operations would occasion an even heavier fall than was justified by all the circumstances. Or, to express the matter more truly, it was feared that our departure from gold would occasion sterling to be the subject of such varying speculative operations by exchange dealers as to bring about violent fluctuations in sterling of a character calculated to affect seriously our foreign trade. Accordingly it was decided to establish what was known as an Exchange Equalisation Account and Parliament placed borrowing powers at the disposal of the Account to an amount not to exceed £150,000,000, such borrowing taking the form of periodical issues of Treasury Bills. With these resources the operations of the Exchange Equalisation Account were designed to " even out " as far as possible these exchange fluctuations when they obviously arose from purely speculative as distinct from natural causes. For example, there are periods in the year when our trade position brings about a natural fall in sterling and it would not be the purpose of the Exchange Equalisation Account to check any such decline in sterling. If, on the other hand, foreign or domestic speculators anticipating some recovery in sterling commenced speculative purchases of it to an extent bringing about an unnatural rise in the value of the £, it might be the function of the management of the Exchange Equalisation Account to use its resources for the purchase of foreign currencies which would be the equivalent of sales of sterling. These constituted the chief functions of the Exchange Equal- isation Account during the early years of its establishment.
STRENGTHENING THE FUND.
It was destined, however, that by reason of other countries departing from gold the exchange markets should become still more disorganised and therefore still more subject to the activities of the speculator, and after a considerable period it became necessary that the resources of the Exchange Equalisation Account should be still further strengthened, and accordingly a few years ago the borrowing powers of the Fund were raised by a further £200,000,000, making a total of £350,000,000, plus £25,000,000 which had been obtained from what had previously been known as the Dollar Exchange Account. With these resources the operations of the Exchange Equalisation Account were continued and in more recent years they have operated pari passu with the operations of similar Exchange Equalisation Funds in the United States and elsewhere ; the object of each of these Funds is to keep their own exchanges as steady as possible.
THE FRENCH CRISIS.
Coming, however, to still more recent times, the world situation has been disturbed by two major influences, the one being the French flight from the franc, and the other being the great increase in the world's supplies of gold. The flight from the franc has resulted in a huge exodus of credits and gold from France, chiefly to this country and to the United States, and because the non-absorption of this gold and these credits would have had a further -disastrous effect upon the exchanges—the comparative steadiness of which is absolutely essential for international trade—the operations of the Ex- change Equalisation Accounts during the last year or two have been increasingly in the direction of absorbing these offerings of gold. During the last few months especially, when the crisis in France has become acute with a fresh flight from the franc, the liquid resources of our own Exchange Equalisation Account must have been seriously strained, and it is this further strain which has now occasioned the Government to apply for increased borrowing powers for the Exchange Equalisation Account up to £200,000,000, raising the total of the account to £575,033,033.
LOOKING AHEAD.
A moment's thought, however, will show that in addition to any desire to even out exchange fluctuations another motive has governed the action of the controllers of the Exchange Equalisation Account both in this country and in the United States. Serious as is the position in France and continuous as is the flight from the franc, it can scarcely be supposed that these conditions and that flight will continue indefinitely. On the contrary, and assuming, for example, that the restora- tion some day of confidence on the part of French nationals should be accompanied by some fresh devaluation of the franc there would then be powerful motives for the repatria- tion of the money temporarily sent here for safety. In view of that possibility, or rather probability, it behoves the authori- ties here to see to it that just as the flight from the franc has not been allowed to occasion an abnormal rise in sterling, so the withdrawal of French funds some day must not be allowed to occasion a slump in sterling. And the greatest safeguard against that eventuality is, of course, to be found in a large holding of gold. Thanks now to the great accumu- lation of the metal here and the far greater accumulations on the other side of the Atlantic, it seems reasonable to believe that the repatriation of French money even on a huge scale should not disturb seriously the exchange markets, especially now that under the Tripartite Agreement the United States and this country should be working in accord.
It may be hoped that some day both international political and economic conditions may be such as to bring about a fresh stabilisation of currencies, accompanied by such international co-operation as shall tend to prevent these abnormal flights of capital from one country to another. For the moment, however, conditions are so abnormal and so disturbing, the more so through the great expansion in gold production, that the establishment of these Exchange Equalisation Accounts controlled by Governments would seem to be the only means for dealing with immediate problems and prepar- ing for eventualities in the future.
So far as may be judged, we must look upon the past opera- tions of these Funds as having been beneficial in character, but in view of their tremendous effect upon credit and upon trade it is not surprising that the House of Commons should have desired somewhat fuller information with regard to their management and progress. From what has already been said of the objects of the Fund in checking improper specu- lative activities it will be seen that it would be highly improper to disclose in any way the daily workings of the Fund, and on the whole the Government seems to have struck the happy medium by promising that every six months' accounts shall be published showing the position of the Funds in a statement only three months in arrear, and the Public Accounts Com- mittee is to be allowed to examine the state of the Account each year as at March 31st, before the following January 31st. This undertaking on the part of the Government has given satisfaction in the City where there is general recog- nition of the fact that whatever may be the objections from some points of view to the system represented by the Exchange Equalisation Accounts they have been rendered necessary by the wholly abnormal conditions of international affairs both political and financial.
ARTHUR W. KIDDY.
(Financial Notes will be found on page 42)
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