Finance—Public & Private
The Recent Gold Purchases
I no not know of anything which better illustrates the abnormal conditions of the present time and the artificial influences operating than the recent large purchases of gold by the Bank of England. Last December, when the United States insisted upon our paying the instalment due on the 15th of that month, the situation was met by the Bank of England taking a little over £19,500,000 in gold out of the Reserve and setting it aside to the credit of the United States Government, and some Portion of the gold, indeed, was actually exported. That was a trans- action fairly intelligible even to the man in the street. It was not difficult to see that, with the sterling exchange at a great discount compared with American currency, payment through the exchanges would have involved the remittance of an amount to the equivalent in sterling of nearly £80,000,000. During the past month, however, it has been announced that the Bank of England has made successive purchases of gold, the total of which now aggregates nearly £20,000,000, or just a little more than the amount parted with last December in connexion with the payment on the American Debt. What has brought about this apparent change in the position ? Has the sterling exchange so improved that gold comes naturally to this country ? Not at all ; though under ordinary conditions the arrival of such large amounts of gold within a short period would have meant that economic conditions in this country were such as to have involved a balance in our favour, moving the Foreign Exchanges also in our favour to a point bringing in gold.
UNINFORMED CRITICISMS.
That there is need for a clearer comprehension of the cause of, and the reason for, these gold movements is evident from the fact that already on both sides of the Atlantic the significance of the gold arrivals is being entirely misinterpreted and, moreover, misinterpreted in a manner calculated to produce controversy, and fricticin at a moment when the situation is already sufficiently difficult. In this country the cry is already being raised in quarters very much opposed to a return to the gold standard that these gold accumulations are evidently intended as a preparation for a speedy return to the gold standard. In the United States, however, that section of the public which unfortunately is not too kindly disposed towards this country has hailed the movement as signifying increased ability on the part of this country to pay the War Debt to America, which, of course, is far from being the ease. At the time of the controversy between the two countries in the autumn of last year it will be remembered that the Biitish Note made it very clear that the refusal by the United States of an extension of the moratorium, followed by the large payment of gold by Great Britain, was only calculated to worsen the situation on both sides of the Atlantic, including conditions in the United States. Now, however, ill-informed critics in America, observing the large pur- chases of gold by the Bank of England, are disposed to regard the event as contradicting the line of argument pursued in the British Note. In so many words, these critics say, " Ha; ha! The payment in gold last December has proved of little embarrassment to England, after all ; so little, in fact, that within a couple of months she is able to more than replace the whole of the amount sent over to meet the December payment on the American Debt."
TEE FACTS.
Now let us see what are the actual facts, and we shall then discover how far either of these two criticisms are justified. Take them in the reverse order, and it should be noted that if the gold had come to us naturally—that is to say, as a consequence of an improve- ment in our economic position—the American criticism would in some measure be justified. Such, however, is very far from the truth. What has happened since the United States refused, last autunm, to extend the moratorium and insisted on payment of interest on the War Debt, can be very briefly stated. As was anticipated in the
• (Continued on page 268.) Finance—Public and Private (Continued from page 267.)
' British Note, the effect of the Wholly • unsympathetic attitude of Congress towards the problem of War Debts and its connexion with world depression was to intensify the depression itself, and more especially the depression in the United States. So greatly has the position worsened in that country that banking troubles have begun again, and with them the process of hoarding, which, be it carefully noted, was largely checked in the spring of last year when, as the result of the Lausanne Conference, there were indications of a revival in international confidence and some improvement in trade. This worsening of conditions in the United States has led to a renewal of the fall in the dollar exchange, and, but for certain action by the authorities here. that fall would have been very much greater.
• PROTECTING OUR EXCHANGE.
It will be recalled that in the spring of this year, when sterling exchange was being victimized by foreign speculative operations, the Government established an Exchange Equalization Account, the object of which was to prevent excessive fluctuations in sterling when such fluctuations were shown to have been produced by abnormal rather than natural influences. Accordingly the Government was authorized to use its credit resources up to an amount not exceeding £150,000,000, plus £25,000,000 which the Government already had in hand in connexion with its former exchange operations, to protect sterling from influences calculated to occasion undue fluctuations to the disturbance of our trade. These disturbances have come chiefly from the tendency of the dollar to fall in consequence of financial depression and lack of confidence in the States, and the authorities here have, therefore, from time to time been under the necessity of making large purchases of dollars. To keep such accumulations, however, always in the form of dollars, would have been unwise from the standpoint of this country and of America. It would have been unwise from the standpoint of this country because, if only as a hedge against risks of fluctuations in currencies, a conversion of part of such holdings into gold was advisable. It would have been unwise, too, from the stand- point of the United States, because if these balances had remained simply in dollar form they would have been undisclosed to the authorities in America and would have constituted a menace, giving us power to withdraw them at a moment. By converting a portion of our holdings into gold earmarked by the Federal Reserve Bank to the credit of the Bank of England, America was able to see the actual position. The two points, however, to be comprehended are, first, that these purchases of dollars and subsequent earmarking of gold were the result not so much of a policy initiated here as of a policy thrust upon us by the course of develop- ments in the States. The other point is that these purchases of dollars were effected not as a consequence of an improvement in our economic position, but by the use of Government erklit, and at what cost to the nation is not at present disclosed. From what I have said with regard to the cause of the operations which have led to the present addition to our gold reserve, I think it will be seen that they arc in no way connected either with an improvement in the position here or with plans for an early return to the gold standard. This latter point is a matter which is largely concerned with the whole problem of co-operation between the various countries in any attempts made after the World Economic Conference to bring about greater stabilization in all foreign currencies and in the Foreign Exchanges. ARTHUR, W. KIDDY.
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