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The possibilities of managed sterling as an international standard McKee, Kenneth M. 1933

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THE POSSIBILITIES OP MANAGED STERLING AlS AN INTERNATIONAL STANDARD Kenneth M. McKee U.B.C. LIBRARY CAT WO. k&J&U&&&J&£& .. ACC. NO. THE P O S S I B I L I T I E S OF MANAGED STERLING AS AN INTERNATIONAL STANDARD K e n n e t h M. McKee A T h e s i s s u b m i t t e d f o r t h e D e g r e e o f MASTER OF ARTS i n t h e De p a r t m e n t o f E c o n o m i c s The U n i v e r s i t y o f B r i t i s h C o l u m b i a A p r i l , 1933. CONTENTS C h a p t e r I I n t r o d u c t i o n . C h a p t e r I I The O u t l o o k f o r the G o l d S t a n d a r d . C h a p t e r I I I G o l d P r o d u c t i o n and t h e P r i c e l e v e l . C h a p t e r I V The E c o n o m i c C o n s e q u e n c e s o f a F l u c t u a t i n g P r i c e l e v e l . C h a p t e r V P u b l i c F i n a n c e and t h e P r i c e L e v e l . C h a p t e r V I A C o n s i d e r a t i o n o f t h e T h e o r y o f Money. C h a p t e r V I I The F o r e i g n E x c h a n g e s . C h a p t e r V I I I A C o n s i d e r a t i o n o f Some S u g g e s t i o n s f o r C o n t r o l l i n g t h e P r i c e L e v e l . C h a p t e r I X The O p e r a t i o n o f a Managed C u r r e n c y w i t h P a r t i c u l a r R e f e r e n c e t o G r e a t B r i t a i n . Chapter X The C l a i m s of S t e r l i n g t o be the B a s i s o f an I n t e r n a t i o n a l Medium o f Exchange. Ch a p t e r X I The C l a i m s of t h e U n i t e d S t a t e s D o l l a r t o be the B a s i s o f an I n t e r n a t i o n a l Medium o f Exchange. Chapter X I I The C l a i m s o f the F r a n c to be the B a s i s o f an I n t e r n a t i o n a l Medium of Exchange. Chapter X I I I The P o s s i b i l i t i e s of Managed S t e r l i n g as an I n t e r n a t i o n a l Medium of Exchange. Chapter X I V The Canadian S i d e of t h e Problem. Appendix A A C o n s i d e r a t i o n of Some P o s s i b l e O b j e c t i o n s t o the P r o p o s e d Exchange Tax. Appendix B A D e t a i l e d C o n s i d e r a t i o n of S o c i a l J u s t i c e i n R e l a t i o n t o the S e l e c t i o n o f P r i c e Indexes. B i b l i o g r a p h y I PREFACE I n t h e m i d s t o f a g r e a t i n t e r n a t i o n a l d e p r e s s i o n t h e p r o b l e m s o f money and c r e d i t a r e s u b j e c t t o a l l the b l a s t s o f b o t h e n l i g h t e n e d a n d m i s g u i d e d c o n t r o v e r s y . T h e r e a r e t h e c u r r e n c y c r a n k s who a r e s u r e t h a t a l l t h e i l l s o f t h e day a r e t h e d i r e c t r e s u l t o f u n sound money p o l i c i e s ; t h e r e a r e t h o s e who t a k e the more m o d e r a t e v i e w t h a t e c o n o m i c d i s t r e s s i s t h e c o n s e q u e n c e o f b o t h m o n e t a r y a n d n o n - m o n e t a r y i n f l u e n c e s ; and t h e r e a r e t h o s e who a r e s a t i s f i e d t h a t e c o n o m i c a c c o r d i s i n c o m p a t i b l e w i t h c a p i t a l i s m . U n d o u b t e d l y most p e o p l e w i l l a g r e e , however, t h a t t h e c a u s e s o f e c o n o m i c d i s c o r d c a n be r e s o l v e d i n t o two f a c t o r s , namely, (1) t h o s e o f a m o n e t a r y n a t u r e , a n d ( 2 ) a l l o t h e r s . The s u b j e c t o f managed c u r r e n c y i s u n u s u a l l y c o n t r o v e r s i a l , and c o n s e q u e n t l y few u n q u a l i f i e d c o n c l u s i o n s w i l l be f o u n d i n t h i s e s s a y . Managed c u r r e n c y i s n o t r e p r e s e n t -ed a s a u n i v e r s a l p a n a c e a f o r a t r o u b l e d w o r l d , n e i t h e r i s i t c l a i m e d t h a t i t w i l l c o n t r o l t h e c r e d i t c y c l e i n so f a r a s i t i s c a u s e d b y n o n - m o n e t a r y f a c t o r s ; b u t i t i s c o n t e n d e d t h a t e n l i g h t e n e d c u r r e n c y management w i l l at t h e v e r y l e a s t m i t i g a t e e c o n o m i c d i s t u r b a n c e s . Some p e o p l e do n o t b e l i e v e t h a t a c o m p a r a t i v e l y s t a b l e p r i c e l e v e l i s t h e b e s t t h i n g f o r a c a p i t a l i s t s o c i e t y , i t b e i n g a r g u e d t h a t a s l i g h t l y r i s i n g p r i c e l e v e l i s a n e c e s s a r y s t i m u l u s o r d r u g t o i n d u s t r i a l 2 a c t i v i t y . S t i l l o t h e r s b e l i e v e t h a t i n v i e w o f d e c r e a s i n g r e a l c o s t s the p r i c e l e v e l s h o u l d be g r a d u a l l y l o w e r e d to enable the p u b l i c t o buy the a d d i t i o n a l p r o d u c t s of i n c r e a s e d e f f i c i e n c y , as i t i s supposed t h a t the r i s e i n wages would n o t be s u f f i c i e n t t o a l l o w the purc h a s e o f the i n c r e a s e d q u a n t i t y o f goods produced. I n s h o r t , t h e r e a r e sound arguments f o r a g r a d u a l l y i n c r e a s i n g p r i c e l e v e l , a s t a b l e p r i c e l e v e l , and a g r a d u a l l y d e c r e a s i n g p r i c e l e v e l i n a c a p i t a l i s t w o r l d . I t would seem t h a t each o f these p l a n s - and a c h o i c e must be made - has i t s quota of d i s t u r b i n g e lements, and the p r e f e r e n c e must r e s t w i t h t h a t one w h i c h has the g r e a t e s t p r o s p e c t o f g i v i n g economic s t a b i l i t y . F o r r e a s o n s g i v e n i n the t e x t , s t a b i l i z a t i o n o f the p r i c e l e v e l i s made the o b j e c t o f c u r r e n c y management, but i t i s l e f t as an open q u e s t i o n whether e f f e c t i v e monetary c o n t r o l i s p o s s i b l e , and some a t t e n t i o n i s g i v e n to a few o f the non-monetary a s p e c t s o f economic i n s t a b i l i t y . The ess a y i s based on the a s s u m p t i o n of c a p i t a l i s m , but i t i s r e c o g n i z e d t h a t the s o c i a l i s t s may be r i g h t when they contend t h a t economic e f f i c i e n c y i s i n c o m p a t i b l e w i t h a c a p i t a l i s t o r g a n i z a t i o n of s o c i e t y . C e r t a i n l y c u r r e n c y management i s p o s s i b l e w i t h o u t s o c i a l i s m , but i t i s not so- c e r t a i n t h a t o t h e r a s p e c t s of economic management a r e p o s s i b l e w i t h o u t i t . A l t h o u g h managed c u r r e n c y may to a l a r g e e x t e n t s o l v e the w o r l d f s monetary p r o b l e m s , i t i s doomed t o d i s a p p o i n t those who ex p e c t economic harmony as i t s l o g i c a l s e q u e l . 3 O b v i o u s l y t h e e s s a y i s b a s e d on t h e w o r k o f Mr. J . M. K e y n e s , b u t i n i t s i n t e r n a t i o n a l a s p e c t s a d e p a r t u r e i s made i n r e s p e c t t o e xchange c o n t r o l . F o r u n u s u a l c i r c u m s t -a n c e s c o n t r o l b y exchange t a x a t i o n i s s u g g e s t e d , w h i c h , i t i s h oped, i m p r o v e s on c u r r e n t u s a g e . W h i l e r e s t r i c t i v e e x change p o l i c i e s a r e u s u a l l y an e v i l , de f a c t o c o n t r o l u n d e r a b n o r m a l c o n d i t i o n s must be r e c o g n i z e d , and i t i s t h o u g h t t h a t c o n t r o l b y t a x a t i o n w o u l d be more e q u i t a b l e t h a n by any means now e m p l o y e d . A new o r g a n i z a t i o n f o r i n v e s t m e n t c o n t r o l b o a r d s i s recommended, and an a l t e r n a t i v e t o c e n t r a l b a n k i n g i s s u g g e s t e d f o r C a nada. A l s o t h e p r o b l e m o f p r o p o r t i o n a l c o n t r o l b y t h e d i s c o u n t r a t e a n d b y open market p o l i c i e s i s r a i s e d . I am i n d e b t e d i n p a r t i c u l a r t o P r o f e s s o r s H.F. Angus and W.A. C a r r o t h e r s f o r k i n d l y c r i t i c i s m and a s s i s t a n c e ; t o t h e members o f t h e D e p a r t m e n t o f E c o n o m i c s a s a w h o l e , an d t o D r . T.H. B o g g s o f S t a n f o r d . F o r a l l i m p e r f e c t i o n s , however, I am f u l l y r e s p o n s i b l e . T h i s t h e s i s i s d e d i c a t e d r e s p e c t f u l l y , and w i t h o u t m a l i c e , t o t h e S p i r i t o f t h e World-Wide D e p r e s s i o n . 4 C h a p t e r I INTRODUCTION. The p r o b l e m o f a n a d e q u a t e money s y s t e m i s a s o l d as t r a d e i t s e l f . A s e a r l y t r a d e r s b a r t e r e d . f o r g o o d s t h e y were i n a l l p r o b a b i l i t y d i m l y aware t h a n an improvement i n t h e i r s y s t e m o f e x c h a n g e m i g h t f a c i l i t a t e t r a d e . I t i s n o t d i f f i c u l t t o i m a g i n e t h e m e n t a l s t a t e o f a b a r t e r e r who w i s h e s t o exchange a g o a t f o r a m e a l , o n l y t o f i n d t h a t a g o a t i s q u i t e u n a c c e p t a b l e b e c a u s e a sheep i s d e s i r e d . B o t h t r a d e r s r e a l i z e t h a t a g o a t i s more v a l u a b l e t h a n a m e a l , b u t a r e c o n f r o n t e d w i t h t h e p r o b l e m t h a t t h e g o a t i s n o t a sheep i n t h e p a r t i c u l a r i n s t a n c e ; and e v e n i f i t were, t h e owner o f t h e g o a t i s n o t p r e p a r e d t o a c c e p t p o u l t r y f o r t h e d i f f e r e n c e i n v a l u e b e t w e e n t h e m e a l a n d t h e g o a t . B o t h t r a d e r s must f e e l t h a t t h e r e i s s o m e t h i n g wrong w i t h t h e i r s y s t e m o f e x c h a n g e . I n a l a t e r economy t h e p r o d u c e r o f m e a l s w o u l d have b e e n g l a d t o a c c e p t a cow f r o m h i s h u n g r y c u s t o m e r , b e c a u s e he w o u l d know t h a t cows c o u l d be e a s i l y e x c h a n g e d f o r any g o o d s t h a t he m i g h t d e s i r e . L i k e w i s e t h e c u s t o m e r w o u l d have s e e n t o i t t h a t h i s g o a t s were e x c h a n g e d f o r cows b e f o r e he p r e s e n t e d h i m s e l f f o r t h e m e a l . B e c a u s e o f t h e g e n e r a l a c c e p t a b i l i t y o f c a t t l e t h e y became a medium o f exchange i n many e a r l y communit-i e s , w i t h t h e r e s u l t t h a t c a t t l e became t h e s t a n d a r d measure o f w e a l t h . B u t a s a s t a n d a r d o f v a l u e and a s a medium o f exchange 5 cow money h a d many d i s a p p o i n t i n g f e a t u r e s . T h i s k i n d o f money ha d t o be f e d a n d was s u b j e c t t o a v a r i e t y o f d i s e a s e s and n a t u r a l f o r c e s w h i c h c a u s e d i t s v a l u e t o f l u c t u a t e most a l a r m i n g l y . I t r e q u i r e d a l o n g t i m e t o c o n v i n c e t h e w o r l d t h a t g o l d was more s u i t a b l e a s a money medium t h a n c a t t l e , c o w r i e s h e l l s , o r b e a v e r f u r s . F o r c e n t u r i e s g o l d h a d to compete w i t h s i l v e r a nd o t h e r m e t a l l i c s t a n d a r d s . I n d e e d , i t s predom-i n a n t p l a c e i n t h e w o r l d ' s money economy was n o t a t t a i n e d u n t i l t h e n i n e t e e n t h c e n t u r y , and t h e n o n l y a f t e r a b i t t e r s t r u g g l e . I n s p i t e o f t h e a d v a n t a g e s o f g o l d w h i c h l e d t o i t s a l m o s t w o r l d w i d e a c c e p t a n c e a s a s t a n d a r d o f v a l u e , t h e o l d p r o b l e m o f a s u i t a b l e money s y s t e m was s t i l l f a r f r o m s o l u t i o n . B e f o r e an a t t e m p t i s made t o s o l v e t h e p r o b l e m i t w i l l be w i s e t o d i s c o v e r j u s t w h e r e i n t h e g o l d s t a n d a r d i s d e f e c t i v e , b e c a u s e i t s v e r y f a u l t s may a f f o r d a c l u e t o t h e u l t i m a t e a n s w e r . F o r th e p r e s e n t t h e i n f l u e n c e o f c r e d i t on the g o l d s t a n d a r d w i l l be n e g l e c t e d , so a s t o t h r o w i n t o c l e a r e r l i g h t some o f t h e f a c t o r s w h i c h d e t e r m i n e t h e v a l u e o f g o l d . Two o f t h e p r i n c i p a l f u n c t i o n s o f money a r e to a c t as a s t a n d a r d o f v a l u e and a s a s t a n d a r d f o r d e f e r r e d p a y m e n t s . W h i l e g o l d r e s p o n d s t o t h e s e p u r p o s e s b e t t e r t h a n more p r i m i t i v e f o r m s o f money, i t d o e s n o t s e r v e them a s w e l l a s t h e w o r l d w o u l d w i s h . The v a l u e o f g o l d a s compared t o most c o m m o d i t i e s i s r e l a t i v e l y s t a b l e b e c a u s e t h e r a t i o o f t h e a n n u a l i n c r e a s e i s so s m a l l t o t h e w o r l d ' s s u p p l y . T hen a g a i n , t h e a n n u a l p r o d u c t i o n i s n o t s u b j e c t t o r a p i d i n c r e a s e o r d e c r e a s e i n 6 r e s p o n s e t o a c h a n g e d demand f o r t h e m e t a l , b e c a u s e o f i t s s c a r c i t y , a n d t h e n a t u r e o f t h e t e c h n o l o g y u s e d i n i t s p r o d u c t i o n . T h u s i t s c h i e f v i r t u e o f s t a b i l i t y i s d e r i v e d l a r g e l y f r o m i t s i n e l a s t i c i t y o f s u p p l y . B u t i n o r d e r t o s e r v e t h e p u r p o s e o f good money, t h e s u p p l y must be s u b j e c t t o c o n t r o l so a s t o meet t h e c h a n g i n g demands f o r i t . I n t h e i m p e r f e c t c o n t r o l o f t h e g o l d s u p p l y , t h e n , i s t o be f o u n d one o f the g r a v e d e f e c t s o f i t s use a s a money s t a n d a r d . I f t h e s u p p l y o f g o l d d o e s n o t r e s p o n d r e a d i l y t o t h e demand, an a l t e r a t i o n i s e f f e c t e d i n i t s v a l u e . G o l d a s a s t a n d a r d o f v a l u e o r f o r d e f e r r e d payments i s t h u s open to s e r i o u s o b j e c t -i o n . A d e b t o r s t a n d s t o g a i n w i t h a f a l l i n t h e v a l u e o f g o l d and t o l o s e w i t h a r i s e i n t h e v a l u e o f g o l d . A p a r t f r o m t h e m o r a l a s p e c t s o f a f l u c t u a t i n g s t a n d a r d , t h e most s e r i o u s c o n s e q u e n c e i s t o be f o u n d i n the r e s u l t i n g d i s o r d e r s t o t h e e c o n o m i c s y s t e m . The I n d u s t r i a l R e v o l u t i o n h a s made money so much more v i t a l t o t h e w o r l d ' s w e l l b e i n g t h a t a s m a l l f l u c t -u a t i o n i n t h e v a l u e o f i t s medium o f exchange o r u n i t o f a c c o u n t , w i l l c a u s e e c o n o m i c c o n s e q u e n c e s undreamed o f two c e n t u r i e s ago. I n o t h e r words t h e more complex t h e e c o n o m i c s y s t e m , t h e more s e n s i t i v e i t i s to c h a n g e s i n the v a l u e o f i t s money. The above a n a l y s i s p r e s e n t s a p i c t u r e o f t h e g o l d s t a n d a r d u n m o d i f i e d b y t h e e x t e n s i o n o f c r e d i t . I t i s much c l o s e r t o t h e f a c t s o f a g e n e r a t i o n ago t h a n i t i s t o t h o s e o f t o d a y . The n e t e f f e c t o f c r e d i t b e f o r e t h e war was t o m o d i f y t h e s u p p l y o f p u r c h a s i n g power w i t h i n c e r t a i n l i m i t s , 7 and t o b r i n g t h e v a l u e o f money u n d e r a l i m i t e d d e g r e e o f bank c o n t r o l . N e v e r t h e l e s s t h e s u p p l y o f g o l d was t h e u n c o n t r o l l e d and most i m p o r t a n t d e t e r m i n i n g f a c t o r i n t h e v a l u e o f money. S i n c e t h e W o r l d War t h e p i c t u r e o f t h e g o l d s t a n d a r d h a s b e e n r a d i c a l l y c h a n g e d . The p a s t two d e c a d e s have w i t n e s s e d t h e d i s a p p e a r a n c e o f g o l d f r o m c i r c u l a t i o n , t h e w i d e a d o p t i o n o f i n c o n v e r t i b l e s t a n d a r d s , and the s u b o r d i n a t i o n o f g o l d t o t h e A m e r i c a n d o l l a r . The g o l d s t a n d a r d h a s b e e n s h a k e n t o i t s v e r y f o u n d a t i o n b y a t e r r i b l e war a n d b y a p o l i c y o f r e p a r a t -i o n s and war d e b t s . The f a c t s a r e t h a t most o f t h e w o r l d now e m p l o y s q u a s i managed s t a n d a r d s w h i c h have a more o r l e s s d e f i n i t e r e l a t i o n s h i p w i t h g o l d , and t h a t most c o u n t r i e s w h i c h use c o n v e r t i b l e c u r r e n c y have w i t h d r a w n g o l d f r o m c i r c u l a t i o n . W hether g o l d w i l l r e c o v e r i t s f o r m e r p o s i t i o n i s open t o q u e s t i o n , and w h e t h e r i t i s d e s i r a b l e t h a t i t s h o u l d i s s t i l l more open t o q u e s t i o n . The g o l d s t a n d a r d h a d b a r e l y become w i d e s p r e a d when t h e s t a g e was r e s e t f o r t h e i n t r o d u c t i o n o f managed c u r r e n c y . The r e s u l t s o f t h e p a s t few y e a r s i n d i c a t e t h a t money can r e t a i n i t s v a l u e w i t h o u t b e i n g c o n v e r t i b l e i n t o g o l d , and have .tended t o e d u c a t e t h e p u b l i c t o an a p p r e c i a t i o n o f the f a c t t h a t g o l d h a s not a m y s t i c v a l u e i n h e r e n t i n i t s e l f . The w o r k i n g o f t h e g o l d s t a n d a r d , t h e n , i s s u b j e c t t o m o d i f i c a t i o n by t h e e x t e n s i o n o f c r e d i t . The power o f c u r r e n c y management p e r m i t s t h o s e i n c o n t r o l t o m i t i g a t e o r a g g r a v a t e th e t e n d e n c y o f money t o f l u c t u a t e i n v a l u e , a l t h o u g h t h i s power may be e x e r c i s e d o n l y w i t h i n c e r t a i n l i m i t s i f a c o u n t r y i s t o r e m a i n on t h e g o l d s t a n d a r d . U n f o r t u n a t e l y many 8 c o u n t r i e s I h a v e b e e n s u b j e c t t o g r o s s m i s u s e o f t h e power o f c u r r e n c y c o n t r o l , w h i c h h a s r e s u l t e d i n t h e i s s u e o f v a r y i n g q u a n t i t i e s o f d e b a s e d c u r r e n c i e s . The c o n c l u s i o n may be r e a c h e d t h a t t h e i n s t a b i l i t y o f money I n most c o u n t r i e s c a n be t r a c e d t o f l u c t u a t i o n s o f t h e v a l u e o f t h e n a t i o n a l c u r r e n c y i n terms o f t h e g o l d s t a n d a r d a n d t o t h e f l u c t u a t i o n s o f t h e v a l u e o f g o l d i t s e l f . I t must be a d m i t t e d , however, t h a t t h e i n c r e a s e d u s e o f c r e d i t h a s made t h e g o l d s t a n d a r d much more e f f i c i e n t t h a n i t o t h e r w i s e 1 w o u l d have b e e n . I t may n o t be t o o much t o s a y t h a t t h e i n s t r u m e n t o f c r e d i t h a s a l l o w e d t h e g o l d s t a n d a r d t o bend w i t h o u t b r e a k i n g . 1. L a u g h l i n , J . L a u r e n c e - Money, C r e d i t a n d P r i c e s , V o l . 1 1 , p.704. 9 C h a p t e r I I THE OUTLOOK FOR THE GOLD STANDARD The e v e n t s o f the p a s t few y e a r s have shown t h a t g o l d i s n o t n e a r l y so v i t a l t o c u r r e n c y a s h a d b e e n s u p p o s e d . The q u e s t i o n b e f o r e many c o u n t r i e s now, i s w h e t h e r i t w o u l d be w i s e o r d e s i r a b l e t o a i m a t t h e u l t i m a t e r e s t o r a t i o n o r r e t e n t i o n o f the g o l d s t a n d a r d . I f t h e w o r l d o r anyone c o u n t r y were t o r e s t o r e t h e g o l d s t a n d a r d ( w h e t h e r a t t h e p r e - w a r p a r o r a t some o t h e r p a r i t y ) r e l a t i v e s t a b i l i t y o f t h e f o r e i g n e x c h a n g e s w o u l d be s e c u r e d , b u t t h e v a l u e o f g o l d i n t h e l o n g r u n w o u l d be l e f t t o t h e mercy o f f a t e . A d v o c a t e s o f t h e g © l d s t a n d a r d p o i n t o u t t h a t i t h a s b e e n r e l a t i v e l y s t a b l e a n d s a t i s f a c t o r y f o r o v e r a h u n d r e d y e a r s . T h e r e f o r e , t h e y n a i v e l y a s s e r t , a d i v i n e p r o v i d e n c e w h i c h h a s g u a r d e d the v a l u e o f g o l d f o r so l o n g w i l l s u r e l y n o t r e l a x i t s v i g i l a n c e . F o r t u n a t e l y f o r t h e r e l a t i v e s t a b i l i t y o f g o l d , t h e g r e a t d i s c o v e r i e s o f o r e b o d i e s o f t h e p a s t c e n t u r y came at most p r o p i t i o u s t i m e s . D e p r e c i a t i o n was a d m i t t e d l y r e a c h i n g d a n g e r o u s p r o p o r t i o n s a f t e r the m i d - c e n t u r y g o l d r u s h e s , a n d t h e s u b s e q u e n t s e r i o u s a p p r e c i a t i o n was f o r t u n a t e l y c h e c k e d b y t h e v e r y t i m e l y d i s c o v e r y o f t h e S o u t h A f r i c a n d e p o s i t s . B u t on t h e w h o l e i t i s u n l i k e l y t h a t any o t h e r s t a n d a r d w o u l d h a v e b e e n more s a t i s f a c t o r y f o r t h e r e q u i r e m e n t s o f t h e n i n e t e e n t h c e n t u r y . 10 I s i t l i k e l y t h a t p u r e l y f o r t u i t o u s c i r c u m s t a n c e s w i l l c o n t i n u e t o s t a b i l i z e the v a l u e o f g o l d ? G e o l o g i s t s t e l l u s t h a t a s t h e w o r l d ' s u n e x p l o r e d r e g i o n s grow s m a l l e r , so t o o w i l l become t h e c h a n c e s o f phenomenal g o l d s t r i k e s . T h i s f a c t o r , i f u n c h e c k e d , w o u l d t e n d t o c a u s e a g r a d u a l a p p r e c i a t i o n i n the v a l u e o f t h e w o r l d ' s g o l d . I t i s sometimes s a i d t h a t t h i s t h r e a t e n e d g o l d s t r i n g e n c y w i l l be met by t h e i n c r e a s i n g e x p l o i t a t i o n o f l o w g r a d e d e p o s i t s , b u t i t i s e q u a l l y l i k e l y t h a t s u c h d e v e l o p m e n t s w i l l be c o u n t e r b a l a n c e d b y t h e f o r c e o f d i m i n i s h i n g r e t u r n s a n d by t h e e x h a u s t i o n o f p r o d u c i n g m i n e s . Then, t o o , t h e v a l u e o f g o l d must be e v e r s u b j e c t t o t h e 1 s c i e n t i f i c d e v e l o p m e n t s i n the t e c h n o l o g y o f g o l d e x t r a c t i o n . I n s h o r t , g o l d i s l i k e l y t o become t o o r a r e o r t o o p l e n t i f u l . Why s h o u l d c o u n t r i e s c l i n g t o a f l u c t u a t i n g and e x p e n s i v e s t a n d a r d when a b e t t e r one i s a v a i l a b l e ? The answer i s , o f c o u r s e , t h a t man i s e s s e n t i a l l y c o n s e r v a t i v e i n h i s h a b i t s o f t h o u g h t and a c t i o n . The argument t h a t t h e g o l d s t a n d a r d p r o t e c t s f r o m i n f l a t i o n i s h a r d l y t e n a b l e i n t h e l i g h t o f r e c e n t e x p e r i e n c e . I t i s s u f f i c i e n t t o r e c a l l A m e r i c a n p r i c e movements d u r i n g t h e war. I f a l l t h e g o l d p r o d u c e d were a v a i l a b l e f o r m o n e t a r y u s e , and i f no e c o n o m i e s were made i n t h e m o n e t a r y u s e o f g o l d , t h e t a s k o f v a l u e p r e d i c t i o n w o u l d be g r e a t l y s i m p l i f i e d . I t w o u l d be a l m o s t s u f f i c i e n t t o s a y t h a t t h e v a l u e o f money 1. "The E c o n o m i s t , " May 9, 1925 - M r . P e t h i e k L a w r e n c e , M.P., spoke f a v o u r a b l y f o r a managed s t a n d a r d a s he h a d g r e a t f a i t h i n t h e p r o s p e c t s o f c h a n g i n g m e r c u r y i n t o g o l d . depends on the s u p p l y o f g o l d and on a l l the f o r c e s w h i c h a f f e c t t h e s u p p l y o f the m e t a l . U n f o r t u n a t e l y f o r s u c h a s i m p l e v i e w , t h e r e e x i s t a h o s t o f c i r c u m s t a n c e s w h i c h a f f e c t t h e demand f o r t h e p r e c i o u s e l e m e n t . I n t h e f i r s t p l a c e , t h e s u p p l y o f g o l d a v a i l a b l e f o r money depends on t h e demand f o r i t i n t h e i n d u s t r i a l a r t s . The demand f o r g o l d i n t h e i n d u s t -r i a l a r t s t e n d s t o r i s e w i t h l i v i n g s t a n d a r d s and t o f a l l w i t h t h e p r i c e l e v e l , b e c a u s e b e t t e r l i v i n g s t a n d a r d s mean t h a t a l a r g e r p r o p o r t i o n o f t h e f a m i l y income i s a v a i l a b l e f o r t h e p u r c h a s e o f l u x u r i e s , and a f a l l i n the p r i c e l e v e l c a u s e s g o l d l u x u r i e s t o be r e l a t i v e l y more e x p e n s i v e i n t e r m s o f g o o d s . I n a d d i t i o n t o t h e above s e c u l a r i n f l u e n c e s i n t h e a r t s 1 demand f o r g o l d , t h e r e must be i n c l u d e d a c y c l i c a l v a r i a t i o n w h i c h i s c l o s e l y r e l a t e d t o t h e b u s i n e s s o r c r e d i t c y c l e . I f t h e s t a n d a r d o f l i v i n g c o n t i n u e s t o i n c r e a s e , i t i s e x t r e m e l y p r o b a b l e t h a t a g r e a t e r p r o p o r t i o n o f new g o l d w i l l f i n d i t s way i n t o t h e a r t s , and l e s s w i l l be a v a i l a b l e f o r m o n e t a r y p u r p o s e s . The c o n s e q u e n t r i s e i n t h e v a l u e o f g o l d may be e x p e c t e d t o a c t a s a p a r t i a l e h e c k t o t h i s t e n d e n c y , p r o v i d e d t h a t t h e g o l d s t a n d a r d i s m a i n t a i n e d . The s u p p l y o f g o l d a v a i l a b l e f o r money i s a l s o 1 de p e n d e n t on t h e h o a r d i n g s o f t h e O r i e n t . F o r c e n t u r i e s t h e r e h a s b e e n an a l m o s t c o n s t a n t d r a i n o f s p e c i e t o t h e O r i e n t 1. A p p r o x i m a t e l y 52$ o f t h e w o r l d ' s s t o c k o f g o l d i s u s e d f o r m o n e t a r y p u r p o s e s , 32$ f o r i n d u s t r i a l p u r p o s e s , and 14$ i s a b s o r b e d by I n d i a , and 3$ i s a b s o r b e d b y C h i n a and E g y p t . D u r i n g the l a s t t h r e e d e c a d e s (1890-1920} C h i n a h a s t a k e n o v e r 75$ o f h e r p r e c i o u s m e t a l i m p o r t s i n s i l v e r , w h i l e I n d i a h a s o n l y t a k e n 45$ i n s i l v e r - S h i r r a s - The F u t u r e o f g o l d and I n d i a n C u r r e n c y R e f o r m - The E c o n o m i c J o u r n a l No.146, V o l . 3 7 , p.242. ( p a r t i c u l a r l y t o I n d i a ) f o r o r n a m e n t a l and h o a r d i n g p u r p o s e s . The amount o f g o l d i m p o r t e d hy t h e s e c o u n t r i e s h a s shown a t e n d e n c y t o v a r y i n v e r s e l y w i t h t h e v a l u e o f g o l d , w i t h t h e r e s u l t t h a t when g o l d was cheap i n t e r m s o f g o o d s , more g o l d was i m p o r t e d t h a n when i t was d e a r . I n so f a r a s a s e c u l a r t r e n d c a n be d e t e r m i n e d f o r t h e O r i e n t a l c o n s u m p t i o n o f g o l d i t w o u l d a p p e a r t o be on t h e i n c r e a s e ; b u t a c a u t i o n must be e x e r c i s e d I n f o r e c a s t i n g , b e c a u s e t h e f u t u r e demand must depend l a r g e l y on e d u c a t i o n , p a t r i o t i c m o t i v e s , a n d g o v e r n m e n t a l p o l i c i e s . B e c a u s e o f t h e r e l a t i v e i n e l a s t i c i t y o f t h e n o n -m o n e t a r y demands f o r g o l d , a f l u c t u a t i o n i n p r o d u c t i o n must have i t s f i r s t c o n s e q u e n c e upon banx r e s e r v e s , w h i c h b e c a u s e o f t h e i r f l e x i b i l i t y may be e x p e c t e d t o s o f t e n t h e s h o c k t o t h e p r i c e l e v e l . The u s e o f g o l d f o r o t h e r t h a n m o n e t a r y p u r p o s e s t e n d s t o a g g r a v a t e the e f f e c t s o f f l u c t u a t i n g g o l d p r o d u c t i o n on t h e s t a b i l i t y o f t h e g o l d s t a n d a r d , b e c a u s e t h e s m a l l e r t h e s u p p l y o f m o n e t a r y g o l d , t h e more a change i n t h e i n c r e m e n t w i l l a f f e c t i t s v a l u e . Economy i n t h e u s e o f g o l d by c e n t r a l i z i n g a n d p o o l i n g r e s e r v e s h a s t h e same e f f e c t on t h e v a l u e o f the m e t a l a s w o u l d a n i n c r e a s e d s u p p l y . When g o l d i s a c c u m u l a t e d i n r e s e r v e s , i t s e r v e s a s a b a s i s f o r t h e e x t e n s i o n o f c r e d i t , and c r e d i t e x p a n s i o n t e n d s t o l o w e r th e v a l u e o f g o l d by i n c r e a s i n g t h e a g g r e g a t e o f p u r c h a s i n g power. C e n t r a l i z e d r e s e r v e s a l s o have t h e e f f e c t o f t e m p e r i n g th e i n f l u e n c e o f f l u c t u a t i n g g o l d p r o d u c t i o n on t h e p r i c e l e v e l , by p e r m i t t i n g a n a l t e r a t i o n '. . IS i n the r a t i o o f r e s e r v e s t o c r e d i t . Newcomers to the g o l d s t a n d a r d may be e x p e c t e d t o cause an a d d i t i o n a l demand f o r g o l d , but i t may be p o i n t e d out t h a t t h e r e a re few c o u n t r i e s t h a t a r e not i n some manner l i n k e d t o g o l d . Some c o u n t r i e s a re o n l y l o o s e l y bound to g o l d by means o f g o l d exchange s t a n d a r d s , and i f t h e y s h o u l d d e c i d e t o adopt the g o l d s t a n d a r d i n f u l l , i t would mean a n e c e s s a r y a c c u m u l a t i o n o f s p e c i e r e s e r v e s w h i c h might s e r i o u s l y a p p r e c i a t e the v a l u e o f the m e t a l . P a r t o f such a demand f o r s p e c i e , however, would be met by the d r a i n i n g o f g o l d from o t h e r r e s e r v e s . 1 The R o y a l Commission on I n d i a n C u r r e n c y and F i n a n c e h e s i t a t e d t o recommend the a d o p t i o n of a complete g o l d s t a n d a r d f o r I n d i a because i t was f e a r e d t h a t h er g o l d r e q u i r e m e n t s might cause s e r i o u s economic d i s t u r b a n c e s as i n d i c a t e d above. I t was e s t i m a t e d t h a t I n d i a would r e q u i r e f i v e hundred m i l l i o n d o l l a r s w o r t h o f g o l d to p l a c e h e r on the g o l d s t a n d a r d , so a compromise was made w h e r e i n I n d i a adopted the g o l d exchange s t a n d a r d i n 1927. By t h i s arrangement I n d i a n money may be exchanged f o r g o l d exchange on London at any time demanded, but c u r r e n c y r e d e m p t i o n i n g o l d i s o p t i o n a l w i t h the a u t h o r i t i e s . The system r e q u i r e s the maintenance of s u b s t a n t i a l r e s e r v e s i n London, and i s cheaper and i s as s a t i s f a c t o r y as a complete 2 g o l d s t a n d a r d . Mr. Gustav C a s s e l has recommended the w i d e r a d o p t i o n of the g o l d exchange s t a n d a r d so as t o economize on 1. K i t c h i n , R e p o r t o f the R o y a l Commission on I n d i a n C u r r e n c y and F i n a n c e , 1 9 2 6 , V o l . I l l , p p . 5 1 9 - 5 4 4 . 2. C a s s e l , Gustav - Post-War Monetary S t a b i l i z a t i o n , p.59. the a v a i l a b l e s u p p l y of monetary g o l d , i n o r d e r t o p r e v e n t a g e n e r a l a p p r e c i a t i o n i n the w o r l d ' s money. The s e c u l a r t r e n d o f p o p u l a t i o n and volume o f t r a d e must m a n i f e s t i t s e l f i n a g r e a t e r demand f o r g o l d i f t h a t s t a n d a r d i s to be r e t a i n e d . P o p u l a t i o n has doubled i t s e l f s i n c e the time o f Napoleon B o n a p a r t e , and i n d i c a t i o n s a re t h a t i t w i l l c o n t i n u e to i n c r e a s e , a l t h o u g h the r a t e of i n c r e a s e may u l t i m a t e l y be e x p e c t e d t o d e c l i n e . Up to a p o i n t i n c r e a s e d p o p u l a t i o n i s l i k e l y t o produce g r e a t e r d i v i s i o n o f l a b o r and s p e c i a l i z a t i o n o f i n d u s t r y , w h i c h w i l l be r e f l e c t e d i n an i n c r e a s i n g volume o f t r a d e . W h i l e changes i n the r a t e o f i n c r e a s e o f p o p u l a t i o n and volume of t r a d e may o c c u r , t h e r e i s e v e r y e v i d e n c e t h a t an a b s o l u t e i n c r e a s e may be e x p e c t e d f o r a l o n g time to come. These changes are g o i n g to i n f l u e n c e a change i n the demand f o r g o l d , w h i c h w i l l t e n d to cause a st e a d y a p p r e c i a t i o n i n the v a l u e o f money. The above c o n s i d e r a t i o n s i n d i c a t e t h a t a p r o g r e s s i v e i n c r e a s e i n the annual s u p p l y of g o l d w i l l be n e c e s s a r y to m a i n t a i n i t s v a l u e , and i t i s l i k e l y t h a t the e x h a u s t i o n o f d e p o s i t s and the f o r c e of d i m i n i s h i n g r e t u r n s w i l l make g o l d 1 p r o d u c t i o n i n a d e q u a t e to meet the f u t u r e demand. P r o v i d i n g t h a t the g o l d s t a n d a r d i s not d i s c a r d e d we may r e a s o n a b l y e x p e c t , t h e n , a l o n g time r i s e i n the v a l u e of g o l d . 1. The o f f i c i a l m i n i n g e n g i n e e r o f the S o u t h A f r i c a n Government, S i r R o b e r t K o t z e , e s t i m a t e s a d e c l i n e i n t e n y e a r s of 48$. Mr. Joseph K i t c h i n , h o l d s t h a t d e c l i n e s i n the T r a n s v a a l w i l l n o t be o f f s e t e l sewhere - S h i r r a s - Economic J o u r n a l , No.146, V o l . 3 7 , 1927. 15 B e f o r e t h e war a n e l e m e n t o f s t a b i l i t y i n t h e v a l u e o f g o l d was i m p a r t e d b y t h e p o l i c y o f numerous b a n k s o f i s s u e . A s g o l d became r e l a t i v e l y r a r e o r a b u n d a n t t h e r a t i o o f g o l d t o bank l i a b i l i t i e s became s m a l l e r o r l a r g e r r e s p e c t i v e l y . S i n c e t h e war t h e v a l u e o f g o l d h a s come l a r g e l y u n d e r t h e c o n t r o l o f a s i n g l e c o u n t r y , n a m e l y t h e U n i t e d S t a t e s . I n o r d e r t o m a i n t a i n t h e v a l u e o f t h e A m e r i c a n d o l l a r t h e F e d e r a l R e s e r v e B o a r d h a s a d o p t e d t h e p o l i c y o f b u r y i n g huge q u a n t i t i e s o f g o l d i n t h e v a u l t s o f W a s h i n g t o n . By r e g u l a t i n g t h e e f f e c t i v e g o l d s u p p l y t h e d o l l a r h a s b e e n m a i n t a i n e d a t a n a r t i f i c i a l l y h i g h v a l u e . A s a c o n s e q u e n c e t h e m a i n t e n a n c e o f t h e g o l d s t a n d a r d demands t h a t a n e x c e s s i v e p r i c e be p a i d by t h o s e n a t i o n s w h i c h p i n t h e i r f a i t h t o g o l d . F u r t h e r m o r e t h e s t a b i l i t y o f t h e g o l d s t a n d a r d i s b r o u g h t i n t o dependence on t h e whims o f one n a t i o n a l b a n k i n g b o a r d . The w o r l d i s by no means a s s u r e d t h a t t h e U n i t e d S t a t e s w i l l c o n t i n u e t o p a y a h e a v y m i n t p r i c e f o r t h e p l e a s u r e o f r e b u r y i n g g o l d . I f t h e U n i t e d S t a t e s were t o d i s c o n t i n u e i t s p r a c t i c e o f f r e e g o l d m i n t i n g t h e p r i c e o f g o l d i n t e r m s o f r e g u l a t e d A m e r i c a n d o l l a r s w o u l d d e c l i n e a t the e x p e n s e o f a l l g o l d s t a n d a r d c o u n t r i e s . Why s h o u l d t h e w o r l d a s p i r e t o a c o s t l y g o l d s t a n d a r d w h i c h i s a t b e s t o n l y a f i c t i o n and w h i c h i s l a r g e l y c o n t r o l l e d by one c o u n t r y ? I n s t r i c t t r u t h t h e g o l d s t a n d a r d h a s become the A m e r i c a n d o l l a r s t a n d a r d . I n s p i t e o f t h e d i f f i c u l t i e s i n h e r e n t i n t h e g o l d s t a n d a r d a s o u t l i n e d above, i t i s p o s s i b l e t h a t i n t e r n a t i o n a l c o o p e r a t i o n d e s i g n e d t o i m p r o v e t h e s i t u a t i o n c o u l d be e f f e c t e d . Many r e c e n t t h i n k e r s on t h i s s u b j e c t h a v e p i n n e d t h e i r f a i t h t o c e n t r a l i z e d r e s e r v e s , g o l d exchange s t a n d a r d s , and i n t i m a t e c e n t r a l b a n k i n g r e l a t i o n s . W h i l e i t i s t r u e t h a t t h e r e h a v e b e e n i n r e c f i n t y e a r s marked examples o f c e n t r a l b a n k i n g c o o p e r -a t i o n , i t i s a l s o t r u e t h a t t h e r e have b e e n examples o f a n t a g o n i s m . Q u i t e a p a r t f r o m any i l l w i l l , t h e r e have grown up s i n c e the war p o l i c i e s w h i c h c o n s c i o u s l y o r u n c o n s c i o u s l y f r u s t r a t e t h e n o r m a l c o u r s e o f t h e i n t e r n a t i o n a l g o l d s t a n d a r d . The f u n c t i o n o f t h e g o l d s t a n d a r d u n d e r n o r m a l c o n d i t i o n s , a s u n d e r s t o o d by t h e C l a s s i c a l E c o n o m i s t s , was t o c o r r e c t a u t o m a t i c a l l y any d i s t u r b a n c e i n e q u i l i b r i u m . T hus g o l d i m p o r t meant an e x p a n s i o n o f c r e d i t , h i g h e r p r i c e s , more i m p o r t s , and f e w e r e x p o r t s . T o d a y c e n t r a l b a n k i n g p o l i c y t e n d s t o f r u s t r a t e f o r c e s w h i c h t e n d t o b r i n g a b o u t e q u i l i b r i u m , * F o r example i f G r e a t B r i t a i n s h i p s g o l d to t h e u n i t e d S t a t e s t h e F e d e r a l R e s e r v e B o a r d may and f r e q u e n t l y does p r e v e n t th e n o r m a l e f f e c t on p r i c e s b y a b s o r b i n g t h e g o l d and s e l l i n g s e c u r i t i e s o f an 1 e q u a l amount. G r e a t B r i t a i n , i n s t e a d o f a l l o w i n g t h e g o l d s h i p m e n t t o a f f e c t i t s p r i c e l e v e l may make up f o r t h e l o s s by a d v a n c i n g c r e d i t . I n t h i s manner the f u n d a m e n t a l c a u s e s w h i c h d e s t r o y e q u i l i b r i u m a r e n o t c o r r e c t e d , and a c o n d i t i o n , i f n o t c h e c k e d , w o u l d a r i s e i n w h i c h a s t e a d y d r a i n o f g o l d m i g h t e n s u e . A g o l d d r a i n o f t h e above n a t u r e c o u l d go on a s l o n g a s t h e U n i t e d S t a t e s were p r e p a r e d t o a b s o r b th e m e t a l , o r a s l o n g a s G r e a t B r i t a i n were p r e p a r e d t o c r e a t e c r e d i t a g a i n s t 1. The M a c M i l l a n R e p o r t . t h e w i t h d r a w a l s . I t i s n o t i n t i m a t e d f o r a moment, t h a t t h e s e p o l i c i e s a r e a p a r t o f a d e l i b e r a t e s a b a t i c a l campaign, b u t t h a t c o u n t r i e s w h i c h p r a c t i c e them a r e a c t u a t e d i n t h e l a r g e by d o m e s t i c m o t i v e s . N e v e r t h e l e s s , a s l o n g a s s u c h p r a c t i c e s a r e f o l l o w e d t h e g o l d s t a n d a r d c a n h a r d l y be c o n s i d e r e d an i n t e r n a t i o n a l medium o f exchange i n the t r a d i t i o n a l s e n s e . I t i s c l e a r t h a t any t e n d e n c y w h i c h i s n o t s u b j e c t t o c h e c k s . must i n the l o n g r u n r e a c h e q u i l i b r i u m by coming t o an e n d . I n e f f e c t t h e end comes by t h e c o u n t r y s u f f e r i n g t h e d r a i n i n l e a v i n g t h e g o l d s t a n d a r d . I t i s n o t i m p l i e d , however, t h a t t h e c e n t r a l b a n k i n g p o l i c i e s a s d e p i c t e d above a r e s o l e l y o r e v e n l a r g e l y r e s p o n s i b l e f o r t h e p r e s e n t s i t u a t i o n i n most c o u n t r i e s . W h i l e i t may be a d m i t t e d t h a t t h e r e i s a l o n g r u n t e n d e n c y f o r the v a l u e o f g o l d t o r i s e i n t h e p r o x i m a t e f u t u r e , i t may be o b j e c t e d b y g o l d a d h e r e n t s t h a t t h e r e i s l i t t l e u s e i n c o n c e r n i n g o u r s e l v e s t o o much w i t h what m i g h t h a p p e n i n a q u a r t e r o r h a l f a c e n t u r y f r o m now. Mr. K i t c h i n i n h i s e s t i m a t e s h a d r e a s s u r e d u s t h a t t h e p r e d i c t e d g o l d s h o r t a g e w i l l n o t make i t s e l f f e l t u n t i l a b o u t 1935, b u t i t must be remembered t h a t t h e e s t i m a t e s were made on t h e b a s i s o f t h e 1 1928 p r i c e l e v e l . I f t h e a v e r a g e p r i c e l e v e l f o r 1931 o r 1932 were t a k e n a s a b a s i s t h e d a t e when an e f f e c t i v e g o l d s h o r t a g e w o u l d be f e l t w i l l have t o be c o n s i d e r a b l y a d v a n c e d . More i m p o r t a n t f o r t h e i m m e d i a t e f u t u r e o f the g o l d s t a n d a r d a r e t h e f a c t o r s o f i n t e r n a t i o n a l g o l d m a l d i s t r i b u t i o n 1. S e l e c t e d Documents on t h e D i s t r i b u t i o n o f G o l d , League o f N a t i o n s , C.102, M38, 1931. a n d c u r r e n t c e n t r a l b a n k i n g p o l i c i e s . I n 1913 E u r o p e p o s s e s s e d s i x t y - t h r e e p e r c e n t o f t h e w o r l d ' s g o l d s t o c k o f 2,102 m i l l i o n p o unds and i n 1925 she h e l d o n l y 35$ o f t h e t h e n a g g r e g a t e g o l d s t o c k o f 2,102 m i l l i o n p o u n d s . On t h e o t h e r h a n d W o r t h A m e r i c a n h o l d i n g s h a d r i s e n f r o m 429 m i l l i o n p o u n d s t o 950 m i l l i o n p o unds, o r f r o m 24$ t o 45$ o f the a g g r e g a t e s t o c k d u r i n g t h i s p e r i o d . From 1925 t o 1928, a p e r i o d when E u r o p e was g e n e r a l l y r e a d o p t i n g t h e g o l d s t a n d a r d , E u r o p e a n demands a b s o r b e d 165 m i l l i o n p ounds o r 18 m i l l i o n p o u n d s more t h a n th e new s u p p l y f o r t h a t p e r i o d . S i n c e t h e n th e m a i n f e a t u r e i n i n t e r n a t i o n a l g o l d movements h a s b e e n the f l o w o f g o l d f r o m d e b t o r t o c r e d i t o r c o u n t r i e s . T hus A m e r i c a n h o l d i n g s have i n c r e a s e d f r o m 880 m i l l i o n p o u n d s t o 944 m i l l i o n p o u n d s f r o m December 1929 t o December 1930, and f o r t h e same p e r i o d F r e n c h h o l d i n g s have i n c r e a s e d f r o m 336 m i l l i o n pounds t o 431 m i l l i o n p o u n d s . Of t h e new g o l d p r o d u c e d d u r i n g 1930 a v a i l a b l e f o r m o n e t a r y p u r p o s e s i t i s e s t i m a t e d t h a t 64$ h a s f o u n d i t s way 1 t o t h e two above named c r e d i t o r c o u n t r i e s . A s a p a r t i a l c o n s e q u e n c e o f t h i s t e n d e n c y t o c o n c e n t r a t i o n , F r a n c e a n d the U n i t e d S t a t e s a r e t h e o n l y i m p o r t a n t c o u n t r i e s on a f u l l g o l d s t a n d a r d , a t t h e t i m e o f w r i t i n g . The f a c t t h a t G r e a t B r i t a i n h a s a bandoned g o l d f o r the p r e s e n t , a t l e a s t , h a s d e a l t a s e v e r e blow t o the g o l d e x change s t a n d a r d . I t was h o ped by Mr. C a s s e l , Mr. H awtrey, and o t h e r e c o n o m i s t s t h a t t h e g o l d exchange s t a n d a r d w o u l d be \ 1. M a c M i l l a n R e p o r t , 1931, pp.64-69. 19 t h e means o f e c o n o m i z i n g g o l d so t h a t t h e p r o b a b l e s h o r t a g e 1 w o u l d n o t be f e l t i n t h e n e a r f u t u r e . P r o b a b l y t h e most s e r i o u s d r a g on t h e i n t e r n a t i o n a l g o l d s t a n d a r d o f t o d a y i s t h e s y s t e m o f war d e b t s , r e p a r a t i o n s , e n c l o s e d t r a d i n g a r e a s , and g o l d and exchange embargoes. T h e s e f a c t o r s a r e a l l c l o s e l y r e l a t e d a n d i n a l a r g e d e g r e e h i n g e a r o u n d t h e p r o b l e m o f war d e b t s . The i n t e r n a t i o n a l d e b t s and t h e i r , a s s o c i a t e d e v i l s a r e i n i m i c a l t o a n i n t e r n a t -i o n a l g o l d s t a n d a r d , and t h e y h a v e b e e n l a r g e l y r e s p o n s i b l e f o r t h e break-down o f t h e s y s t e m . I t i s a l m o s t a x i o m a t i c t h a t i f t h e U n i t e d S t a t e s p e r s i s t s i n i t s d e b t p o l i c y t h a t t h e g o l d s t a n d a r d a s a n i n t e r n a t i o n a l medium o f exchange i s g one. I n s p i t e o f t h e d e c i s i o n o f December 193E r e g a r d i n g t h e s e t t l e m e n t o f t h e d e b t p r o b l e m , many e c o n o m i s t s e x p e c t a change o f p o l i c y w h i c h w i l l be more o r l e s s r a d i c a l . I t i s • r e c o g n i s e d , however, t h a t any o p i n i o n a d v a n c e d a t t h i s d a t e i s s u b j e c t t o m o d i f i c a t i o n i n t h e n e a r f u t u r e . A n o t h e r p o s t war f a c t o r t h a t s h o u l d n o t be n e g l e c t e d i s t h e u n u s u a l l y l a r g e i n t e r n a t i o n a l s h o r t l o a n f u n d . U n t i l t h i s l a r g e f u n d i s i n v e s t e d i n l o n g t e r m s e c u r i t i e s t h o s e c o u n t r i e s i n w h i c h t h e f u n d s a r e m a i n t a i n e d must keep a b n o r -E m a l l y l a r g e g o l d r e s e r v e s t o p r o t e c t t h e i r e x c h a n g e s . F r a n c e , i n p a r t i c u l a r m a i n t a i n s l a r g e l i q u i d b a l a n c e s i n L o n d o n . a n d o t h e r c e n t r e s , and she c a n embarass any c e n t r e by sudden w i t h d r a w a l s . 1. G r e g o r y , T.E., •» The G o l d S t a n d a r d a n d i t s F u t u r e . E . I b i d . , p.38. I n c o n c l u s i o n i t may be n o t e d , t h a t a p a r t f r o m any o b j e c t i o n s t o t h e g o l d s t a n d a r d o c a s s i o n e d b y i t s b a r b a r i t y , c l u m s i n e s s , and t h e u n s t e a d y s u p p l y o f t h e m e t a l , t h e r e a r e v e r y g r a v e c u r r e n t e c o n o m i c p r o b l e m s t o be s o l v e d b e f o r e t h e i n t e r n a t i o n a l g o l d s t a n d a r d c an be e s t a b l i s h e d on e v e n a m o d i f i e d p r e - w a r b a s i s . The M a c M i l l a n Committee, w h i l e r e c o g n i z i n g t h e d i f f i c u l t i e s i n v o l v e d b y changed e c o n o m i c c o n d i t i o n s , was h o p e f u l , a l t h o u g h n o t f u l l y c o n v i n c e d t h a t c o o p e r a t i o n w o u l d m a i n t a i n t h e s t a n d a r d . "Among t h e c a u s e s w h i c h may make f o r d i s e q u i l i b r i u m two s t a n d o u t most p r o m i n e n t l y . I n t h e f i r s t p l a c e t h e w o r k i n g o f t h e g o l d s t a n d a r d may f r o m t i m e t o t i m e be s e r i o u s l y a f f e c t e d b y t h e r e c u r r e n c e o f boom c o n d i t i o n s i n A m e r i c a n economic c o n d i t i o n s . I n the s e c o n d c a s e , t h e g o l d s t a n d a r d i s l i a b l e t o be a f f e c t e d by t h e break-down, a f t e r a p e r i o d o f e x p a n s i o n , o f t h e p r o c e s s o f i n t e r n a t i o n a l i n v e s t m e n t . The immense g r o w t h o f t h e f i n a n c i a l a nd e c o n o m i c power o f t h e U n i t e d S t a t e s h a s a l t e r e d t h e s c a l e , i f n o t t h e t e r m s , o f t h e p r o b l e m o f A m e r i c a n - E u r o p e a n e c o n o m i c r e l a t i o n s , and t h r o w n upon the E u r o p e a n C e n t r a l B a n k s - i n t h e a b s e n c e o f any d e f i n i t e  g u a r a n t e e t h a t t h e F e d e r a l R e s e r v e B a n k s w i l l be p e r m i t t e d by  p u b l i c o p i n i o n t o c o - o p e r a t e a t a l l t i m e s w h o l e - h e a r t e d l y w i t h  o t h e r C e n t r a l B anks - a t a s k o f g r e a t d i f f i c u l t y , w h i c h c a n o n l y be s o l v e d by common u n d e r s t a n d i n g a n d a c t i o n The w o r k i n g o f t h e g o l d s t a n d a r d must be a d j u s t e d t o t h e s e s t r i k i n g c h a n g e s i n w o r l d c o n d i t i o n s , and t h e t a s k o f a d j u s t m e n t must 1 be e n t r u s t e d t o the C e n t r a l B a n k s . " T h i s p a s s a g e i s q u o t e d a t l e n g t h b e c a u s e i t r e p r e s e n t s c o n s e r v a t i v e o p i n i o n , and y e t i t i m p l i e s a d o u b t w h i c h i s u n t h i n k a b l e b u t n e v e r t h e l e s s i s p r e s e n t . I t s u g g e s t s t h a t t h e a u t h o r s o f t h e s t a t e m e n t a r e h a l f aware t h a t t h e y a r e c l u t c h i n g a t t h e p r o v e r b i a l s t r a w , b u t t h a t t h e y a r e h a r d l y p r e p a r e d t o a d m i t i t e v e n t o t h e m s e l v e s 1. M a c M i l l a n R e p o r t - P a r a g r a p h 174, p.78. 22 C h a p t e r I I I GOLD PRODUCTION AND THE PRICE L E V E L The Roman w o r l d o b e y e d t h e same economic l a w s t h a t a r e i n f o r c e t o d a y , - a t l e a s t i n so f a r a s t h e q u a n t i t y t h e o r y o f money i s c o n c e r n e d . The r i c h t r i b u t e f r o m f o r e i g n c o n q u e s t p l a y e d h a v o c w i t h t h e n a t i o n a l p r i c e l e v e l , a n d r i s i n g p r i c e s s hook the p a t r i o t i s m o f many an o t h e r w i s e n o b l e Roman. I t i s e s t i m a t e d t h a t Rome a t t h e h e i g h t o f h e r g l o r y p o s s e s s e d s p e c i e t o t h e amount o f one and o n e - h a l f b i l l i o n d o l l a r s . The M e d i a e v a l w o r l d n e v e r i n h e r i t e d t h i s r i c h l e g a c y , a s i t seems t o have p e r i s h e d i n t h e h a n d s o f the B a r b a r i a n s . D u r i n g t h e l a t t e r p a r t o f t h e M i d d l e A g e s money s c a r c i t y became a c u t e . G o l d and s i l v e r m i n e s were l i t t l e w o r k e d , and i n many p a r t s o f E u r o p e the a n c i e n t m e t a l l u r g i c a r t s h a d b e e n f o r g o t t e n . O u t s i d e o f the d i s c o v e r y o f some a l l u v i a l s i l v e r d e p o s i t s i n P o r t u g a l and t h e o p e n i n g o f a few m i n e s i n Bohemia, t h e p r o d u c t i o n o f p r e c i o u s m e t a l s i n E u r o p e was 1 v i r t u a l l y a t a s t a n d s t i l l . The d i s c o v e r y o f t h e A m e r i c a s h a d t h e happy e f f e c t o f p r o v i d i n g E u r o p e w i t h an a d e q u a t e money s u p p l y , and t h e l e s s happy e f f e c t o f m a k i n g S p a i n t h e p r e m i e r power on t h e C o n t i n e n t . P r i c e s h a d a t e n d e n c y t o r i s e t h r o u g h o u t E u r o p e , a l t h o u g h i n some p l a c e s S p a n i s h g o l d was v e r y s l o w i n m a k i n g i t s e l f f e l t . 1. F e a v e a r y e a r , A .E., - The P o u n d S t e r l i n g , 1 931. 23 D u r i n g th e p e r i o d f r o m 1782 t o 1814 p r i c e s were r i s i n g i n w e s t e r n E u r o p e and i n t h e U n i t e d S t a t e s , b u t t h e c a u s e s a r e a t t r i b u t a b l e , n o t t o an i n c r e a s e i n g o l d a n d s i l v e r p r o d u c t i o n , b u t t o t h e w i d e e x t e n s i o n o f c r e d i t . I n E n g l a n d i n c o n v e r t i b l e p a p e r was t h e c h i e f medium o f exchange t h r o u g h o u t t h e N a p o l e o n i c w a r s , and i n F r a n c e t h e A s s i g n a t s e n t p r i c e s r i s i n g to the s x i e s . I n a d d i t i o n t o i n f l a t i o n a r y -war p r a c t i c e s , however, the g r o w t h o f d e p o s i t b a n k i n g and l e g i t i m a t e n o t e i s s u e was an i m p o r t a n t c a u s e o f r i s i n g p r i c e s d u r i n g t h i s p e r i o d . From t h e c l o s e o f t h e N a p o l e o n i c w a r s t o t h e m i d d l e o f t h e c e n t u r y the p r i c e l e v e l f e l l . The S o u t h A m e r i c a n s t r u g g l e s f o r i n d e p e n d e n c e d i s o r g a n i z e d g o l d and s i l v e r p r o d u c t i o n and many m i n e s h a d b e e n d e p l e t e d ; but the c h a o t i c c h a r a c t e r o f b a n k i n g , p e r h a p s , was t h e most i m p o r t a n t r e a s o n f o r t h e p r i c e d e c l i n e . I t was a p e r i o d o f r e p e a t e d c r i s e s t h r o u g h o u t t h e i n d u s t r i a l w o r l d , and t h e b a n k i n g f a c i l i t i e s were i n a d e q u a t e t o meet t h e l e g i t i m a t e n e e d s o f b u s i n e s s . I n 1848 g o l d was d i s c o v e r e d i n C a l i f o r n i a and a l i t t l e l a t e r i n A u s t r a l i a , w i t h the r e s u l t t h a t t h e w o r l d ' s g o l d s u p p l y was n e a r l y t r i p l e d i n a p e r i o d o f t w e n t y - f i v e y e a r s . A s u b s t a n t i a l r i s e i n p r i c e s was i n e v i t a b l e , b u t t h e e f f e c t o f t h e new s u p p l y on p r i c e s was t e m p e r e d b y a f o u r f o l d i n c r e a s e i n the demand o f t h e a r t s f o r t h e m e t a l . A l s o much o f t h i s new g o l d was a b s o r b e d by new c o n v e r t s t o t h e g o l d s t a n d a r d . I t i s e s t i m a t e d t h a t F r a n c e and Germany a l o n e a b s o r b e d one b i l l i o n , f i v e h u n d r e d s i x t y - f o u r m i l l i o n d o l l a r s 1 o f t h i s new g o l d when t h e y a d o p t e d t h e new s t a n d a r d . The g r o w t h o f p o p u l a t i o n and t r a d e c r e a t e d a n a d d i t i o n a l demand f o r g o l d , b u t t h i s f a c t o r was more t h a n o f f s e t b y t h e d e v e l o p -ment o f sound b a n k i n g i n t h e i m p o r t a n t c o u n t r i e s . From 1873 t o 1898 a w o r l d w i d e p r i c e d e c l i n e a g a i n made i t s a p p e a r a n c e . W h i l e e c o n o m i s t s a r e n o t u n i t e d i n t h e i r r e a s o n s f o r t h i s s e c u l a r t r e n d , i t i s g e n e r a l l y a g r e e d t h a t a f a l l i n g o f f o f g o l d p r o d u c t i o n , t h e w i d e a d o p t i o n o f t h e g o l d s t a n d a r d , and i n c r e a s i n g p o p u l a t i o n a n d t r a d e were p r i m a r i l y r e s p o n s i b l e . G o l d d i s c o v e r i e s i n S o u t h A f r i c a and t h e K l o n d i k e were the c h i e f c a u s e s f o r r i s i n g p r i c e s up t i l l a p p r o x i m a t e l y 1915 when c r e d i t i n f l a t i o n became t h e c h i e f f a c t o r . Most o f t h e g o l d f r o m S o u t h A f r i c a was a v a i l a b l e f o r m o n e t a r y p u r p o s e s b e c a u s e O r i e n t a l c o n s u m p t i o n was n o t commensurate w i t h t h e i n c r e a s e d s u p p l y . Much o f t h i s new g o l d , however, d i d n o t a f f e c t t h e p u r c h a s i n g power o f t h e w o r l d ' s c u r r e n c y , b e c a u s e many o f t h e c e n t r a l b a n k s u s e d i t t o s t r e n g t h e n t h e i r r e s e r v e s . 1. l a u g h l i n , J . L a u r e n c e - H i s t o r y o f B i m e t a l i s m , 1892, p .145. 25 C h a p t e r I V THE ECONOMIC CONSEQUENCES OF A FLUCTUATING P R I C E L E V E L I t i s a t r u i s m t o s a y t h a t a change i n t h e p r i c e l e v e l w h i c h w o u l d a f f e c t a l l members o f s o c i e t y i n a n e q u a l manner w o u l d c a u s e no u n j u s t t r a n s f e r o f w e a l t h a s b e t w e e n c l a s s e s . The f a c t i s , however, t h a t t h e i n c i d e n c e o f a c h a n g e d p r i c e l e v e l f a l l s u n e q u a l l y and c a u s e s i n n u m e r a b l e s o c i a l c o m p l i c a t i o n s . B y t h e m e r e s t c h i c a n e r y o f f a t e w e a l t h may be t r a n s f e r r e d f r o m one c l a s s o f p e o p l e t o a n o t h e r , r e g a r d l e s s o f a l l p l a n n i n g o r e x p e c t a t i o n . F o r t h e p u r p o s e s o f c o n s i d e r i n g the e f f e c t o f u n s t a b l e money, s o c i e t y may be d i v i d e d i n t o two o v e r l a p p i n g i n t e r e s t s , n a m e l y c r e d i t o r and d e b t o r . M o s t p e o p l e a r e b o t h c r e d i t o r s and d e b t o r s b u t t h e i r g e n e r a l a t t i t u d e s t o w a r d f l u c t u a t i n g money a r e l a r g e l y d e t e r m i n e d b y t h e i r p r e d o m i n a t i n g i n t e r e s t . C o n s e q u e n t l y d e b t o r s t e n d t o l o o k w i t h f a v o u r on i n f l a t i o n a r y m e a s u r e s w h i l e c r e d i t o r s t e n d to f a v o u r d e f l a t i o n . A g r a d u a l i n c r e a s e i n t h e v a l u e o f money r e s u l t s i n s u b s t a n t i a l g a i n s t o t h o s e who own l o n g t e r m i n v e s t m e n t s o r have c l a i m s t o f u t u r e money i n c o m e s . T h i s c l a s s o f p e o p l e may be c o n v e n i e n t l y c a l l e d t h e i n v e s t i n g c l a s s and c o m p r i s e s a l l t h o s e who r e c e i v e money i n c o m e s f r o m b o n d s , m o r t g a g e s , a n n u i t i e s , l e a s e s , and s i m i l a r c o n t r a c t s . D u r i n g t h e l a s t h a l f o f t h e n i n e t e e n t h c e n t u r y t h e r e n t i e r s r e a p e d s u b s t a n t i a l g a i n s b e c a u s e o f t h e g r a d u a l 26 b u t s t e a d y d e c l i n e i n t h e p r i c e l e v e l . As t h e b u r d e n o f t h e s e d e b t s became n o t i c e a b l y h e a v i e r d u r i n g t h e e i g h t i e s and n i n e t i e s o f t h e n i n e t e e n t h c e n t u r y t h i s c l a s s became i n c r e a s i n g l y u n p o p u l a r ; t o s u c h an e x t e n t t h a t t h e a d v e r s e f e e l i n g t o l o n g t e r m c r e d i t o r s was w i d e l y r e f l e c t e d i n t h e c u r r e n t l i t e r a t u r e . When p r i c e s a r e r i s i n g , however, t h i s c l a s s t e n d s t o l o s e . A t t i m e s t h e p r i c e l e v e l may r i s e so r a p i d l y t h a t t h e d e b t o r may a c t u a l l y r e p a y l e s s p u r c h a s i n g power t h a n was b o r r o w e d , a n d t h e r e a l r a t e o f i n t e r e s t a s d i s t i n c t f r o m t h e money r a t e may be n e g a t i v e . C o n s e q u e n t l y , d u r i n g p e r i o d s o f r i s i n g p r i c e s , bond i n v e s t m e n t t e n d s t o become l e s s a t t r a c t i v e , w i t h t h e r e s u l t t h a t b o r r o w e r s must o f f e r h i g h e r i n t e r e s t r a t e s . I n t h e l o n g r u n , i f t h e e conomic o r d e r i s t o depend on i n d i v i d u a l s a v i n g s f o r i t s c a p i t a l , i t must s a f e g u a r d t h e i n v e s t o r f r o m l o s s e s a t t r i b u t a b l e t o f l u c t u a t i n g money s t a n d a r d s . The b u s i n e s s c l a s s g e n e r a l l y b u y s b e f o r e i t s e l l s , a nd c o n s e q u e n t l y s t a n d s t o make a f o r t u i t o u s g a i n i n e x c e s s o f n o r m a l p r o f i t s when p r i c e s a r e r i s i n g . B u s i n e s s i s d e c l a r e d t o be g ood and employment and p r o d u c t i o n a r e a t a maximum. D u r i n g a p e r i o d o f r i s i n g p r i c e s a p e r s o n who c a n b o r r o w money f r e q u e n t l y f i n d s t h a t h i s repayment h a s l e s s p u r c h a s i n g power t h a n h i s b o r r o w i n g , and i n a u s u a l l y f u t i l e a t t e m p t t o keep up w i t h t h e f a l l i n t h e v a l u e o f money, i n t e r e s t r a t e s may s o a r t o g r e a t h e i g h t s . H i g h u n e a r n e d r e w a r d s stamp the b u s i n e s s man a r u t h l e s s p r o f i t e e r . T h i s , t h e n , i s t h e s e c o n d d i s t u r b a n c e t o the e c onomic s y s t e m w h i c h c a n be b l a m e d on r i s i n g p r i c e s . I f t h e r i s i n g p r i c e s d i s c o u r a g e the i n v e s t o r , t h e y a l s o b r i n g down o p p r o b r i u m on t h e b u s i n e s s i n t e r e s t s . When the p r i c e l e v e l i s f a l l i n g b u s i n e s s e n t e r p r i s e r s f r e q u e n t l y r e p a y , a t t h e e x p e n s e o f t h e i r p r o f i t s o r c a p i t a l , more p u r c h a s i n g power t h a n t h e y b o r r o w e d . I n d u s t r y i s s t a g n a n t , unemployment i s r i f e , a n d t h e i n t e r e s t r a t e i s l o w . T hus t h e n e e d s o f s o c i e t y a r e s u b o r d i n a t e d t o t h e f a i t h i n a t r e a c h e r o u s 1 s t a n d a r d . Wages have a d e c i d e d t e n d e n c y t o l a g b e h i n d p r i c e movements. A s a c o n s e q u e n c e t h o s e who d u r i n g p e r i o d s o f f a l l i n g p r i c e s a r e s u f f i c i e n t l y l u c k y t o r e t a i n employment e n j o y a n i n c r e a s e i n r e a l wages. I n p e r i o d s o f r i s i n g p r i c e s r e a l wages have a t e n d e n c y t o f a l l . T h i s t e n d e n c y , i n t h e c a s e o f s t r o n g l y o r g a n i z e d l a b o u r , may be d i s c o x t n t e d by s u c c e s s f u l demands on the i n c r e a s e d p r o f i t s o f the e n t e r p r i s e r . I n t h e l o n g r u n r i s i n g p r i c e s p r o b a b l y r e s u l t i n a r e l a t i v e g a i n , a n d i n some c a s e s i n an a b s o l u t e g a i n t o l a b o r a s a w h o l e , t h a t i s a s compared t o i n t e r e s t s o t h e r t h a n b u s i n e s s . S i n c e b u s i n e s s i s c a r r i e d on f o r t h e sake o f p r o s p e c t -i v e money p r o f i t s , the volume o f p r o d u c t i o n must be i n f l u e n c e d by a c h a n g e , o r b y a mere e x p e c t a t i o n o f a change i n t h e p r i c e l e v e l . I f b u s i n e s s men e x p e c t a f a l l i n t h e p r i c e l e v e l i t may p a y them to c h e c k i n d u s t r y a t the e x p e n s e o f s o c i e t y . I n so f a r a s c h a n g es i n t h e p r i c e l e v e l a r e u n f o r e s e e n , s p e c i a l p r o v i s i o n must be made f o r t h e e l e m e n t o f r i s k . The c o s t o f r i s k b e a r i n g i s one o f t h e b i g w a s t e s o f s p e c i a l i z e d e c o n o m i c a c t i v i t y , so 1. M a e M i l l a n E e p o r t , p a r a g r a p h 171, p.86. t h a t w h e r e v e r r i s k c a n be r e d u c e d a s o c i a l s a v i n g may be s a i d t o a c c r u e . T h o s e r i s k s w h i c h a r e a t t r i b u t a b l e t o f l u c t u a t i o n s i n t h e p r i c e l e v e l c a n be m i n i m i z e d by s t a b i l i z i n g t h e s t a n d a r d o f v a l u e . T h i s r i s k i s much g r e a t e r i n i n t e r n a t i o n a l t r a d e b e c a u s e o f t h e t i m e e l e m e n t , and may be a l m o s t p r o h i b i t i v e when p r i c e l e v e l s a r e f l u c t u a t i n g r a p i d l y . The r i s k b e a r e r must be recompensed f o r h i s s e r v i c e and t h i s c o s t must be b o r n e by i n d u s t r y and consumer a l i k e . I f p r i c e s a r e e x p e c t e d t o f a l l r i s k b e a r e r s demand a h i g h e r r e m u n e r a t i o n , so t h a t t h o s e i n d u s t r i e s i n w h i c h t h e time e l e m e n t i s paramount may c u r t a i l p r o d u c t i o n t o t h e v a n i s h i n g p o i n t , - a g a i n a t t h e ex p e n s e o f s o c i e t y . 89 C h a p t e r V PUBLIC FINANCE AND THE P R I C E L E V E L G o l d a d h e r e n t s a r e f o n d o f s a y i n g t h a t a managed c u r r e n c y c a n n e v e r be s u c c e s s f u l u n t i l g o v e r n m e n t s l e a r n t o 1 b a l a n c e t h e i r b u d g e t s . The i m p l i c a t i o n i s t h a t t h e g o l d s t a n d a r d d o e s n o t tempt a government t o i n f l a t e w h i l e a managed s t a n d a r d d o e s . The e x p e r i e n c e o f r e c e n t y e a r s t e n d s t o show t h a t g o l d i s a p o o r b u l w a r k a g a i n s t t h e i n f l a t i o n a r y m e a s u r e s o f h a r d p r e s s e d g o v e r n m e n t s . I t i s p e r h a p s t r u e t h a t a government m i g h t b e m o r e h e s i t a n t a b o u t a b a n d o n i n g a g o l d s t a n d a r d t h a n d e p r e c i a t i n g a managed s t a n d a r d , b u t i n a n a t i o n a l emergency g o l d i s j u s t as p r o n e a s managed c u r r e n c y t o s u r r e n d e r i t s s a n c t i t y t o g o v e r n m e n t a l e x i g e n c i e s . I t i s so s i m p l e t o b a l a n c e c u m u l a t i v e government d e f i c i t s by r e s o r t i n g t o t h e p r i n t i n g p r e s s . I n f l a t i o n i s t h e e a s i e s t means o f t a x i n g known, a s i t r e q u i r e s no c o l l e c t o r s and no e n f o r c e m e n t . I n d e e d , i t m i g h t e v e n be p o p u l a r f o r a t i m e , p r o v i d i n g i t were r e g u l a t e d . The i n c i d e n c e o f t h e t a x f a l l s e q u a l l y on a l l n o t e h o l d e r s a n d i s r o u g h l y p r o p o r t i o n a l t o t h e i r w e a l t h . L i k e a l l f o r m s o f t a x a t i o n i t s abuse must e v e n t u a l l y l e a d t o d e c r e a s e d p r o s p e r i t y and e v e n c h a o s , a l t h o u g h a s l o n g a s t h e c u r r e n c y h a s v a l u e t h e t a x i s a p p l i c a b l e . 1. L e h f e l d t , R.A., - R e s t o r a t i o n o f t h e W o r l d ' s C u r r e n c i e s . I n t h e f i r s t s t a g e o f i n f l a t i o n a government m i g h t r e a p a d o u b l e b e n e f i t . W i t h t h e f i r s t r i s e o f p r i c e s o p t i m i s t -i c n o t e h o l d e r s a r e l i k e l y t o h o a r d t h e i r money i n t h e hope o f b e i n g i n a p o s i t i o n t o t a k e a d v a n t a g e o f the e x p e c t e d p r i c e f a l l . T h i s s t a g e s o o n p a s s e s when t h e p u b l i c b e g i n s t o r e a l i z e t h e i n f l a t i o n a r y c h a r a c t e r o f t h e government p o l i c y . I n o r d e r t o a v o i d t h e t a x o f i n f l a t i o n t h e y s e e k t o r e d u c e t h e i r h o l d i n g s o f t h e n a t i o n a l c u r r e n c y b y c o n v e r t i n g i t i n t o c o m m o d i t i e s and f o r e i g n e x c h a n g e . T h e y r e t a i n j u s t s u f f i c i e n t c u r r e n c y t o meet t h e i r d a i l y r e q u i r e m e n t s , a n d a s a c o n s e q u e n c e p r i c e s may be a f f e c t e d b y r e c u r r i n g p e r i o d s o f money s t r i n g e n c y . We may c o n c l u d e t h a t i n f l a t i o n i s a d a n g e r o u s method o f t a x a t i o n and may ev e n l e a d t o r u i n . A c o u n t r y may be e x p e c t e d t o a v o i d i n f l a t i o n w h e r e v e r p o s s i b l e so a s t o m a i n t a i n i t s s t a n d a r d s and b u s i n e s s h o n o u r , t h e l a t t e r b e i n g e s p e c i a l l y i m p o r t a n t t o i t s e c o n o m i c r e l a t i o n s a b r o a d . Thus a managed s t a n d a r d i s j u s t a s l i k e l y t o be r e s p e c t e d i n ' p r a c t i c e a s a g o l d s t a n d a r d , b e c a u s e t h e p r i c e o f i n f l a t i o n i s j u s t a s h e a v y w i t h t h e one as the o t h e r . Some c o u n t r i e s , n o t a b l y I t a l y , C z e c h o s l o v a k i a , and G r e a t B r i t a i n have a t t e m p t e d t o d e f l a t e t h e i r c u r r e n c i e s t o t h e p r e - w a r - g o l d p a r , <rae a d v i s a b i l i t y o f s u c h a p o l i c y w o u l d depend on t h e d i s c r e p a n c y between t h e p r e s e n t p a r and t h e p r e - w a r p a r . I t w o u l d r e s u l t i n a c o u n t r y m a i n t a i n i n g i t s 1 h o n our and f i n a n c i a l r e p u t a t i o n a t t h e expense o f i t s i n d u s t r y . 1. M a c M i l l a n R e p o r t - pp.89-92. When t h e c u r r e n c y i s o n l y s l i g h t l y d e p r e c i a t e d t h e r e g a i n i n g o f a l o s t r e p u t a t i o n i s w e l l w o r t h the p r i c e , b u t when t h e r e i s a g r e a t s p r e a d b e t w e e n t h e p a r s s u c h a c o u r s e i s l i t t l e s h o r t o f s u i c i d a l . I f P r a n c e were t o a t t e m p t t o b r i n g t h e f r a n c b a c k t o i t s p r e - w a r p a r , F r e n c h i n d u s t r y w o u l d be c r i p p l e d a n d t h e b u r d e n o f t a x e s r e q u i r e d t o meet p u b l i c d e b t s o f g r e a t l y e n h a n c e d v a l u e w o u l d be i n t o l e r a b l e . F r a n c e h a s p u r s u e d t h e o n l y f e a s i b l e c o u r s e , n amely, t h a t o f r e d e f i n i n g t h e f r a n c i n t e r m s o f g o l d , b u t a t the e x p e n s e o f i t s i n t e r -n a t i o n a l r e p u t a t i o n . E c o n o m i s t s w i l l f o r g i v e , b u t t h e p u b l i c w i l l n o t . I t i s p r o b a b l y r e a s o n a b l e t o c o n c l u d e t h a t a c o u n t r y w o u l d f i n d i t j u s t a s d e s i r a b l e t o r e s p e c t a managed s t a n d a r d a s t h e g o l d s t a n d a r d . I n t i m e s o f g r e a t s t r e s s n e i t h e r w i l l be r e s p e c t e d . The managed s t a n d a r d , however, w i l l work a t i t s b e s t i n t h o s e c o u n t r i e s w h i c h have r e l a t i v e l y s t a b l e p o l i t i c a l and f i n a n c i a l i n s t i t u t i o n s . I t i s s u g g e s t e d t h a t G r e a t B r i t a i n s a t i s f i e s t h e s e r e q u i s i t e s b e t t e r t h a n any o t h e r c o u n t r y , a n d f u r t h e r m o r e t h a t she i s i n s u c h a p o s i t i o n t h a t t h e a d o p t i o n o f a managed s t a n d a r d w o u l d c r e a t e t h e l e a s t e c o n o m i c and p s y c h o l o g i c a l d i s t u r b a n c e . 32 C h a p t e r VI A CONSIDERATION OF THE THEORY OF MONEY I n th e p r e c e d i n g c h a p t e r s we have d e a l t a l m o s t e x c l u s i v e l y w i t h t h e v a g a r i e s o f u n s t a b l e money and h a v e s u g g e s t e d t h a t a managed c u r r e n c y w o u l d r e d u c e t h e s e v a g a r i e s to a minimum. B e f o r e a scheme o f managed c u r r e n c y c a n be d e v e l o p e d s a t i s f a c t o r i l y , however, i t w i l l be n e c e s s a r y to m a s t e r some o f the d e t a i l s w i t h w h i c h m o n e t a r y t h e o r y i s c o n c e r n e d , a s t h e o r y i s t h e r a t i o n a l e o f p r a c t i c e . U n f o r t u n a t e l y , t h o s e v e r y d e t a i l s w h i c h a r e n e c e s s a r y t o s u c c e s s f u l c u r r e n c y management a r e t o some e x t e n t c o n t r o v e r s i a l . I n d e e d , t h e 1 c h i e f o p p o s i t i o n to managed c u r r e n c y r e f o r m i s n o t d i r e c t e d a g a i n s t t h e p l a n i t s e l f , b u t a g a i n s t i t s p r e m i s e s , and t h e s e p r e m i s e s c e n t r e a r o u n d t h e t r u t h a n d w o r k i n g o f t h e q u a n t i t y t h e o r y of t h e v a l u e o f money. T h e r e a r e many t h e o r i e s o f t h e v a l u e o f money, b u t p r o b a b l y t h e most w i d e l y h e l d i s t h e q u a n t i t y t h e o r y . The d i f f i c u l t y i s t h a t few a g r e e a s t o j u s t what t h e q u a n t i t y t h e o r y i n v o l v e s , and a s a c o n s e q u e n c e t h e r e a r e many m o d i f i c a t i o n s w h i c h i n t u r n r e c e i v e numerous d e g r e e s o f e m p h a s i s . The q u a n t i t y 1. See The Chase E c o n o m i c B u l l e t i n ; "Commodity P r i c e S t a b i l i z a t i o n - A f a l s e g o a l o f C e n t r a l B a n k i n g P o l i c y , " V o l . 1 1 , No.4, O c t o b e r 29, 1927; and "The G o l d S t a n d a r d v e r s u s a Managed C u r r e n c y , " V o l . V , N o . I , M a r c h 25, 1925. t h e o r y i s by no means a new-comer t o the sc i e n c e , o f economics, as i t r e c e i v e d a t t e n t i o n by the e a r l i e r C l a s s i c a l e c o n o m i s t s . Thus, Mr. D a v i d R i c a r d o , i n those more r a t i o n a l moments when he d i d not confuse l a b o u r c o s t w i t h the v a l u e o f money, advoc-a t e d i t . The t h e o r y i n t h e i r hands, however, t o o k a crude form i n which the q u a n t i t y of money was emphasized a t the expense o f the i n f l u e n c e o f bank r e s e r v e s and p r i v a t e h o a r d s . . The m o d i f i e d q u a n t i t y t h e o r y , as g e n e r a l l y a c c e p t e d today, s t a t e s t h a t the p r i c e l e v e l v a r i e s d i r e c t l y w i t h t h e q u a n t i t y o f media o f exchange, o t h e r t h i n g s b e i n g e q u a l . T h i s l a t t e r q u a l i f i c a t i o n i s d e s i g n e d t o cov e r the i n f l u e n c e s on the v a l u e o f money w h i c h are dependent on such f a c t o r s as cha n g i n g b u s i n e s s h a b i t s and b a n k i n g customs. The t h e o r y o f money e a r l y l e n t i t s e l f to m a t h e m a t i c a l i n t e r p r e t a t i o n , but by f a r the b e s t known e q u a t i o n i s t h a t o f P r o f e s s o r I r v i n g , w h i c h t a k e s the form o f MV p l u s M"^ 1* PT. M r e p r e s e n t s the q u a n t i t y of money i n c i r c u l a t i o n i n the form o f c o i n and c u r r e n c y , and M 1 r e p r e s e n t s a l l o t h e r forms o f p u r c h a s i n g power, p a r t i c u l a r l y bank d e p o s i t s . The c i r c u l a t i o n v e l o c i t y o f the fo r m e r i s r e p r e s e n t e d by V and the c i r c u l a t i o n v e l o c i t y o f the l a t t e r i s r e p r e s e n t e d by V 1. P i s a p r i c e i n d e x and T i s the volume o f t r a d e . The e q u a t i o n i s o b v i o u s l y a t r u i s m , and i s one o f the e a s i e r money e q u a t i o n s to u n d e r s t a n d , w h i c h makes i t more v a l u a b l e f o r some purposes t h a n i t s "Complicated s u c c e s s o r s . A n o t h e r f o r m o f t h e money e q u a t i o n i s n - p ( k p l u s r k 1 ) where "n" r e p r e s e n t s t h e number o f u n i t s o f money an d c u r r e n c y , "p" r e p r e s e n t s t h e p r i c e o f e a c h c o n s u m p t i o n u n i t , "k" r e p r e s e n t s t h e number o f c o n s u m p t i o n u n i t s o v e r w h i c h t h e p u b l i c w i s h e s t o have c o n t r o l i n t h e f o r m o f c a s h , and " k 1 " r e p r e s e n t s t h e number o f c o n s u m p t i o n u n i t s o v e r w h i c h t h e p u b l i c w i s h e s to have c o n t r o l i n t h e f o r m o f bank d e p o s i t s , and " r " r e p r e s e n t s t h e r a t i o o f bank r e s e r v e s to d e p o s i t s . A c o n s u m p t i o n u n i t may be d e f i n e d a s t h e a g g r e g a t e v a l u e o f a g i v e n q u a n t i t y o f s t a n d a r d o b j e c t s o f c o n s u m p t i o n o r o t h e r 1 f o r m s o f e x p e n d i t u r e a t r e p r e s e n t a t i v e p r i c e s . R e c e n t l y P r o f e s s o r K eynes h a s d e v e l o p e d a new s e t o f 2 money e q u a t i o n s w h i c h have a t t r a c t e d w i d e s p r e a d a t t e n t i o n . T h e s e d i f f e r f r o m the o l d e r f o r m s i n t h e i r method o f a p p r o a c h , and l i k e them a r e t r u i s m s . I t i s c l a i m e d by P r o f e s s o r K e y n e s t h a t t h e new money e q u a t i o n s a r e s u p e r i o r f o r s t a t i s t i c a l p u r p o s e s i n t h a t t h e y e l u c i d a t e c a u s a l i n f l u e n c e s more c l e a r l y . F o r t h e p u r p o s e s o f t h i s p a p e r i t i s i m m a t e r i a l w h i c h f o r m o f t h e money e q u a t i o n i s u s e d a s t h e y a r e a l l t r u e , but d i f f e r o n l y i n t h e i r a p p r o a c h . F o r the s t a t i s t i c i a n , however, t h e m a t t e r o f a p p r o a c h i s v e r y i m p o r t a n t and he must s e l e c t t h e e q u a t i o n w h i c h b e s t s u i t s h i s p u r p o s e . Mr. K e y n e s ' r e c e n t c o n t r i b u t i o n s t o m o n e t a r y t h e o r y w i l l be f u r t h e r c o n s i d e r e d b elow. 1. K e y n e s , J o h n M a y n a r d - " M o n e t a r y R e f o r m s ; " a l s o P i g o u , M a r s h a l l . . 2. K e y n e s , John M a y n a r d - " T r e a t i s e on Money." 35 W h i c h e v e r e q u a t i o n we s h o u l d u s e f o r o u r p u r p o s e s i t i s c l e a r t h a t t h e p r i c e l e v e l ( u s u a l l y r e p r e s e n t e d h y P ) i s a f u n c t i o n o f t h e o t h e r t e r m s . Thus i f P i s t o he k e p t c o n s t a n t we must d e c i d e w h i c h o f t h e r e m a i n i n g t e r m s s h a l l a l t e r , and i f we w i s h t o t r a c e t h e c a u s a l d i s t u r b a n c e s we s h o u l d p r o b a b l y f a v o u r Mr* K e y n e s ' f u n d a m e n t a l e q u a t i o n s . B u t , a f t e r a l l , j u s t what do we u n d e r s t a n d b y P. C u r i o u s l y enough t h e r e i s some d i s a g r e e m e n t a s t o the meaning o f t h e " p r i c e l e v e l . " M r. J e v o n s and s t a t i s t i c i a n s o f t h e o l d e r s c h o o l t h o u g h t o f t h e p r i c e l e v e l a s an a v e r a g e o f a l l p r i c e s o r a s a c e n t r a l t e n d e n c y a b o u t w h i c h i n d i v i d u a l p r i c e s t e n d e d t o r e v o l v e . I t h a s s i n c e b e e n d e m o n s t r a t e d t h a t t h e r e i s no 1 s u c h t h i n g a s a g e n e r a l p r i c e l e v e l . Most a u t h o r i t i e s now a g r e e t h a t t h e r e i s a p l u r a l i t y o f p r i c e l e v e l s , and some w r i t e r s e v e n go so f a r as t o deny t h e e x i s t e n c e o f any c o m p o s i t e 2 p r i c e l e v e l . Most o f t h e f a m i l i a r p r i c e i n d e x e s s u c h a s S a u e r b e c k ' s and t h e E c o n o m i s t ' s a r e p u r e l y o f t h e w h o l e s a l e t y p e . I n a d d i t i o n t o t h i s k i n d , however, t h e r e a r e p r i c e s t a n d a r d s o f c o n s u m p t i o n , e a r n i n g , i n t e r n a t i o n a l g o o d s a n d o t h e r s o f m i n o r i m p o r t a n c e . I t i s o n l y r e a s o n a b l e t o e x p e c t t h a t t h e s e m u l t i p l e p r i c e i n d e x e s s h o u l d d i f f e r b e c a u s e t h e y d i f f e r i n t h e i r w e i g h t i n g and i n t h e i r c o m p o s i t i o n . F o r example, t h e c o n s u m p t i o n s t a n d a r d i n c l u d e s t h e p r i c e s o f p e r s o n a l s e r v i c e s , most o f t h e c o s t s o f m a r k e t i n g , h o u s e r e n t , 1. K e y n e s , John M a y n a r d - op. c i t . 2. W h i t n e y , C a r o l i n e - The E q u a t i o n o f E x c h a n g e a n d t h e P r i c e S t a b i l i z a t i o n P r o b l e m , The A m e r i c a n E c o n o m i c Review, V o l . X X I I , p.194, 1932. and o t h e r e x p e n s e s w h i c h a r e n o t c o n s i d e r e d h y the w h o l e s a l e s t a n d a r d . The i n t e r n a t i o n a l i n d e x i s composed o f t h o s e goods w h i c h e n t e r i n t o f o r e i g n t r a d e a n d a s a c o n s e q u e n c e c o u l d n o t he e x p e c t e d to r e f l e c t p u r e l y d o m e s t i c p r i c e movements. Thus the 1927 i n t e r n a t i o n a l i n d e x f e l l i n t e r m s o f most l o c a l i n d e x e s . What c o n c e r n s u s i n t h i s t h e s i s i s what p r i c e s s h o u l d he u s e d a s a g u i d e i n d i r e c t i n g m o n e t a r y p o l i c y . The a i m o f s c i e n t i f i c management a c c o r d i n g t o most a u t h o r i t i e s i s t o s t a b i l i z e t h e a v e r a g e o f w h o l e s a l e p r i c e s . T h i s a i m i s f a v o u r e d b y M e s s r s . F i s h e r , K e y n e s , C a s s e l and Commons, w h i l e Mr. C a r l S n y d e r p r e f e r s t h e s t a b i l i z a t i o n o f a n a v e r a g e o f a l l k i n d s o f p r i c e s . The R e c e n t C o n t r i b u t i o n s o f Mr. K e y n e s : M r . K e y n e s 1 " T r e a t i s e o n Money" i s the p r o d u c t o f a number o f y e a r s o f d i v i d e d l a b o u r a n d i n many i n s t a n c e s t h e book shows d e f e c t s w h i c h w o u l d n o t have a p p e a r e d i f w r i t t e n u n d e r more f a v o u r a b l e c i r c u m s t a n c e s . I t i s , n e v e r t h e l e s s , t h e o u t s t a n d i n g c o n t r i b u t i o n t o m o n e t a r y t h o u g h t o f t h e t w e n t i e t h c e n t u r y . He i s p r i m a r i l y c o n c e r n e d w i t h a t h e o r y o f t h e v a l u e o f money and a t h e o r y o f p r i c e c o n t r o l b y c e n t r a l b a n k i n g a c t i v i t y . A s a t r e a t i s e i t o f n e c e s s i t y d e a l s w i t h some p h a s e s o f the money p r o b l e m w h i c h a r e n o t p e r t i n e n t t o t h i s s u b j e c t , b u t on the w h o l e , i t r e p r e s e n t s a d e v e l o p m e n t w h i c h c a n n o t be n e g l e c t e d . H i s t h e o r y o f t h e v a l u e o f money i s b a s e d on t h e r e l a t i o n s h i p o f s a v i n g t o i n v e s t m e n t . The method o f a p p r o a c h i s t o d i v i d e b o t h g o o d s a n d money i n t o a number of c a t e g o r i e s w i t h t h e p u r p o s e o f b e i n g a b l e t o d e t e r m i n e c a u s a l a g e n c i e s so t h a t new money e q u a t i o n s o f a more u s e f u l n a t u r e may be f o r m e d . T hus g o o d s a r e d i v i d e d a c c o r d i n g to t h e i r u s e , n a m e l y , f o r c o n s u m p t i o n and f o r c a p i t a l o r i n v e s t m e n t p u r p o s e s ; and money i s s i m i l a r l y d i v i d e d i n t o two g r o u p s , n amely, t h a t w h i c h i s t o be s p e n t and t h a t w h i c h i s t o be s a v e d . H i s c h i e f a i m i s t o show t h e r e l a t i o n w h i c h h o l d s b e t w e e n the p r i c e l e v e l of c o n s u m p t i o n g o o d s and the r a t i o o f n a t i o n a l income t o p r o d u c t i o n The a n a l y s i s i s c o m p l i c a t e d , however, by t h e f a c t t h a t a l l income i s n o t s p e n t on c o n s u m p t i o n g o o d s , and n o t a l l the n a t i o n a l p r o d u c e i s o f f e r e d f o r i m m e d i a t e s a l e . When p e o p l e s a v e , t h e i r i n c o m e s a v a i l a b l e f o r c u r r e n t s p e n d i n g a r e r e d u c e d , and i f t h e s e s a v i n g s e x c e e d i n v e s t m e n t s t h e p r i c e l e v e l t e n d s t o f a l l b e c a u s e a b u y e r ' s market i s c r e a t e d . On t h e o t h e r hand, i f i n v e s t m e n t e x c e e d s s a v i n g , and c a p i t a l g o o d s i n c r e a s e r e l a t i v e ^ l o c o n s u m p t i o n g o o d s t h e p u b l i c o b t a i n s a n e x t r a income w h i c h i s n o t r e p r e s e n t e d i n c o n s u m p t i o n goods, so t h a t p r i c e s t e n d t o r i s e . An i n v e s t m e n t g o o d f o r t h e p u r p o s e s o f t h i s t h e o r y may be d e f i n e d a s any g ood w h i c h i s w i t h h e l d f r o m t h e m a r k e t , f o r example, f i x e d c a p i t a l i n t h e shape o f a w a r e h o u s e , o r s u r p l u s s t o c k s . Thus g i v e n e f f i c i e n c y wages, t h e p r i c e l e v e l o f c o n s u m p t i o n g o o d s may be k e p t r e l a t i v e l y c o n s t a n t b y b a l a n c i n g s a v i n g and i n v e s t m e n t , and i t i s t h e d u t y o f t h e c e n t r a l bank t o p r omote t h i s e q u i l i b r i u m . T h i s i n f l u e n c e must be e x e r t e d n o t o n l y on t h e volume o f s a v i n g and i n v e s t m e n t , but a l s o on t h e v a l u e o f i n v e s t m e n t g o o d s , b e c a u s e t h e p r i c e l e v e l o f i n v e s t m e n t g o o d s c a n a f f e c t t h e v a l u e o f c o n s u m p t i o n goods by-i t s e f f e c t on t h e s a v i n g - i n v e s t m e n t r a t i o , and i n t h e l o n g r u n by a f f e c t i n g t h e r a t e o f e a r n i n g o f the p r o d u c t i v e f a c t o r s . To i l l u s t r a t e , i f the p r i c e l e v e l o f i n v e s t m e n t g o o d s i s r e d u c e d b y c e n t r a l b a n k i n g p o l i c y , s a v i n g s w i l l be i n c r e a s e d b e c a u s e i n v e s t m e n t w i l l be l e s s a t t r a c t i v e , and c o n s e q u e n t l y t h e t o t a l o f p r o d u c t i o n w i l l d i m i n i s h , b r i n g i n g a b o u t r e d u c e d p r i c e s and e a r n i n g s . I f a t any t i m e t h e p r i c e l e v e l o f i n v e s t m e n t g o o d s were a b n o r m a l l y h i g h , t h e p r o d u c e r w o u l d make a p r o f i t . Now p r o f i t i s n e i t h e r a p a r t o f t h e money income o f t h e community n o r s a v i n g , and c o n s e q u e n t l y i t s e x p e n d i t u r e t e n d s to d i s t u r b e q u i l i b r i u m . N o r m a l l y p r o f i t s made f r o m the p r o d u c t i o n o f i n v e s t m e n t g o o d s w o u l d be u s e d i n t h e p r o d u c t i o n o f more i n v e s t m e n t g o o d s , w h i c h w o u l d mean t h a t t h e e x p e n d i t u r e on t h e s e g o o d s would e x c e e d s a v i n g w i t h the r e s u l t t h a t s o c i e t y w o u l d h ave an i n c r e a s e d money income t o spend on c o n s u m p t i o n g o o d s . Thus p r i c e s w o u l d r i s e f o r t h i s c l a s s o f g o o d s and g i v e p r o f i t s t o c o n s u m p t i o n g o o d s p r o d u c e r s . I n t h i s manner p r o f i t s t e n d t o i n c r e a s e i n a l l b r a n c h e s o f i n d u s t r y u n t i l c o m p e t i t i o n f o r t h e f a c t o r s o f p r o d u c t i o n r e d u c e p r o f i t s and r e s t o r e e q u i l i b r i u m . I f t h e s o c i a l s y s t e m i s r i g i d t h i s p r o c e s s may go on u n t i l l o s s e s a p p e a r and t h e o l d e q u i l i b r i u m i s r e s t o r e d b y d e f l a t i o n o f p r i c e s , p r o f i t s , a nd u l t i m a t e l y i n c o m e s . Thus to p r e s e r v e e q u i l i b r i u m i t i s n e c e s s a r y t o e l i m i n a t e p r o f i t and l o s s so t h a t t h e p r i c e l e v e l o f i n v e s t m e n t g o o d s w i l l be 1 m a i n t a i n e d . On f i r s t c o n s i d e r a t i o n one m i g h t t h i n k t h a t s a v i n g must e q u a l i n v e s t m e n t , b u t t h e r e i s no r e a l r e a s o n why t h i s s h o u l d be so b e c a u s e t h e two f u n c t i o n s a r e u s u a l l y p e r f o r m e d by d i f f e r e n t p e o p l e . F o r example, when a bank ha s l o a n e d to t h e l i m i t , a s h i f t f r o m demand to t i m e d e p o s i t s w i l l n o t a f f e c t t h e a g g r e g a t e o f l o a n s , but t h e s a v i n g w i l l be an i d l e i n s t e a d o f an a c t i v e r e s e r v e a s f o r m e r l y , and t h e s p e n d i n g power w i l l be r e d u c e d . Mr. K e y n e s c o n c l u d e s t h a t t h e r e l a t i o n o f t i m e to demand d e p o s i t s i s a n i m p o r t a n t i n d e x t o show w h e t h e r s a v i n g i s e x c e s s i v e o r w h e t h e r i n v e s t m e n t i s e x c e s s i v e . I f t h e f o r m e r p r e v a i l s a d e c r e a s e i n t h e bank r a t e w i l l make s a v i n g l e s s a t t r a c t i v e and i f t h e l a t t e r p r e v a i l s a n i n c r e a s e i n t h e bank r a t e w i l l d i s c o u r a g e i n v e s t m e n t . The Bank r a t e t e n d s t o i n f l u e n c e i t s e f f e c t on c r e d i t by a l t e r i n g t h e r a t i o o f member bank r e s e r v e s . Thus an i n c r e a s e i n the b ank r a t e makes b o r r o w i n g l e s s a t t r a c t i v e and more l o a n s a r e r e p a i d t h a n a r e renewed, w i t h t h e r e s u l t t h a t t i m e d e p o s i t s a r e d e c r e a s e d . O b v i o u s l y t h e d e t a i l s i n t h e t h e o r i e s o f Mr. K e y n e s a r e b a s e d on B r i t i s h c o n d i t i o n s and t h e y w o u l d r e q u i r e some a d j u s t m e n t t o make them a p p l i c a b l e t o o t h e r b a n k i n g s y s t e m s . 1. T h i s i s e x p r e s s e d a l g e b r a i c a l l y a s f o l l o w s : P = E p l u s I 1 - S, and TT = ? p l u s P 1 = E p l u s I - S O R 0 0 where S = s a v i n g s , I-*-" C o s t o f I n v e s t m e n t , I =value o f i n v e s t m e n t , E = e a r n i n g s , 0 = o u t p u t , P= p r i c e s o f c o n s u m p t i o n 1 g o o d s , P = p r i c e l e v e l o f c o n s u m p t i o n g o o d s , and R= c u r r e n t o u t p u t o f c o n s u m p t i o n . 40 The Q u a l i t y o f I n v e s t m e n t and E c o n o m i c E q u i l i b r i u m . E v e n t h o u g h t h e b a n k s were a b l e t o b a l a n c e t h e s a v i n g - i n v e s t m e n t r a t i o i t i s by no means i m p o s s i b l e t h a t a m a j o r f i n a n c i a l l o s s t h r o u g h u n w i s e f i n a n c i n g m i g h t s e r i o u s l y d i s t u r b t h e e c o n o m i c s y s t e m . P u b l i c i n v e s t m e n t i s f r e q u e n t l y g u i d e d b y o p t i m i s t i c and e v e n g l a m o r o u s f a c t o r s . Hence i t i s n o t u n u s u a l f o r a p a r t i c u l a r I n d u s t r y w h i c h h a p pens t o a p p e a l t o the p u b l i c eye t o be o v e r c a p i t a l i z e d ; a n d l i k e w i s e , i t i s f r e q u e n t l y t h e c a s e t h a t o t h e r e s s e n t i a l i n d u s t r i e s s u f f e r t h r o u g h c a p i t a l d i v e r s i o n . M a n i f e s t l y i t i s b o t h u n d e s i r a b l e and i m p o s s i b l e t o c o n t r o l the d i r e c t i o n o f p u b l i c i n v e s t m e n t , but i t i s b y no means i m p o s s i b l e t o i n f l u e n c e i t . F o r example i t w o u l d be u n j u s t t o f o r c e an i n d i v i d u a l t o a b s t a i n f r o m p a r t i c u l a r i n v e s t m e n t s , but h i s r a n g e o f c h o i c e c o u l d be r e s t r i c t e d by c o n t r o l l i n g t h e number and q u a l i t y o f i n v e s t m e n t s t o w h i c h he i s i n v i t e d t o s u b s c r i b e . I t i s s u g g e s t e d t h a t t h e r e q u i r e d s u p e r v i s i o n c o u l d be made by an i n v e s t m e n t c o n t r o l b o a r d empowered t o a u t h o r i z e , m o d i f y o r r e j e c t , a l l i m p o r t a n t i n d u s t r i a l bond and s t o c k i s s u e s . Thus i t s h o u l d be p o s s i b l e t o d i s t r i b u t e c a p i t a l on a more r a t i o n a l b a s i s a s b etween i n d u s t r i e s . Of c o u r s e e v a s i o n by s u c h t a c t i c s as b o r r o w i n g a b r o a d w o u l d be p o s s i b l e , b u t i n a l l l i k e l i h o o d t h e o f f i c i a l f r o w n e x e r c i s e d by t h e b o a r d w o u l d l i m i t t h e p u b l i c t a s t e f o r t h o s e s e c u r i t i e s . An i n v e s t m e n t c o n t r o l b o a r d s h o u l d i n t h e l a s t a n a l y s i s be c o n t r o l l e d b y t h o s e who a r e r e s p o n s i b l e f o r c u r r e n c y management, b u t i t w o u l d be d e s i r a b l e t o h a v e i n d u s t r i a l i n t e r e s t s r e p r e s e n t e d on i t . 41 The i d e a o f an i n v e s t m e n t b o a r d i s by no means new, b u t t h e m a j o r i t y o f p l a n s u s u a l l y i n v o l v e s t a t e g u a r a n t e e s and r e s p o n s i b i l i t y f o r t h e i n v e s t m e n t s w h i c h a r e s p o n s o r e d , and i n some p r o p o s a l s t h e i n v e s t m e n t b o a r d e v e n h a s a b o r r o w i n g and r e l e n d i n g f u n c t i o n . To my mind t h e s e a l t e r n a t i v e s u g g e s t -i o n s i n v o l v e an undue measure o f s t a t e c o n t r o l , b u t i t i s a d m i t t e d t h a t t h e y may be n e c e s s a r y t o a l l e v i a t e a p a n i c . An o r g a n i z a t i o n s i m i l a r t o t h e one I have o u t l i n e d , however, i s recommended f o r n o r m a l c o n t r o l u n d e r c u r r e n c y management. 42 C h a p t e r V I I THE FOREIGN EXCHANGES The m a j o r a d v a n t a g e o f t h e i n t e r n a t i o n a l g o l d s t a n d a r d i s t h a t f l u c t u a t i o n s i n t h e f o r e i g n e x c h a n g e s a r e c o n f i n e d t o n a r r o w l i m i t s , w h i c h a r e f i x e d b y t h e c o s t s i n v o l v e d i n g o l d e x p o r t i n g and i m p o r t i n g . Under t h i s s y s t e m e q u i l i b r i u m i s e s t a b l i s h e d b y g o l d movements w h i c h t e n d t o be r e f l e c t e d i n c h a n g e s i n the n a t i o n a l p r i c e l e v e l s and s o c i a l s t r u c t u r e s ; w h i l e u n d e r a p a p e r s t a n d a r d , e q u i l i b r i u m i s s e c u r e d by v a r i a t i o n s i n the e x c h a n g e s o r r e l a t i v e v a l u e o f c u r r e n c i e s . The l a t t e r s y s t e m h a s a g r e a t a d v a n t a g e i n so f a r a s i t m i n i m i z e s t h e n e c e s s i t y o f i n t e r n a l a d j u s t m e n t t o w o r l d p r i c e f o r c e s , b u t i t h a s t h e d i s a d v a n t a g e o f i n t r o d u c i n g the e l e m e n t o f u n c e r t a i n t y i n t o i n t e r n a t i o n a l c a p i t a l and commodity movements. O t h e r t h i n g s b e i n g e q u a l , t h e exchange r a t e s u n d e r i n c o n v e r t i b l e p a p e r s t a n d a r d s may be a p p r o x i m a t e d by a c o m p a r i s o n o f t h e i r r e s p e c t i v e p u r c h a s i n g p o w e r s . The p a r i t y d e r i v e d f r o m c o m p a r i n g the r e s p e c t i v e p u r c h a s i n g p o w e r s o f two c u r r e n c i e s may be d e f i n e d a s t h e r a t e o f e xchange a t w h i c h the p u r c h a s i n g power o f t h e money o f t h e g i v e n c o u n t r y w o u l d be t h e same i f s p e n t a t home o r c o n v e r t e d i n t o f o r e i g n c u r r e n c y and s p e n t a b r o a d . I t must be remembered, however, t h a t t h e p a r i t y so d e r i v e d i s m e r e l y a c e n t r a l t e n d e n c y and d o e s n o t 43 1 n e c e s s a r i l y measure t h e r a t e o f exchange f o r any g i v e n t i m e . M o r e o v e r the p a r i t y i t s e l f i s not a c o n s t a n t , as i t t e n d s t o change w i t h a r e l a t i v e i n c r e a s e o r d e c r e a s e o f one n a t i o n a l p r i c e l e v e l a s compared w i t h a n o t h e r . E v e n i f c o m p a r a t i v e c h a n g e s i n the r e s p e c t i v e p r i c e l e v e l s c o u l d be n e g l e c t e d t h e d o c t r i n e i s s u b j e c t t o a number o f i m p o r t a n t q u a l i f i c a t i o n s . The f i r s t q u a l i f i c a t i o n t o the t h e o r y a s o u t l i n e d above i s t h a t t h e p r e v a i l i n g m a r k e t r a t e i s i n f l u e n c e d b y t h e a n t i c i p a t e d f u t u r e v a l u e o f t h e c u r r e n c y i n t h e e x c h a n g e m a r k e t . F o r example, i f i t i s f e a r e d t h a t g o v e r n m e n t a l a c t i o n o r c e n t r a l b a n k i n g p o l i c y w i l l r e d u c e t h e n a t i o n a l p u r c h a s i n g power o f t h e c u r r e n c y , t h e p r e s e n t m arket r a t e w i l l r e f l e c t t h e e x p e c t e d p o l i c y , and t h e exchange r a t e w i l l be l o w e r e d . S e c o n d l y i t i s p o s s i b l e t h a t t h e e x i s t i n g r a t e , t h e p u r c h a s i n g power p a r i t y , and the t r u e e q u i l i b r i u m r a t e w i l l be d i f f e r e n t . S u ch a c o n d i t i o n m i g h t be e x p e c t e d i f one c o u n t r y h a d a more i n s i s t e n t demand f o r f o r e i g n p r o d u c t s t h a n o t h e r c o u n t r i e s h a d f o r i t s own p r o d u c t s , w i t h t h e r e s u l t that. : e q u i l i b r i u m w o u l d be l o w e r t h a n t h e p u r c h a s i n g power p a r i t y . A c c o r d i n g t o the m o d i f i e d p u r c h a s i n g power p a r i t y d o c t r i n e t h e money o f a c o u n t r y on a p a p e r s t a n d a r d i s l i k e l y t o be e i t h e r o v e r - v a l u e d o r u n d e r v a l u e d . What e f f e c t have t h e s e p r o b a b l e d i s c r e p a n c i e s f r o m t h e t r u e v a l u e on t h e i n d u s t r y o f a c o u n t r y . I f a c u r r e n c y i s u n d e r v a l u e d and t h e d o m e s t i c p r i c e l e v e l r e m a i n s u n c h a n g e d f o r e i g n e r s w i l l f i n d i t cheap t o 1. K e y n e s , John M a y n a r d op. c i t . , pp.72-73. i m p o r t f r o m t h e c o u n t r y i n w h i c h t h e c u r r e n c y i s u n d e r v a l u e d , w h i l e t h e l a t t e r w i l l f i n d i t more e x p e n s i v e t o buy a b r o a d . S i n c e t h e l a t t e r t e n d s t o buy l e s s f r o m a b r o a d t h e demand f o r f o r e i g n e xchange w i l l d e c r e a s e a n d the demand f o r exchange i n the u n d e r v a l u e d c u r r e n c y w i l l i n c r e a s e , and t h u s e q u i l i b r i u m w i l l t e n d t o be r e s t o r e d . Does t h i s mean t h a t t h e e x p o r t i n d u s t r i e s o f a n u n d e r v a l u e d money c o u n t r y a r e s t i m u l a t e d , and i f s o , how i s t h e s t i m u l u s e f f e c t e d ? I f t h e raw m a t e r i a l s , l a b o u r , a n d c a p i t a l u s e d a r e e n t i r e l y n a t i o n a l a n d a r e p a i d f o r i n t h e n a t i o n a l c u r r e n c y , t h e p r o d u c e r o f e x p o r t c o m m o d i t i e s e n j o y s a d e f i n i t e a d v a n t a g e o v e r f o r e i g n c o m p e t i t o r s . I f , on t h e o t h e r hand, raw m a t e r i a l s must be i m p o r t e d and p a i d w i t h a p p r e c i a t e d c u r r e n c y t h e a d v a n t a g e w i l l d epend on t h e r a t i o o f d o m e s t i c c o s t s t o f o r e i g n c o s t s . I t i s c o n c e i v a b l e t h a t an e x p o r t i n d u s t r y m i g h t be d i s c o u r a g e d by h a v i n g i t s n a t i o n a l c u r r e n c y u n d e r v a l u e d i n t h e c a s e where c o s t s a r e l a r g e l y f o r e i g n . F o r example, i f two p r o d u c e r s , one b e i n g i n a c o u n t r y o f d e p r e c i a t e d c u r r e n c y , buy t h e i r raw m a t e r i a l s i n a t h i r d c o u n t r y whose c u r r e n c y i s d e p r e c i a t e d i n t e r m s o f the o t h e r two, t h e b u y e r w i t h t h e most v a l u a b l e c u r r e n c y w i l l have t h e a d v a n t a g e . T h i s , o f c o u r s e , i s an extreme c a s e , b u t i t s h o u l d s e r v e a s a c a u t i o n t o t h o s e who e x p e c t n o t h i n g b u t g a i n f r o m d e p r e c i a t i n g t h e i r c u r r e n c y . On September E l , 1931, t h e pound was v a l u e d a t f>4.50 i n New Y o r k , and on O c t o b e r 31, i t h a d d e p r e c i a t e d t o $3.40. 1 S i n c e t h a t t i m e t h e pound h a s b e e n u n d e r v a l u e d . How i s t h i s t o be e x p l a i n e d i n t h e l i g h t o f t h e above t h e o r y ? I n t h e f i r s t p l a c e t h e r e a r e a number o f s h o r t r u n i n f l u e n c e s t h a t have t e n d e d t o d e p r e c i a t e s t e r l i n g . When t h e g o l d s t a n d a r d was a b a n d o n e d many f o r e i g n owners o f l i q u i d b a l a n c e s were w i l l i n g t o s u f f e r a l o s s b e c a u s e t h e y f e a r e d a f u r t h e r d e c l i n e i n t h e pound, a n d a d d e d t o t h i s some B r i t i s h c a p i t a l s o u g h t t o f l e e f r o m t h e c o u n t r y . The p o l i t i c a l s i t u a t i o n a u g u r e d a g e n e r a l e l e c t i o n , and i n v i e w o f t h e u n c e r t a i n t y c r e a t e d , t h e e x c h a n g e s were a f f e c t e d f o r the most p a r t u n f a v o u r a b l y . P e r h a p s t h e s e s c a r e i n f l u e n c e s were the most i m p o r t a n t i n t h e i n i t i a l s t a g e s , b u t l a t e r t h e s e were p r o b a b l y s u p e r s e d e d b y t h e a d v e r s e f a c t o r s o f d e c r e a s e d s h i p p i n g and o t h e r c o m m e r c i a l e a r n i n g s , d e c r e a s e d r e t u r n s f r o m f o r e i g n i n v e s t m e n t s , a n d i n c r e a s e d i m p o r t s r e s u l t i n g f r o m t a r i f f a n t i c i p a t i o n s . I n so f a r , h owever, a s t h e B r i t i s h m a r k e t i s o v e r s t o c k e d w i t h i m p o r t s , t h e d e c r e a s e d g o l d c o s t s o f new i m p o r t s , t h e d e s i r a b i l i t y o f r e p a y i n g s t e r l i n g d e b t s u n d e r th e p r e s e n t r a t e o f e x c h a n g e , and t h e d i s i n c l i n a t i o n t o f o r e i g n i n v e s t m e n t s a r e c o n c e r n e d , s t e r l i n g w i l l t e n d t o b e s t r e n g t h e n e d . A t t h e p r e s e n t t i m e , however, i n v i e w o f t h e c o m p l e x i t y o f i n f l u e n c e s , i t i s v e r y u n s a f e t o draw c o n c l u s i o n s a s t o t h e i m m e d i a t e p r o s p e c t s o f t h e pound i n the f o r e i g n e x c h a n g e s . A t t h e r i s k o f a n t i c i p a t i n g some o f t h e l a t e r c h a p t e r s i t m i g h t be s a i d t h a t f l u c t u a t i n g e x c h a n g e s u n d e r managed 1. G r e g o r y , T.E. « W h i t h e r t h e Pound? - The N i n e t e e n t h C e n t u r y and A f t e r , V o l . C X I , p.432, A p r i l , 1932. c u r r e n c i e s c o u l d b e c o n t r o l l e d b y t h e w a r t i m e d e v i c e o f p e g g i n g . I t i s n o t s u g g e s t e d , h o w e v e r , t h a t t h i s m e t h o d i s a p a n a c e a t o f i l l t h e g a p w h e r e e v e n t h e g o l d s t a n d a r d h a s w i d e l y f a i l e d . A d m i t t e d l y , t h e g o l d s t a n d a r d c a n n o t b e i m p r o v e d u p o n a s f a r a s e x c h a n g e s t a b i l i z a t i o n i s c o n c e r n e d , a n d i t i s p r o b a b l e t h a t i t c a n r e s i s t g r e a t e r s t r a i n s t h a n a n y o t h e r d e v i c e . A l e s s p e r f e c t m e t h o d , h o w e v e r , w o u l d b e d e s i r a b l e i f g r e a t e r g a i n s w o u l d a c c r u e i n o t h e r d i r e c t i o n s w i t h t h e a b a n d o n m e n t o f g o l d . I t i s s u g g e s t e d t h a t m a n y o f t h e n o r m a l -t i m e v a g a r i e s o f t h e f o r e i g n e x c h a n g e s c a n b e e l i m i n a t e d b y p e g g i n g , a n d t h a t i f a t a n y t i m e i t i s n e c e s s a r y t o a l t e r t h e e x c h a n g e p a r i n t h e i n t e r e s t s o f m o n e t a r y s t a b i l i t y , t h e O p e r a t i o n c a n b e p e r f o r m e d u n d e r l o g i c a l d i r e c t i o n a n d c o n t r o l . A f t e r a l l i t i s n o t t h e f l u c t u a t i o n i n t h e e x c h a n g e i t s e l f t h a t i s s o b a d , a s t h e r i s k i n v o l v e d b y c h a n c e f l u c t u a t i o n s . I f t h e p a r i t y i s t o a l t e r i t i s d e s i r a b l e t o h a v e i t a l t e r g r a d u a l l y a n d a c c o r d i n g t o p l a n . 47 Chapter VIII ' A CONSIDERATION OF SOME SUGGESTIONS FOR CONTROLLING THE PRICE LEVEL. Economists have long been aware of secular changes i n the value of money, but i t i s only i n recent years that serious consideration has been given to the problem of s t a b i l -i z i n g the price l e v e l . Some of the plans examined below have features which are now considered undesirable or obsolete, but i t should be remembered that each was r a d i c a l when proposed, and that they have a l l made valuable contributions to monetary thought. The pioneering work was done with the development of the idea that a unit of purchasing power should not be measured by a unit of weight. The f i r s t plan to be considered i s that known as the tabular standard, which was designed to adjust secular changes i n the value of money as they affect debtor and c r e d i t o r . According to i t , a l l money contracts, unless otherwise stipulated, would be subject to r e v i s i o n when payment f e l l due, so that debtors would repay purchasing power equivalent to that which they borrowed. The plan deserves praise as an attempt to solve the problem of unstable money, but i n practice i t i s open to many serious objections. First., i t would be impossible to esta b l i s h a single index that would be f a i r to a l l classes and a l l sections of a community, and s e c o n d l y i t w o u l d i n v o l v e t r e m endous d i f f i c u l t i e s f o r t h o s e who w o u l d have many c l a i m s t o s e t t l e b e c a u s e s e p a r a t e comput-a t i o n s w o u l d have t o be made f o r e a c h s e t t l e m e n t . A b e t t e r p l a n i s t h a t o f a l t e r i n g the w e i g h t o f g o l d i n t h e money u n i t t o f i t t h e p u r c h a s i n g power. P r o f e s s o r I r v i n g 1 F i s h e r , w h i l e n o t t h e o r i g i n a t o r , i s the b e s t known s p o n s o r o f t h e p l a n , and i t i s he who h a s d e v e l o p e d many o f i t s i n t r i c a c i e s . The s y s t e m w o u l d be a u t o m a t i c i n i t s w o r k i n g and w o u l d n o t a l l o w f o r t h e c o n t r o l o f any a n t i c i p a t e d p r i c e movements. Thus i f w h o l e s a l e commodity p r i c e s were r i s i n g t h e w e i g h t o f t h e u n i t o f money w o u l d be d e c r e a s e d by one p e r c e n t p e r month u n t i l the movement was c o r r e c t e d , and c o n v e r s e l y i f p r i c e s were f a l l i n g the w e i g h t o f the money u n i t w o u l d be a u t o m a t i c a l l y i n c r e a s e d . The p l a n i n v o l v e s b o t h t h e abandonment o f g o l d c i r c u l a t i o n and o f f r e e m i n t i n g so t h a t a d e c i s i o n t o a l t e r t h e w e i g h t o f g o l d i n t h e u n i t o f money w o u l d be e f f e c t e d by a l t e r i n g t h e o f f i c i a l p r i c e o f b u y i n g and s e l l i n g g o l d . Thus i f w h o l e s a l e p r i c e s were t o f a l l t h e m i n t w o u l d i n c r e a s e t h e p r i c e o f g o l d w i t h t h e r e s u l t t h a t g o l d w o u l d be w i t h d r a w n f r o m the a r t s t o s w e l l bank r e s e r v e s and c r e d i t , and a r i s e i n w h o l e s a l e p r i c e s w o u l d a u t o m a t i c a l l y e n s u e . I n o r d e r t o p r e v e n t s p e c u l a t i o n i n g o l d f u t u r e s a b r a s s a g e c h a r g e o f one p e r c e n t w o u l d be c h a r g e d so t h a t t h e s e l l i n g p r i c e w o u l d a l w a y s be one p e r c e n t above t h e b u y i n g p r i c e , w h i c h w o u l d mean t h a t t h e s p e c u l a t o r who p u r c h a s e d g o l d i n a n t i c i p a t i o n o f a r i s e i n p r i c e w o u l d have h i s p r o f i t 1. F i s h e r , I r v i n g - S t a b i l i z i n g t h e D o l l a r . 49 a b s o r b e d b y the b r a s s a g e f e e . The p l a n w o u l d p r o b a b l y be e f f e c t i v e i n c o n t r o l l i n g s e c u l a r p r i c e c h a n g e s , b ut i t s m e c h a n i c a l f e a t u r e s l i m i t i t s a p p l i c a b i l i t y to s e a s o n a l o r c r e d i t c y c l e s . B e c a u s e t h e c o r r e c t i v e i s a l w a y s a p p l i e d a f t e r t h e c o n s e q u e n c e , and s i n c e c o n s e q u e n c e s a r e f r e q u e n t l y c u m u l -a t i v e , t h e p l a n m i g h t n o t be a s e f f e c t i v e a s c l a i m e d . A d v a n c e d g o l d s t a n d a r d s u p p o r t e r s have p r o p o s e d a p a l l i a t i v e t o s e c u l a r p r i c e c h a n g e s i n a n e x t e n s i o n o f t h e u s e o f g o l d by means o f the g o l d exchange s t a n d a r d . By c o n c e n t r a t -i n g most o f t h e a v a i l a b l e g o l d i n London, New Y o r k , o r P a r i s and t h e l i n k i n g o f w o r l d c u r r e n c i e s w i t h t h e g o l d e x c h a n g e s t a n d a r d , g r e a t e r e c o n o m i e s i n the u s e o f g o l d w o u l d be e f f e c t e d . W h i l e t h i s s u g g e s t i o n does n o t e s c a p e t h e f u n d a m e n t a l o b j e c t i o n s t o be f o u n d i n g o l d a s a' medium o f exchange a s o u t l i n e d i n C h a p t e r I , i t w o u l d be a n improvement o v e r e x i s t i n g m e a s u r e s . U n f o r t u n a t e l y , t h e abandonment b y E n g l a n d o f t h e g o l d s t a n d a r d 1 h a s s h a k e n f a i t h i n t h i s d e v i c e . Many c o u n t r i e s w h i c h m i g h t have b e e n f r i e n d l y t o t h e p l a n have had t h e b i t t e r e x p e r i e n c e o f s e e i n g t h e i r L o n d o n b a l a n c e s d e p r e c i a t e , a n d c o n s e q u e n t l y may r e a s o n a b l y be e x p e c t e d t o be u n s y m p a t h e t i c w i t h t h i s p r o p o s a l . An i n t e r e s t i n g s u g g e s t i o n f o r the c o n t r o l o f s e c u l a r c h a n g e s i n the p r i c e l e v e l h a s been p r e s e n t e d by P r o f e s s o r R.A. L e h f e l d t o f S o u t h A f r i c a . H i s a p p r o a c h t o t h e p r o b l e m i s 1/ G r e g o r y , T.E. «*. The G o l d S t a n d a r d and i t s F u t u r e , p.58. u n u s u a l and h i s t r e a t m e n t i s l a r g e l y i n f l u e n c e d hy t h e l o c a l n e e d s o f h i s c o u n t r y . He a p p r o a c h e s the p r o b l e m w i t h the f u n d a m e n t a l t h e s i s t h a t m o n e t a r y p o l i c y s h o u l d be l a r g e l y d i r e c t e d f o r t h e n a t i o n a l good and t h a t w o r l d c o n s e q u e n c e s s h o u l d r e c e i v e s e c o n d a r y c o n s i d e r a t i o n . He warns h i s r e a d e r a t t h e o u t s e t t h a t h i s v i e w s a r e h e l d i n t h e s p e c i a l i n t e r e s t s o f S o u t h A f r i c a and r e m i n d s them t h a t i t i s t o h e r i n t e r e s t 1 t o m a i n t a i n t h e v a l u e o f g o l d . A s a c o n s e q u e n c e many o f h i s a t t i t u d e s s a v o u r o f a r c h a i s m t o t h o s e o f t h e managed c u r r e n c y s c h o o l , b u t t h a t d o e s n o t mean t o s a y t h a t he i s a n u n r e a s o n -i n g d i e - h a r d o r t h a t he i s l a c k i n g i n a b i l i t y t o measure new f o r c e s . A s an example o f h i s c o n s e r v a t i v e a t t i t u d e he g i v e s a s t h e l e a d i n g a d v a n t a g e o f t h e g o l d s t a n d a r d t h e r e l a t i v e 2 f r e e d o m i t e n j o y s f r o m the a r b i t r a r y a c t i o n o f g o v e r n m e n t s , w h i l e th e more r a d i c a l t h i n k e r s e m p h a s i z e the a d v a n t a g e s t o be d e r i v e d f r o m the c o m p a r a t i v e s t a b i l i t y o f t h e f o r e i g n e x c h a n g e s . Then, t o o , he i s one o f t h e few e c o n o m i s t s who h a s a good w o r d t o s a y f o r the c i r c u l a t i o n o f g o l d c o i n s , and a t t e n t i o n i s 3 drawn t o t h e v i r t u e s o f a n i n t r i n s i c s t a n d a r d . A f t e r a c a r e f u l i n v e s t i g a t i o n o f P r o f e s s o r F i s h e r ' s p l a n , he c o n c l u d e s t h a t f o r e c a s t i n g on t h e b a s i s o f i n d e x 4 numbers i n v o l v e s t o o many d i f f i c u l t i e s . N e x t he e x amined t h e Genoa r e c o m m e n d a t i o n s w h i c h c o n t e m p l a t e d i n t e n t i o n a l r e g u l a t i o n o f c r e d i t , i . e . , o f the demand f o r g o l d , b u t f o r D r . l e h f e l d t 1. L e h f e l d t , R.A. - R e s t o r a t i o n o f t h e W o r l d ' s C u r r e n c i e s , pp.1-4. 2. I b i d . , - p . 32. 3. " - pp.54-55. 4. H - pp.51-52. 51 i t i s a " d i f f i c u l t and d a n g e r o u s p l a n w h i c h s h o u l d be r e s e r v e d 1 t i l l t h e s i t u a t i o n I s b e t t e r u n d e r s t o o d and more u n d e r c o n t r o l . " The c o u n t e r p l a n w h i c h he h a s e v o l v e d i s b a s e d on t h e r e g u l a t -i o n o f the s u p p l y o f g o l d w i t h t h e s o l e o b j e c t o f a v o i d i n g 2 s e c u l a r t r e n d s i n p r i c e s . The diamond i n d u s t r y i s q u o t e d a s a n example o f a s u c c e s s f u l measure t o m a i n t a i n p r i c e s by l i m i t a t i o n o f s u p p l y , w h i c h i s e f f e c t e d by t h e c o n c e n t r a t i o n 3 o f c o n t r o l i n one f i n a n c i a l g r o u p . S i m i l a r l y , i t i s a r g u e d , t h e i m p o r t a n t g o l d p r o d u c i n g c o u n t r i e s a r e few and i t w o u l d n o t be d i f f i c u l t t o f o r m a s y n d i c a t e o f t h e i m p o r t a n t n a t i o n s c o n c e r n e d t o c o n t r o l t h e s u p p l y o f t h e p r e c i o u s m e t a l . To c a r r y out a c o n t r o l p o l i c y a C o m m i s s i o n c o n s i s t i n g o f a s c i e n t i f i c and a n a d m i n i s t r a t i v e b u r e a u w o u l d be f o r m e d an d t h e p e r s o n e l w o u l d be a p p o i n t e d b y t h e p o wers r e p r e s e n t e d i n t h e s y n d i c a t e . The S c i e n t i f i c b u r e a u w o u l d be r e s p o n s i b l e f o r t h e c o l l e c t i o n o f i n f o r m a t i o n on ( l ) m o n e t a r y an d b a n k i n g s t a t i s t i c s o f a l l c o u n t r i e s , (2) s t a t i s t i c s o f p r i c e s i n s e l e c t e d m a r k e t s , (3) i n f o r m a t i o n on t h e g e o l o g y and e x p l o i t a t i o n o f t h e known s o u r c e s o f g o l d and ( 4 ) i n f o r m a t i o n a s t o law a n d f i n a n c e o f g o l d - m i n i n g l a n d s and t h e c o n d i t i o n o f g o l d - m i n i n g c o m p a n i e s . Prom t h e i n f o r m a t i o n g a t h e r e d b y t h i s d e p a r t m e n t t h e a d m i n i s t r -a t i v e b u r e a u w o u l d a c t t h r o u g h t h e i n t e r m e d i a t i o n o f the c o n s t i t u e n t g o v e r n m e n t s . 1. L e h f e l d t , R.A., - op. c i t . , P r e f a c e , p.V. 2. I b i d . , pp.56-62. 3  " . 56. 52 The o b v i o u s o b j e c t i o n t h a t a change i n t h e s u p p l y o f g o l d r e a c t s v e r y s l o w l y on p r i c e s i s a n t i c i p a t e d when t h e s i t u a t i o n i s compared to t h e w o r k i n g o f a machine t h a t i s e q u i p p e d w i t h an i n a d e q u a t e g o v e r n o r , t h a t sometimes g o e s t o o f a s t o r t o o s l o w . T h i s d i f f i c u l t y i s a n s w e r e d by t h e s t a t e m e n t " t h a t t h e aim o f t h e C o m m i s s i o n w o u l d be t o a n t i c i p a t e t h e c h a n g e s o f v a l u e , and c o r r e c t them by i n t e l l i g e n t a c t i o n , i n s t e a d o f l e a v i n g n a t u r a l f o r c e s s l o w l y t o s t o p a n d r e v e r s e the movement; t h a t i s , t o p l a y t h e p a r t o f t h e g o v e r n o r . " I t i s h a r d t o r e c o n c i l e t h i s answer w i t h h i s o b j e c t i o n t o t h e p l a n o f P r o f e s s o r F i s h e r , b e c a u s e s u r e l y c h a n g e s i n v a l u e c o u l d be a n t i c i p a t e d a s e f f e c t i v e l y u n d e r the one p l a n a s t h e o t h e r , a s t h e y b o t h i n v o l v e t h e u s e o f p r i c e s t a t i s t i c s . I n d e e d , the p r o b l e m o f i n t e l l i g e n t a n t i c i p a t i o n i s t h e c h i e f b u g b e a r o f t h e most r a d i c a l management s y s t e m s i n w h i c h t h e t i m e e l e m e n t i s r e d u c e d t o a minimum. B u t , p e r h a p s t h i s i s an u n f a i r c o m p a r i s o n b e c a u s e P r o f e s s o r L e h f e l d t i s o n l y c o n s i d e r i n g s e c u l a r t r e n d s , and he d o e s n o t c r i t i c i z e t h e K e y n e s - C a s s e l g r o u p on t h e i r power o f f o r e c a s t i n g , b u t r a t h e r b e c a u s e o f t h e t e m p t a t i o n t o i n f l a t i o n . D u r i n g p e r i o d s o f r i s i n g p r i c e s g o l d p r o d u c t i o n w o u l d be c h e c k e d b y c l o s i n g t h e l e a s t p r o d u c t i v e m i n e s an d by p r e v e n t -i n g t h e e x p l o i t a t i o n o f new o n e s . T h i s w o u l d i n v o l v e t h e p u r c h a s e o f s h a r e s i n t h o s e m i n e s w h i c h were n e a r l y d e f u n c t and i t i s c l a i m e d t h a t the c o s t w o u l d n o t be g r e a t b e c a u s e o f the low v a l u e o f t h e s h a r e s ; b u t he d o e s n o t seem t o a n t i c i p a t e t h e f o r c e s o f 1. L e h f e l d t , B..A. - op. c i t . , p.56. 53 s p e c u l a t i o n w h i c h would t e n d t o r a i s e t h e i r p r i c e s as soon as i t became known t h a t the Government was i n the market f o r them. D u r i n g p e r i o d s o f f a l l i n g p r i c e s he recommends; ( l ) the e x p l o i t a t i o n o f l a n d w h i c h the commission had a c q u i r e d , and on w h i c h i t had suspended work, (2) the encouragement o f system-a t i c e x p l o r a t i o n w i t h a v i e w to d i s c o v e r i n g new ore d e p o s i t s (3) encouragement o f r e s e a r c h i n t o improved methods o f g o l d e x t r a c t i o n , and (4) the f a c i l i t a t i o n o f employment of paper s u b s t i t u t e s f o r g o l d . W i t h r e s p e c t t o the f o u r t h recommendation he d i s c u s s e s the dangers of r e g u l a t i n g demand. H i s s u g g e s t i o n i s o n l y a l l o w e d to e f f e c t a m o d e r a t i o n i n the r a t i o of r e s e r v e s to c u r r e n c y and he t h i n k s t h a t t h i s power w i l l n o t be abused because i t would l e a d t o the abandonment o f the g o l d s t a n d a r d and the e v i l s o f i n f l a t i o n . I n an a n a l y s i s of the l e h f e l d t p l a n one i s s t r u c k by the d e s i r e to b u i l d up a case f o r South A f r i c a ' s major i n d u s t r y , and the f a i t h i n the s a n c t i t y of g o l d . The p l a n would i n v o l v e i n t e r n a t i o n a l c o o p e r a t i o n to an unprecedented degree and i s above a l l a clumsy d e v i c e . I t must be remembered, however, t h a t the p r o p o s a l was made b e f o r e 1923 and t h a t Dr. L e h f e l d t c o u l d n o t have a n t i c i p a t e d the many subsequent changes i n the g o l d p r o b l e m w h i c h p l a c e h i s c r i t i c s i n a more f a v o u r a b l e p o s i t i o n . I f he were w r i t i n g a t a more r e c e n t date he may have g i v e n more c o n s i d e r a t i o n to the e f f e c t s o f g o l d s t e r i l i z a t i o n 1 and c o n c e n t r a t i o n on the v a l u e o f the m e t a l . A t the time o f 1. L e h f e l d t , R.A., - Posthumous a r t i c l e , "The Monetary S i t u a t i o n i n the U n i t e d S t a t e s as vi e w e d from W i t h o u t - Q u a r t e r l y J o u r n a l o f E c o n o m i c s , V o l . X L I I , p.26, 1928. 54 h i s w r i t i n g t h e v a l u e o f g o l d was r e l a t i v e l y low and he c o n s i d e r e d an a p p r e c i a t i o n t o be d e s i r a b l e , but he f e a r e d a renewed d e p r e c i a t i o n and the " a s s o c i a t e d e v i l of c u r r e n c y i n f l a t i o n . " A t the p r e s e n t time i t i s d i f f i c u l t to u n d e r s t a n d why he e x p r e s s l y c o n t r a d i c t e d the c o n c l u s i o n s of the Genoa Co n f e r e n c e w i t h r e s p e c t t o the p r o b a b l e s e c u l a r t r e n d o f the v a l u e o f g o l d , and one i s tempted t o conclude t h a t he e i t h e r l a c k e d a c c e s s to the r e l e v a n t d a t a o r t h a t he was b l i n d e d by S o u t h problems. A f r i c a n A more r e a s o n a b l e method of c o n t r o l l i n g the p r i c e l e v e l i s t o be found i n e n l i g h t e n e d c e n t r a l b a n k i n g p o l i c y . T h i s p l a n i s p r i m a r i l y i n t e n d e d f o r the c o n t r o l of s h o r t time p r i c e t r e n d s and was n o t d e s i g n e d f o r the management o f s e c u l a r movements. I t does, however,, l e a v e some room f o r c o n t r o l l i n g s e c u l a r changes by p e r m i t t i n g an a l t e r a t i o n of r e s e r v e r a t i o s . The c h i e f method o f c o n t r o l l i n g s h o r t p r i c e l e v e l movements i s 1 t h a t of a l t e r i n g the d i s c o u n t r a t e . Thus when p r i c e s t e n d to r i s e an i n c r e a s e i n the bank r a t e t e n d s t o be r e f l e c t e d i n t i g h t money, and a decrease i s m a n i f e s t e d by t e n d e n c i e s toward easy money. C o n s e q u e n t l y when the r a t e i s h i g h b u s i n e s s a c t i v i t y i s checked by t h e i n c r e a s e d c o s t of l o a n s , and when the r a t e i s low t r a d e and i n d u s t r y a re s t i m u l a t e d by cheap money. One o f the d i f f i c u l t i e s i n c o n t r o l l i n g p r i c e f l u c t u a t i o n s by the m a n i p u l a t i o n of the d i s c o u n t r a t e i s t h a t i t i s not o f s u f f i c i e n t power to c o r r e c t major p r i c e d i s t u r b a n c e s . F o r example, i f a 1. Wynne, W.H., - Some A s p e c t s o f C e n t r a l B a n k i n g , J o u r n a l o f Canadian B a n k e r s ' A s s o c i a t i o n , Vol.XXXV, p.340. boom i s a l l o w e d t o make headway c o m m e r c i a l o p t i m i s m may i n a l a r g e measure d i s r e g a r d a s u b s t a n t i a l i n c r e a s e i n t h e bank r a t e . S i m i l a r l y i f a p e r i o d o f d e p r e s s i o n becomes e s t a b l i s h e d a g r e a t p r o p o r t i o n o f the e n t e r p r i s e r s w i l l r e f u s e t o b o r r o w u n d e r any c i r c u m s t a n c e s . I t may be a r g u e d t h a t e n l i g h t e n e d c e n t r a l b a n k i n g p o l i c y w o u l d p r e v e n t t h e c y c l e f r o m g e t t i n g b e y o n d c o n t r o l , and t h e argument may be t r u e p r o v i d e d t h a t t h e e n l i g h t e n e d p o l i c y were i n t e r n a t i o n a l . I t i s v e r y u n l i k e l y t h a t any s i n g l e c o u n t r y c o u l d have a v e r t e d t h e e f f e c t s o f t h e p r e s e n t i n t e r n a t i o n a l d e p r e s s i o n by any c e n t r a l b a n k i n g p o l i c y . E v e n i n n o r m a l t i m e s t h e b ank r a t e must depend on i n t e r n a t i o n a l c o o p e r a t i o n t o be e f f e c t i v e ; f o r example, i f t h e Bank o f E n g l a n d r a i s e d i t s d i s c o u n t r a t e t h e r e s u l t s c a n be l a r g e l y n e g a t i v e d by s i m i l a r a c t i o n i n t h e u n i t e d S t a t e s . A n o t h e r o b s t a c l e t o t h e s u c c e s s f u l w o r k i n g o f t h e d i s c o u n t r a t e i s t o be f o u n d i n the p u b l i c a t t i t u d e t o w a r d 1 c h a n g e s i n t h e r a t e . I f the r a t e i s r a i s e d t h e r e i s a t e n d e n c y t o r e g a r d i t a s a n a t t e m p t t o c h e c k the d e v e l o p m e n t o f i n d u s t r y , when t h e r e a l r e a s o n may be t o c o r r e c t a d i s t u r -b a nce i n the e x c h a n g e s . B e f o r e a n a d e q u a t e d i s c o u n t p o l i c y c a n be p r a c t i c e d t h e p u b l i c must be e d u c a t e d so t h a t e v e r y change w i l l n o t be i n t e r p r e t e d a s a d e s i g n t o r e s t r i c t c r e d i t a n d i n d u s t r y . I n a d d i t i o n t o m a n i p u l a t i o n o f the d i s c o u n t r a t e e n l i g h t e n e d c e n t r a l b a n k i n g p o l i c y i n c l u d e s t h e p r a c t i c e o f open market a c t i v i t i e s . F o r example, when b u l l i n f l u e n c e s t e n d 1. K e y n e s , John M a y n a r d •* T r e a t i s e on Money, V o l . 1 1 , p.272. t o m a n i f e s t t h e m s e l v e s t h e c e n t r a l bank may e x e r t a c o u n t e r -a c t i n g b e a r i n f l u e n c e by s e l l i n g s e c u r i t i e s ; a n d c o n v e r s e l y , a b e a r i s h t e n d e n c y may be c h e c k e d by t h e p u r c h a s e o f s e c u r i t i e s . I n t h i s manner, b y i t s open m a r k e t a c t i v i t i e s , a c e n t r a l b ank ca n e a s e a t i g h t money market o r t i g h t e n an e a s y money m a r k e t . I t i s d o u b t f u l i f c e n t r a l b a n k i n g p o l i c y i s s u f f i c i e n t t o 1 c o n t r o l b u s i n e s s c y c l e s , and e v e n i f i t were p o s s i b l e , i t i s d o u b t f u l i f c o n t r o l b y t h i s d e v i c e a l o n e w o u l d s e c u r e t h e most f a v o u r a b l e r e s u l t s . I f , f o r example, t h e s i t u a t i o n c o u l d be c o n t r o l l e d s o l e l y by a l t e r a t i o n s i n t h e d i s c o u n t r a t e , t h e r e s u l t w o u l d l e a d to an u n n e c e s s a r y d i s t u r b a n c e i n t h e d i s c o u n t m a r k e t , w h i l e , on the o t h e r h a n d , i f t h e c o n t r o l l i n g f o r c e s were d i s t r i b u t e d , t h e e f f e c t on any one c o m m e r c i a l a c t i v i t y w o u l d be l e s s s e v e r e . That i s t o s a y , i t w o u l d be u n d e s i r a b l e t o d e p r e s s o r s t i m u l a t e t h e d i s c o u n t market t o t h e a d v a n t a g e o f t h e bond market o r d e p o s i t owners. Of c o u r s e any g i v e n i n f l u e n c e w o u l d t e n d i n t h e l o n g r u n t o a f f e c t a l l m a r k e t s , b u t the i n f l u e n c e o f the t i m e e l e m e n t on p a r t i c u l a r i n t e r e s t s must be c o n s i d e r e d i n g i v i n g d i r e c t i o n t o c e n t r a l b a n k i n g p o l i c y . So f a r no t h o u g h t h a s b e e n g i v e n a s t o how much c o n t r o l s h o u l d be e x e r c i s e d by t h e bank r a t e , how much by open m a r k e t a c t i v i t -i e s , a nd how much b y o t h e r a g e n c i e s . I t i s p o s s i b l e t h a t t h e bank r a t e may be u s e d t o o f r e e l y w h i l e the o t h e r f a c t o r s may be c o m p a r a t i v e l y n e g l e c t e d . 1. K e y n e s , John M a y n a r d - op. c i t . , p . 3 8 1 . 5 7 The most r e c e n t p l a n f o r s t a b i l i z i n g t h e p r i c e l e v e l i s t h a t known as t h e managed c u r r e n c y s t a n d a r d . I t embraces a l l t h e a d v a n t a g e s o f t h e p r e c e d i n g p l a n , a n d i s w i d e r i n i t s scope i n t h a t i t a l l o w s f o r u n l i m i t e d c o n t r o l o v e r the q u a n t i t y o f money. I t p r o v i d e s f o r c o m p l e t e s e c u l a r c o n t r o l o f t h e p r i c e l e v e l b y d i v o r c i n g i t s e l f f r o m t h e g o l d s t a n d a r d and i s t h u s f r e e f r o m th e d i s a d v a n t a g e s o f t h e l a t t e r . O p ponents o f t h e managed c u r r e n c y p l a n have two major o b j e c t i o n s , namely, (1) t h e d a n g e r o f i n f l a t i o n , and (2) t h e d i f f i c u l t y o f r e g u l a t i n g the e x c h a n g e s . A more d e t a i l e d c o n s i d e r a t i o n o f t h i s p l a n w i l l be d e v e l o p e d i n s u b s e q u e n t c h a p t e r s . 58 C h a p t e r IX THE OPERATION OF A NATIONAL MANAGED CURRENCY WITH PARTICULAR REFERENCE TO GREAT BRITAIN. I n C h a p t e r VI i t was shown t h a t t h e p r i c e l e v e l o r t h e v a l u e o f money was a f u n c t i o n o f t h e o t h e r t e r m s o f t h e e q u a t i o n o f e x c h a n g e . By s u i t a b l e a l t e r a t i o n s i n t h e v a l u e o f t h e v a r i a b l e s i n the e q u a t i o n t h e p r i c e l e v e l can be c o n t r o l l e d . I n c o n s i d e r i n g t h e d e t a i l s o f managed c u r r e n c y o p e r a t i o n i t w i l l be w i s e t o examine the i n f l u e n c e o f e a c h t e r m i n t h e e q u a t i o n on m o n e t a r y s t a b i l i t y . I t i s t o be e x p e c t e d t h a t i n f u t u r e a change w i l l be b r o u g h t a b o u t i n t h e n a t u r e o f bank r e s e r v e s . U n d e r t h e p r e s e n t s y s t e m g o l d p l a y s s u c h an i m p o r t a n t p a r t i n r e s e r v e s t h a t c e n t r a l b a n k s l a c k c o m p l e t e c o n t r o l o v e r t h e i r v o l u m e . S i m i l a r -l y the i m p o r t a n c e o f g o l d hampers c e n t r a l b a n k i n g c o n t r o l o v e r t h e q u a n t i t y o f c u r r e n c y . I n the n e a r f u t u r e i t i s t o be e x p e c t e d t h a t g o l d w i l l become a l e s s i m p o r t a n t f a c t o r i n bank r e s e r v e s and i t s p l a c e w i l l be o c c u p i e d by l i q u i d s e c u r i t i e s . A t f i r s t g o l d w i l l be i m p o r t a n t t o r e s e r v e s o n l y i n so f a r a s t h e s e t t l e m e n t o f f o r e i g n b a l a n c e s i s c o n c e r n e d , and i n t h e remote f u t u r e i t may e n t i r e l y d i s a p p e a r . O n l y when t h e c e n t r a l bank h a s c o m p l e t e c o n t r o l o v e r b o t h bank r e s e r v e s and the n o t e i s s u e can c u r r e n c y management be t r u l y e f f e c t e d . Once t h e l i m i t i n g f a c t o r o f g o l d i s removed t h e d i s c o u n t r a t e w i l l have i t s f u l l e f f e c t on r e s e r v e s and c u r r e n c y . F o r example, a . ' r i s e i n t h e d i s c o u n t r a t e makes b o r r o w i n g l e s s a t t r a c t i v e and l o a n s t e n d t o be r e p a i d w i t h t h e 1 r e s u l t t h a t t h e q u a n t i t y o f money i s r e d u c e d . A s a c o n s e q u e n c e o f t h e repayment o f p a r t o f t h e l o a n s t h e bank r e s e r v e s a r e s t r e n g t h e n e d . I t i s p o s s i b l e t h a t t h e j o i n t s t o c k b a n k s c o u l d oppose t h e o f f i c i a l p o l i c y f o r a t i m e by c o n t i n u i n g to l e n d a t t h e o l d r a t e . Soon, however, the r a t i o o f r e s e r v e s t o l i a b i l -i t i e s w o u l d d e c r e a s e and t h e y w o u l d be f o r c e d t o r e t r e n c h . S i n c e t h e y have n o t r e c o u r s e t o t h e p r a c t i c e o f r e d i s c o u n t i n g w i t h t h e Bank o f E n g l a n d u n d e r n o r m a l c i r c u m s t a n c e s , t h e y w o u l d be f o r c e d t o s t r e n g t h e n t h e i r p o s i t i o n by ( a ) s e l l i n g a s s e t s , (b) a l l o w i n g t r e a s u r y b i l l s t o r u n o f f and t h u s f o r c i n g t h e T r e a s u r y t o b o r r o w f r o m t h e Bank o f E n g l a n d o r f r o m t h e m a r k e t , and ( c ) by w i t h d r a w i n g c a l l l o a n s . C o n s e q u e n t l y i t i s c l e a r t h a t no s i n g l e bank c o u l d r u n c o u n t e r to t h e Bank o f E n g l a n d , a l t h o u g h i t w o u l d be p o s s i b l e f o r a c o m b i n a t i o n o f b a n k s t o d e l a y t h e c e n t r a l p o l i c y . I n p r a c t i c e , however, s u c h a p o s s i b -i l i t y i s i n c o n c e i v a b l e . A t p r e s e n t t h e p r o p o r t i o n o f bank r e s e r v e s t o l i a b i l -i t i e s i s n o t e l a s t i c b e c a u s e o f o l d f a s h i o n e d b a n k i n g h a b i t s , and b e c a u s e o f t h i s , the c r e a t i o n o f c r e d i t i s b r o u g h t i n t o dependence on t h e i r t o t a l r e s e r v e s . Thus the t o t a l m a g n i t u d e o f c r e d i t must c o r r e s p o n d to a g r e a t d e g r e e w i t h the t o t a l b i l l 1. C a s s e l , G u s t a v - " M o n e t a r y R e c o n s t r u c t i o n , " I n t e r n a t i o n a l A f f a i r s , V o l . X I , No.5, September 1 9 3 £ . 60 h o l d i n g s , i n v e s t m e n t s , and a d v a n c e s , w h i c h u l t i m a t e l y must d e t e r m i n e t h e i n t e r n a l p r i c e l e v e l . The r e s e r v e s o f t h e c o u n t r y b a n k s a s a r u l e t a k e t h e f o r m o f c u r r e n c y on hand and d e p o s i t s w i t h t h e Bank o f E n g l a n d . The amount o f t h e s e r e s e r v e s c a n be a l t e r e d by ( a ) a change i n t h e q u a n t i t y o f n o t e s demanded by t h e p u b l i c , (b) by T r e a s u r y b o r r o w i n g f r o m t h e C u r r e n c y Note R e s e r v e , ( c ) by t h e r e s e r v e p o l i c y o f t h e Bank o f E n g l a n d , a n d (d) by a l t e r a t i o n o f the q u a n t i t y o f T r e a s u r y B i l l s h e l d by t h e b a n k s . W h i l e T r e a s u r y B i l l s a r e n o t s t r i c t l y s p e a k i n g c a s h t h e y may be s o l d t o t h e p u b l i c i n o r d e r t o i n c r e a s e c a s h r e s e r v e s a s a l r e a d y i n d i c a t e d , a n d c o n s e q u e n t l y may be c a l l e d " s e c o n d l i n e " r e s e r v e s . C o n v e r s e l y t h e T r e a s u r y may, by b o r r o w i n g f r o m t h e p u b l i c o r by t a x a t i o n , p a y o f f some o f t h e T r e a s u r y N o t e s and r e d u c e t h e s e s e c o n d l i n e r e s e r v e s ; o r i t may p a y o f f d i r e c t a d v a n c e s f r o m t h e Bank o f E n g l a n d w h i c h r e d u c e s t h e f i r s t l i n e r e s e r v e s . I n p r a c t i c e t h e above f o u r f a c t o r s a r e t h e d e t e r m i n a n t s o f t h e i n t e r n a l p r i c e l e v e l . ( a ) , however, i s more a r e f l e c t i o n o f the p r i c e l e v e l and t h e volume o f t r a d e , and i t s e f f e c t on bank r e s e r v e s i s i n d i r e c t , a s i t o p e r a t e s t h r o u g h ( c ) and ( d ) . T h a t i s , an i n c r e a s e i n n o t e i s s u e i s e f f e c t e d by T r e a s u r y b o r r o w i n g s f r o m t h e C u r r e n c y N o t e R e s e r v e s , and bank a s s e t s a r e c o r r e s p o n d i n g l y r e d u c e d when rep a y m e n t i s made t o t h e Bank o f E n g l a n d and when T r e a s u r y N o t e s a r e redeemed. A s r e g a r d s (b) a T r e a s u r y b o r r o w i n g f r o m t h e C u r r e n c y N o t e R e s e r v e i s e f f e c t e d by bank a d v a n c e s t o t h e T r e a s u r y . Prom t h e above i t c a n be 61 s e e n t h a t (c) and (d) a r e t h e i m p o r t a n t d e t e r m i n a n t s o f t h e n a t i o n a l p r i c e l e v e l . The r a t i o o f r e s e r v e s t o l i a b i l i t i e s o f t h e Bank o f E n g l a n d depend i n so f a r a s t h e y a r e v a r i a b l e on c h a n g e s i n t h e t o t a l o f (1) Ways and Means a d v a n c e s t o t h e T r e a s u r y , ( 2 ) i n v e s t m e n t s , (3) l o a n s and b i l l s o f exchange, and (4) g o l d . An i n c r e a s e i n t h e s e v a r i a b l e r e s e r v e s t e n d s t o i n c r e a s e p r i c e s by t h e c r e a t i o n o f a d d i t i o n a l c r e d i t , and c o n v e r s e l y a d e c r e a s e i n t h e s e r e s e r v e s t e n d s t o l o w e r p r i c e s by c r e d i t r e s t r i c t i o n . Thus i f the bank w i s h e s to i n c r e a s e t h e r e s e r v e r a t i o i t m e r e l y r a i s e s t h e d i s c o u n t r a t e some T h u r s d a y m o r n i n g . And ( d ) , the bank h o l d i n g s i n T r e a s u r y B i l l s a r e d e p e n d e n t on t h e m a g n i t u d e o f government d e f i c i t s n o t o t h e r w i s e c o v e r e d , and t e n d t o r a i s e p r i c e s b y i n c r e a s i n g b ank s e c o n d a r y r e s e r v e s . Hence t h e c r e a t i o n o f c r e d i t and c o n s e q u e n t l y t h e l e v e l o f p r i c e s a n d t h e e x c h a n g e s i s b r o u g h t i n t o dependence on t h e r e s e r v e o r d i s c o u n t p o l i c y o f t h e Bank o f E n g l a n d and the r e q u i r e m e n t s o f t h e T r e a s u r y . C l o s e c o o p e r a t i o n on t h e p a r t o f t h e T r e a s u r y and t h e Bank o f E n g l a n d , t h e n , i s a l l t h a t i s n e c e s s a r y t o s t a r t G r e a t B r i t a i n i n t h e s y s t e m o f managed c u r r e n c y . The r e a d e r may r e m a r k t h a t the demands o f managed c u r r e n c y a r e i n a l l e s s e n t i a l s b e i n g met b y t h e B r i t i s h b a n k i n g s y s t e m o f t o d a y . And so t h e y a r e e x c e p t t h a t t h e l u r e o f g o l d s t i l l h i n d e r s c o m p l e t e c o n t r o l o v e r r e s e r v e r a t i o s and t h e q u a n t i t y o f c u r r e n c y . I n d e e d t h e c h a n g e s t h a t a r e r e q u i r e d t o manage s t e r l i n g a r e o f a c o m p a r a t i v e l y m i n o r n a t u r e , and a r e i n  no s e n s e r a d i c a l . G r e a t B r i t a i n i s not on t h e g o l d s t a n d a r d and o n l y c o n s e r v a t i v e o p i n i o n w h i c h l o o k s f o r w a r d t o t h e r e e s t a b l i s h m e n t o f g o l d p r e v e n t s a g r e a t e r d i s r e g a r d f o r r u l e - o f - t h u m b r a t i o s . Of c o u r s e i t w o u l d be d e s i r a b l e t o have a more a c c u r a t e s t a t i s t i c a l k nowledge o f b a n k i n g d e t a i l s , s u c h as t h e volume o f c u r r e n t and t i m e d e p o s i t s . I n f a c t t h i s k n owledge i s a l m o s t e s s e n t i a l f o r a d e q u a t e c o n t r o l , b u t t h e r e i s no r e a s o n why t h i s knowledge s h o u l d be d i f f i c u l t t o s e c u r e . A d m i t t e d l y c u r r e n c y management i s b a s e d on t h e o r y and t h e r e a d e r i s e n t i t l e d t o a s k i f i t w i l l work i n p r a c t i c e . I n s t r i c t t r u t h t h a t a l l i m p o r t a n t q u e s t i o n c a n n o t be d e f i n i t -e l y a n s w e r e d . I f a c r e d i t c y c l e were p e r m i t t e d t o o b t a i n a r e a s o n a b l e s t a r t w o u l d the above m e a s u r e s be o f s u f f i c i e n t power t o c o n t r o l t h e d i s t u r b a n c e ? I n a l l p r o b a b i l i t y t h e y w o u l d n o t be a b l e to c o r r e c t t h e s i t u a t i o n . The o n l y hope, t h e n , w o u l d be t o c o r r e c t a c y c l i c movement b e f o r e i t h a d g a t h e r e d m a t e r i a l headway. I t may be o b j e c t e d t h a t f o r e c a s t i n g i s v e r y d i f f i c u l t , and so i t i s . On t h e o t h e r h a n d f o r e c a s t i n g i s made much e a s i e r i f the c o n t r o l l i n g power i s i n hand, b e c a u s e to a c e r t a i n d e g r e e the f u t u r e c a n be made. I t i s made s t i l l more e a s y i f s t a t i s t i c a l d a t a i s a v a i l a b l e , a s m i g h t be r e a s o n -a b l y s u p p o s e d i f G r e a t B r i t a i n were t o a t t e m p t s c i e n t i f i c c u r r e n c y management. I t i s n o t my p u r p o s e t o u n d e r e s t i m a t e t h e d i f f i c u l t i e s i n v o l v e d , f o r t h e y a r e t h e r e and v e r y r e a l , but t h e r e i s no r e a s o n to s a y t h a t t h e s e d i f f i c u l t i e s a r e i . h s u p e r a b l e . The o n l y way t o d e t e r m i n e i f t h i s p l a n i s w o r k a b l e i s t o put i t . a c t u a l l y i n t o p r a c t i c e * E v e n i f i t were t o f a i l i t i s c e r t a i n t h a t t h e r e s u l t s w o u l d be l e s s d i s a s t r o u s t h a n 63 t h e w o r k i n g o f an a u t o m a t i c s y s t e m b e c a u s e i t i s d e f i n i t e l y e s t a b l i s h e d t h a t e n l i g h t e n e d c e n t r a l b a n k i n g p o l i c y h a s a t t h e v e r y l e a s t a m e l i o r a t i v e i n f l u e n c e . The s y s t e m w o u l d be a t i t s b e s t i f i t were p r a c t i c e d i n t e r n a t i o n a l l y and t h e r e i s no r e a s o n why n a t i o n a l managed c u r r e n c i e s s h o u l d be e t e r n a l l y i s o l a t e d b y c h a o t i c e x c h a n g e s . I n c o n s i d e r i n g t h e c onsummation.of managed c u r r e n c y Mr. K e y n e s 1 w r i t e s : "The f o r e i g n e x c h a n g e s a r e u n r e g u l a t e d and l e f t t o l o o k a f t e r t h e m s e l v e s . From day t o day t h e y f l u c t u a t e i n a c c o r d a n c e w i t h t h e s e a s o n s and o t h e r i r r e g u l a r i n f l u e n c e s . " T h ese s t a t e m e n t s a r e n o t t y p i c a l o f Mr. K e y n e s ; t h e y sound more l i k e a m a s t e r m a r i n e r ' s r e p o r t on t h e w a n d e r i n g s o f a d e r e l i c t a t s e a . O b v i o u s l y i t i s i m p o s s i b l e t o e s t a b l i s h permanent exchange s t a b i l i t y among managed c u r r e n c i e s , but i t i s p o s s i b l e t o g i v e a l a r g e measure of s t a b i l i t y t o them by s c i e n t i f i c c o n t r o l d e v i c e s . I n the s u c c e e d i n g c h a p t e r s I am g o i n g t o e s t i m a t e t h e p o s s i b i l i t i e s o f an i n t e r n a t i o n a l money c o n n e c t i o n w i t h managed s t e r l i n g a n d t o show why t h e pound s t e r l i n g i s t h e most d e s i r a b l e b a s i s . 1. K e y n e s , John M a y n a r d - M o n e t a r y R e f o r m . 64 C h a p t e r X THE CLAIMS OP STERLING TO BE THE BASIS OP AN INTERNATIONAL MEDIUM OP EXCHANGE I t w o u l d seem at f i r s t g l a n c e t h a t many c o u n t r i e s w o u l d c l a i m t h e h o n o u r o f h a v i n g t h e i r own c u r r e n c y made t h e b a s i s f o r a n i n t e r n a t i o n a l c u r r e n c y p l a n . I n p r a c t i c e t h e r e a r e o n l y t h r e e c o u n t r i e s t h a t c o u l d w i t h any p r o s p e c t o f s u c c e s s i n i t i a t e the i n t e r n a t i o n a l c u r r e n c y i d e a l , n amely G r e a t B r i t a i n , t h e U n i t e d S t a t e s and P r a n c e . I t i s t h e o b j e c t o f t h i s c h a p t e r t o show why s t e r l i n g w o u l d be more s u i t a b l e f o r t h e p u r p o s e t h a n t h e A m e r i c a n d o l l a r , o r t h e f r a n c . F i r s t , .-; i n o r d e r t o c l a i m t h i s h o n o u r , a c o u n t r y must have a n i n t e r n a t -i o n a l r e p u t a t i o n f o r t h e s t a b i l i t y and i n t e g r i t y o f i t s f i n a n -c i a l i n s t i t u t i o n s , w h i c h c a n be i n s p i r e d o n l y w i t h a l o n g r e c o r d o f sound e c o n o m i c p o l i c i e s . S e c o n d l y , i t i s n e c e s s a r y t h a t t h e w o r l d have i m p l i c i t c o n f i d e n c e i n t h e p o l i t i c a l a n d s o c i a l i n s t i t u t i o n s o f t h e c o u n t r y . T h i r d l y , i t i s n e c e s s a r y t h a t t h e f i n a n c i a l i n t e r e s t s o f t h e c o u n t r y be o f s u f f i c i e n t i m p o r t a n c e and o f s u f f i c i e n t d i v e r s i t y o f employment a s t o make i t s money f a m i l i a r t o t h e w o r l d . F o u r t h l y , i t i s n e c e s s a r y t h a t t h e w o r l d a l r e a d y have wide e x p e r i e n c e i n the u s e o f t h a t c o u n t r y ' s c r e d i t a s an i n t e r n a t i o n a l medium o f e x c h a n g e . And f i f t h l y , i t i s n e c e s s a r y t h a t t h e c o u n t r y be p o s s e s s e d o f s t r o n g c e n t r a l b a n k i n g f a c i l i t i e s . I t i s c o n t e n d e d t h a t s t e r l i n g i s t h e most 1 s u i t a b l e c u r r e n c y t o meet t h e s e f i v e c o n d i t i o n s . The s w e e p i n g c l a i m s made f o r s t e r l i n g must be d e f e n d e d , and t h e o n l y way t h a t t h i s c a n be done i s t o a p p e a l t o t h e t r u t h s o f h i s t o r y . An a p p e a l t o t h e t r u t h s o f h i s t o r y , however, must be c o n s i d e r e d i n t h e l i g h t o f h i s t o r i c a l and p e r s o n a l b i a s . I must warn t h e r e a d e r b e f o r e h a n d t h a t I am n a t u r a l l y b i a s e d i n f a v o u r o f s t e r l i n g , and t h a t while my p u r p o s e i s n o t t o d i s t o r t h i s t o r y , I may be l e d u n c o n s c i o u s l y t o o v e r e m p h a s i z e i n s t e r l i n g ' s f a v o u r . I d e c l a r e my p o s i t i o n i n a d v a n c e so a s t o do f u l l j u s t i c e t o t h e c l a i m s o f t h e A m e r i c a n d o l l a r and t h e f r a n c . E n g l a n d , a s compared t o o t h e r E u r o p e a n c o u n t r i e s , h a s a l w a y s o c c u p i e d an anomalous p o s i t i o n . H e r i n s t i t u t i o n s , i n t h e i r e m b r y o n i c s t a g e s , have b e e n r e l a t i v e l y f r e e f r o m t h e i n f l u e n c e o f p r e v a i l i n g c o n t i n e n t a l c u l t u r e s b e c a u s e o f h e r c o m p a r a t i v e i s o l a t i o n . The E n g l i s h p e o p l e have d e v e l o p e d a u n i q u e s y s t e m o f government w h i c h h a s b e e n w i d e l y c o p i e d t h r o u g h o u t t h e c i v i l i z e d w o r l d . I t t o o k a t h o u s a n d y e a r s o f t r i a l and e r r o r t o shape t h i s p o l i t i c a l m a c h i n e , and a p p r o x i m -a t e l y a h u n d r e d y e a r s f o r t h e w o r l d t o copy i t . The c u m u l a t i v e e x p e r i e n c e s o f g e n e r a t i o n s have i m p a r t e d a s t a b i l i t y i n t o E n g l i s h p o l i t i c s w h i c h c a n n o t be e x p o r t e d a l o n g w i t h t h e p o l i t i c a l f ramework. Many c o u n t r i e s have b o r r o w e d t h e s e t o f E n g l i s h p o l i t i c a l r u l e s b u t have f a i l e d t o a p p r e c i a t e t h e u n d e r l y i n g i d e a l s . The r e s u l t h a s b e e n t h a t E n g l a n d h a s l a r g e l y 1. B l a c k e t t , S i r B a s i l - " I t was s t e r l i n g r a t h e r t h a n g o l d t h a t f o r m e d t h e t r u e i n t e r n a t i o n a l s t a n d a r d b e f o r e t h e War" - The N i n e t e e n t h C e n t u r y and A f t e r , V o l . C X I , p.531, May 1938. 66 e s c a p e d t h e p o l i t i c a l u p h e a v a l s t h a t have c h a r a c t e r i z e d c o n t i n e n t a l h i s t o r y . P e r h a p s th e so c a l l e d A n g l o - S a x o n temperament i s l e s s amenable t o sudden change and i s more g i v e n t o p a t i e n t s u f f e r i n g , w h i c h i s r e w a r d e d on t h e w h o l e by s t e a d y , i f s l o w p r o g r e s s . E q u a l l y p o s s i b l e , t h e c o u r s e o f E n g l i s h h i s t o r y may have moulded t h e A n g l o - S a x o n temperament t o a deep r e s p e c t f o r c o n s t i t u t i o n a l methods. T h i s d o e s n o t mean t h a t t h e E n g l i s h p e o p l e a r e imbued w i t h a f a t a l i s t i c i n d i f f e r e n c e t o t h e c o u r s e o f e v e n t s , b u t t h a t t h e y have a g r e a t e r r e s p e c t i n t h e power o f t h e i r i n s t i t u t i o n s , t h a n t h e y have i n t h e power o f v i o l e n c e . W h a t e v e r t h e f o r c e of t h e above r e a s o n s t h e f a c t i s t h a t E n g l a n d h a s b e e n s i n g u l a r l y f r e e f r o m v i o l e n t p o l i t i c a l s t r i f e , and w h i l e i t i s u n s a f e to a d o p t t h e r o l e o f a s e e r , h e r p a s t must t o a l a r g e d e g r e e i n s t i l c o n f i d e n c e i n c o n t i n u e d p o l i t i c a l s t a b i l i t y . T h i s f a c t o r , a l o n e , I t h i n k s h o u l d be s u f f i c i e n t t o e l i m i n a t e t h e f r a n c and o t h e r i m p o r t a n t E u r o p e a n c u r r e n c i e s . f r o m w o r l d a c c e p t a n c e a s t h e b a s i s f o r an i n t e r n a t -i o n a l money. I t may be t r u e t h a t some o f t h e s e i m p o r t a n t E u r o p e a n c o u n t r i e s have r e f o r m e d and a r e on t h e t h r e s h o l d o f e c o n o m i c and p o l i t i c a l s t a b i l i t y , b u t t h e w o r l d i s s l o w t o r e v i s e i t s o p i n i o n s i n s u c h m a t t e r s . The I n d u s t r i a l R e v o l u t i o n , b e c a u s e o f i t s h e a d s t a r t i n E n g l a n d , h a s g i v e n t h a t c o u n t r y a h i g h l y s y s t e m a t i z e d e c o n o m i c o r d e r and h a s made h e r t h e f i r s t i n d u s t r i a l l e a d e r . T h e r e i s room f o r argument a s t o w h e t h e r she h a s a l w a y s m a i n t a i n e d t h a t e n v i a b l e p o s i t i o n , b ut t h e f a c t i s t h a t most o f t h e w o r l d h a s c a r r i e d on i t s i n t e r n a t i o n a l b u s i n e s s t h r o u g h L o n d o n s i n c e t h e d a y s o f D u t c h supremacy. D u r i n g t h e v i c i s s i t -u d i n o u s c o u r s e o f t h e pound a s t h e r e s u l t o f t h e G r e a t War, L o n d o n ' s f i n a n c i a l p r e s t i g e was c h a l l e n g e d by New Y o r k , b u t a f i n a n c i a l c e n t r e o f w o r l d wide i m p o r t a n c e i s n o t t h e p r o d u c t o f a few t r o u b l e d y e a r s . I t t a k e s a l o n g t i m e t o a c c u m u l a t e t h e b u s i n e s s s k i l l s , h a b i t s , and p r e s t i g e n e c e s s a r y t o m a i n t a i n s u c h a p o s i t i o n ; so l o n g , i n f a c t , t h a t o t h e r t h i n g s b e i n g e q u a l , t h e w o r l d w i l l r e v e r t t o i t s f o r m e r e c o n o m i c c e n t r e . T h i s seems t o have been the c a s e w i t h t h e p o s t war r e e s t a b l i s h -ment o f s t e r l i n g , a n d o u t s i d e o f t h e U n i t e d S t a t e s , t h e f a c t i s g e n e r a l l y c o n c e d e d . The r e g a i n i n g o f t h i s o u t s t a n d i n g f i n a n c i a l p o s i t i o n was a t r i b u t e to t h e h i g h l y s p e c i a l i z e d b u s i n e s s i n s t i t u t i o n s w h i c h have done the w o r l d ' s b a n k i n g f o r so l o n g . Why, a p a r t f r o m th e e a r l y i n c i d e n c e o f t h e I n d u s t r i a l R e v o l u t i o n d i d s t e r l i n g become a synonym f o r i n t e g r i t y ? To a n swer t h i s q u e s t i o n i t i s n e c e s s a r y t o c o n s i d e r m o n e t a r y h i s t o r y and t o i n q u i r e i n t o t h e d e v e l o p m e n t o f E n g l i s h b a n k i n g . T h e r e h a s b een no s e v e r e b r e a k i n t h e h i s t o r y o f s t e r l i n g s i n c e t h e d a y s o f K i n g O f f a o f M e r c i a . I t s h i s t o r y , l i k e a l l o t h e r s , i s a l o n g s t o r y o f d e p r e c i a t i o n , b u t when compared w i t h o t h e r s i t a p p e a r s an e m i n e n t l y r e s p e c t a b l e s t a n d a r d . F o r t h e p u r p o s e s o f t h i s e x p o s i t i o n i t i s u n n e c e s s a r y to r e v i e w a l l o f t h i s c o m p l i c a t e d h i s t o r y . The Bank o f E n g l a n d , f o u n d e d l a t e i n t h e s e v e n t e e n t h c e n t u r y , h a s become the c e n t r e o f t h e E n g l i s h s y s t e m . F o r a l o n g t i m e i t h a d a m onopoly on n o t e i s s u e but by the a c t o f 1826 t h i s p r i v i l e g e was e x t e n d e d to banks o p e r a t i n g o u t s i d e a d i s t a n c e o f s i x t y - f i v e m i l e s f r o m London, and i n 1833 c o r p o r -a t i o n s were a l l o w e d t o . c a r r y on a g e n e r a l banking" b u s i n e s s , w i t h t h e e x c e p t i o n o f n o t e i s s u e w i t h i n t h e c o n f i n e s o f L o n d o n . H i t h e r t o t h e s e p r i v i l e g e s h a d b e e n l i m i t e d t o t h e Bank o f E n g l -and and b a n k i n g f i r m s c o m p r i s i n g n o t more t h a n s i x p e r s o n s . T h i s l e g i s l a t i o n was f o l l o w e d by a g r e a t e x t e n s i o n o f j o i n t s t o c k b a n k i n g w h i c h r e s u l t e d i n numerous u n s o u n d n o t e i s s u e s . I n o r d e r t o meet t h e new s i t u a t i o n P e e l ' s A c t o f 1844 l i m i t e d t h e r i g h t o f c o u n t r y b a n k s t o i s s u e n o t e s and made p r o v i s i o n f o r t h e s e c u r i t y o f t h e Bank o f E n g l a n d ' s n o t e s . By t h i s a c t no c o u n t r y bank was p e r m i t t e d t o i n c r e a s e i t s n o t e i s s u e above a p r e d e t e r m i n e d a v e r a g e and a l l new b a n k s were d e n i e d t h e r i g h t o f i s s u e . F u r t h e r m o r e p r o v i s i o n was made t o t a k e o v e r t h e n o t e i s s u e f u n c t i o n o f any bank t h a t s h o u l d c e a s e t o do b u s i n e s s , w i t h t h e u l t i m a t e p u r p o s e o f g i v i n g t o t h e Bank o f E n g l a n d a c o m p l e t e monopoly o f t h i s p a r t o f t h e b a n k i n g b u s i n e s s . N o t e s had t o be c o v e r e d by government s e c u r i t i e s o r b u l l i o n up to f o u r t e e n m i l l i o n p o u n d s , and by b u l l i o n f o r any a d d i t i o n a l q u a n t i t y . T h i s a c t i s i m p o r t a n t b e c a u s e i t i s the b a s i s o f t h e p r e s e n t E n g l i s h b a n k i n g s y s t e m . D u r i n g t h e p a s t c e n t u r y i t was s u s p e n d e d no l e s s t h a n f o u r t i m e s i n t h e f a c e o f e m e r g e n c i e s . I n t h e c a s e o f the Bank o f E n g l a n d , i t i s mere o f f i c i a l d o m t o l i m i t n o t e i s s u e b y s t a t u t e b e c a u s e o f i t s c o n s e r v a t i v e p o l i c y and t h e c o n f i d e n c e t h e Bank e n j o y s . I t may be s a i d t h a t the Bank o f E n g l a n d i s b o t h a b a n k e r s ' and government bank. Most o f t h e c o u n t r y b a n k s keep a l a r g e p o r t i o n o f t h e i r r e s e r v e s i n i t a n d t h e government d o e s p r a c t i c a l l y a l l i t s b a n k i n g w i t h t h a t i n s t i t u t i o n . B e c a u s e o f t h i s f a c t t h e bank i s p l a c e d i n t h e p e c u l i a r p o s i t i o n o f b e i n g a p r i v a t e bank y e t p o s s e s s i n g a l l t h e r e s p o n s i b i l i t i e s o f a n a t i o n a l i n s t i t u t i o n . T h i s may be b e s t i l l u s t r a t e d b y a c o n s i d e r a t i o n o f t h e B a r i n g c r i s i s . I n 1890 an emergency was c r e a t e d by t h e s u s p e n s i o n o f B a r i n g B r o s . & Company. T h i s company i m p r u d e n t l y l o c k e d up t o o l a r g e a p r o p o r t i o n o f i t s a s s e t s i n l o n g - d a t e d s e c u r i t i e s , p r i n c i p a l l y t h o s e o f S o u t h A m e r i c a . W h i l e t h e s e s e c u r i t i e s p r o v e d t o be p e r f e c t l y sound t h e f i r m had so h e a v i l y i n v e s t e d i n them t h a t i t c o u l d n o t r e a l i z e on s h o r t n o t i c e . Waen o t h e r h o u s e s were a s k e d t o r e l i e v e i t , t h e y grew n e r v o u s and a p a n i c t h r e a t e n e d . The Bank o f E n g l a n d a v e r t e d t h e c r i s i s b y coming t o i t s a s s i s t a n c e a t t h e r i s k o f j e o p a r d i z i n g a s u b s t a n t i a l p a r t o f i t s r e s e r v e s . The p r e - w a r s y s t e m i s a d m i r a b l y summed by Mr. P e a v e a r y e a r a s f o l l o w s : " I n the d a y s b e f o r e the war a l l who s t u d i e d t h e E n g l i s h b a n k i n g s y s t e m , w i t h few e x c e p t i o n s , contem-p l a t e d i t w i t h a d m i r a t i o n m i n g l e d a l i t t l e w i t h awe. L ondon, t h e y s a i d , was t h e f i n a n c i a l c e n t r e o f t h e w o r l d , t h e b a n k e r o f a l l n a t i o n s . The b i l l upon L o n d o n was a n i n t e r n a t i o n a l c u r r e n c y w h i c h c o u l d be n e g o t i a t e d anywhere, b e c a u s e e v e r y o n e owed us money. A m o u n t a i n o f c r e d i t o f u n p r e c e d e n t e d s i z e was r e a r e d up i n t e r n a l l y u pon the r e s e r v e o f t h e Bank o f E n g l a n d , and t h a t r e s e r v e was a m a z i n g l y s m a l l . . . . The i n g e n u i t y w i t h w h i c h t h e bank m a i n t a i n e d a f r e e market f o r t h e m e t a l and c a r r i e d on t h e f i n a n c e s o f t h e w o r l d upon so s m a l l a f o u n d a t i o n 1 was t h e wonder o f a l l . " T h e s e w o r d s show t h a t i f any c o u n t r y a t t h a t t i m e h a d t h e o r g a n i z a t i o n t o e s t a b l i s h a managed i n t e r n a t i o n a l c u r r e n c y s u r e l y i t was G r e a t B r i t a i n . I t w i l l be a t t e m p t e d t o show t h a t war a n d p o s t war s t r a i n s have p r e p a r e d G r e a t B r i t a i n s t i l l more f o r t h e a d o p t i o n o f t h i s r o l e The a d v e n t o f war meant t h e s u s p e n s i o n o f t h e Bank A c t , w h i c h p r e p a r e d t h e way f o r c u r r e n c y and c r e d i t i n f l a t i o n , and the s u s p e n s i o n o f t h e g o l d s t a n d a r d . W h i l e t h e g o l d s t a n d a r d was n o t f o r m a l l y r e v o k e d d u r i n g t h e war, i t s a c t i o n was so c o n t r o l l e d a s t o make s p e c i e r e d e m p t i o n u n p r o f i t a b l e i f n o t p r o h i b i t i v e . G o l d c o u l d n o t be e x p o r t e d a t a p r o f i t b e c a u s e , o f g o v e r n m e n t a l c o n t r o l o f s h i p p i n g , so t h a t t h e main ' i n c e n t i v e to s p e c i e r e d e m p t i o n was e f f e c t i v e l y removed. Mo3t o f t h e i m p o r t a n t c o n t i n e n t a l c u r r e n c i e s were p e g g e d to t h e pound, i n terms o f w h i c h t h e y t e n d e d t o f a l l . The p r i n c i p a l c u r r e n c y i n w h i c h t h e pound t e n d e d t o f a l l was t h e A m e r i c a n d o l l a r , a nd so t o w a r d s the end o f 1915 t h e B r i t i s h government p e g g e d t h e pound t o t h e d o l l a r . I n o r d e r t o do t h i s , A m e r i c a n and C a n a d i a n s e c u r i t i e s h e l d i n G r e a t B r i t a i n were by v a r i o u s i n d u c e m e n t s c o l l e c t e d a nd u s e d t o s u p p o r t t h e pound on t h e exchange, by p l a c i n g d o l l a r s on t h e L o n d o n m a r k e t e v e r y t i m e s t e r l i n g t e n d e d t o f a l l . When the U n i t e d S t a t e s e n t e r e d t h e war A m e r i c a n government a d v a n c e s were u s e d f o r the same p u r p o s e . The wisdom o f t h e p l a n i s q u e s t i o n a b l e , b e c a u s e i n so f a r a s A m e r i c a n i m p o r t s were p u r c h a s e d w i t h b o r r o w e d 1. P e a v e a r y e a r , A . E. - op. c i t . d o l l a r s , i m p o r t s were n o t made c h e a p e r . I t d i d make i m p o r t s c h e a p e r f o r t h o s e who had t o buy t h e i r d o l l a r exchange i n London, b ut t h i s b e n e f i t e d c h i e f l y t h o s e who were i m p o r t e r s o f l u x u r i e s . I n o r d e r t o l i m i t t h e l a t t e r a c t i v i t i e s t h e McKenna d u t i e s were i m p o s e d . The p e r i o d was one o f r i s i n g p r i c e s and the cau s e i s v a r i o u s l y a t t a c h e d t o t h e i n c r e a s e o f n o t e c i r c u l a t i o n , t o t h e i n c r e a s e o f c r e d i t , and t o the s u c c e s s -f u l demands o f o r g a n i z e d l a b o u r f o r h i g h e r wages. I n M a r c h 1919 t h e exchange p e g was removed and the pound f e l l r a p i d l y to i t s p u r c h a s i n g power p a r i t y w i t h t h e d o l l a r . F o r e s e e i n g t h a t a p r o f i t c o u l d be made b y e x p o r t i n g g o l d a f t e r t h e p e g was removed, t h e government I m m e d i a t e l y p u t an embargo on t h e e x p o r t o f g o l d , w h i l e a t t h e same time p e r m i t t i n g i t s i m p o r t -a t i o n . T h i s r e g u l a t i o n p r e v e n t e d what l i t t l e f r e e g o l d t h e r e was a t t h e t i m e f r o m coming t o E n g l a n d u n t i l t h e government g r a n t e d a l i c e n s e f o r t h e r e e x p o r t o f n e w l y i m p o r t e d g o l d . When t h e l a s t o f t h e p e a c e t r e a t i e s h ad b e e n s i g n e d t h e embargo l a p s e d , b u t t h e G o l d a n d S i l v e r A c t o f 19E0 made p r o v i s i o n f o r the r e s u m p t i o n o f t h i s c o n t r o l a t any time w i t h i n the n e x t f i v e y e a r s . A n t i c i p a t i n g t h e c u r r e n c y p r o b l e m s t h a t w o u l d a r i s e w i t h t h e c e s s a t i o n o f h o s t i l i t i e s , t h e government a p p o i n t e d t h e C u n l i f f e C ommission t o s t u d y them. The Committee d e c i d e d t h a t i n f l a t i o n h a d r e s u l t e d b e c a u s e t h e n o r m a l c h e c k , n a m e l y t h e e x p o r t a t i o n o f g o l d , h a d b e e n h e l d i n a b e y a n c e . They recommended d e f l a t i o n so a s t o b r i n g a b o u t t h e r e s t o r a t i o n o f the g o l d s t a n d a r d and p r o p o s e d t h a t t h e government b e g i n t o 72 r e d u c e i t s i n d e b t e d n e s s . They u p h e l d the p r i n c i p l e o f t h e A c t o f 1844 and recommended t h e r e i n t r o d u c t i o n o f l e g a l n o t e i s s u e r e s t r i c t i o n . W h i l e t h e y d e c i d e d t h a t c o n v e r t i b i l i t y s h o u l d be r e t a i n e d i t was recommended t h a t g o l d r e s e r v e s s h o u l d be c e n t r a l i z e d and the p u b l i c s h o u l d be d i s c o u r a g e d f r o m u s i n g g o l d c o i n s . F o r a y e a r t h e government was n o t i n a p o s i t i o n t o a d o p t any o f t h e s e r e s o l u t i o n s and meanwhile t h e p o s t war boom began to t a k e e f f e c t . A l t h o u g h p r i c e s r o s e t h e a u t h o r i t -i e s a p p l i e d t h e l e s s o n s o f t h e C u n l i f f e R e p o r t b y p r e v e n t i n g i n f l a t i o n a nd d i s c o u r a g i n g t h e e x t e n s i o n o f c r e d i t . The i n e v i t a b l e c o l l a p s e came i n t h e f a l l o f 1920 and t h e s u b s e q u e n t d e p r e s s i o n made i t i n a d v i s a b l e t o d e f l a t e f u r t h e r . By 1925, however, t h e s t e r l i n g e xchange h a d r i s e n i n t e r m s o f d o l l a r s t o a p o i n t where the r e s u m p t i o n o f t h e g o l d s t a n d a r d was p r a c t i c a b l e . The G o l d S t a n d a r d A c t o f 1925 p r o v i d e d f o r r e d e m p t -i o n f o r e x p o r t p u r p o s e s o n l y , and i n u n i t s o f g o l d w e i g h i n g f o u r h u n d r e d o u n c e s . Thus g o l d c i r c u l a t i o n was abandoned on t h e s t a b i l i z a t i o n o f the p o u n d . A l t h o u g h t h e exchange v a l u e o f t h e pound was a t p a r , t h e i n t e r n a l p r i c e l e v e l h a d n o t a d j u s t e d i t s e l f t o t h e new v a l u e of the pound, p a r t l y b e c a u s e o f t h e r i g i d i t y o f t h e B r i t i s h s o c i a l s y s t e m . T h i s meant t h a t B r i t i s h i n d u s t r y was t o s u f f e r i n w o r l d c o m p e t i t i o n b e c a u s e o f h i g h e r c o s t s , and a s a c o n s e q u e n c e o f t h e c o a l i n d u s t r y a t t e m p t i n g to r e d u c e t h e s e c o s t s t h e G e n e r a l S t r i k e o f 1926 r e s u l t e d . I t seemed l i k e l y a t the t i m e t h a t t h e g r e a t i n d u s t r i a l stoppage would d r i v e Great B r i t a i n from the g o l d s t a n d a r d , but i t i s p r o b a b l e t h a t the " f l i g h t from the 1 f r a n c " was i n s t r u m e n t a l i n l e s s e n i n g the s t r a i n . P a r t l y as a consequence of the r e t u r n to g o l d , Great B r i t a i n has s u f f e r e d a c h r o n i c d e p r e s s i o n i n some of her i m p o r t a n t i n d u s t r i e s , but i t must be remembered t h a t a l l t h e s e i n d u s t r i a l i l l s can n o t be a t t r i b u t e d t o monetary f a c t o r s . The c o a l and c o t t o n 2 i n d u s t r i e s , f o r example, have p r o b a b l y been more d e p r e s s e d by i n f l u e n c e s p e c u l i a r t o themselves t h a n by monetary changes; t h a t i s to say, o i l has tended to r e p l a c e c o a l , and e a s t e r n c o m p e t i t i o n has d i s p l a c e d Manchester i n some o f the w o r l d m a r k e t s . Superimposed upon Great B r i t a i n ' s d o m e s t i c d i f f i c u l -t i e s i s the i n f l u e n c e o f the g r e a t i n t e r n a t i o n a l d e p r e s s i o n w h i c h made i t s appearance towards the end o f 1929. Faced w i t h t h e s e d i f f i c u l t i e s the B r i t i s h government c r e a t e d t h e M a c M i l l a n Committee t o s t u d y the problems and to make recommendations f o r t h e i r s o l u t i o n . The Committee completed i t s t a s k i n 1931 and i t s r e p o r t i s p r o b a b l y the most e x h a u s t i n g a n a l y s i s o f the s i t u a t i o n t h a t had been made up to t h a t t i m e , and some of the f i n d i n g s and recommendations o f the Committee are p e r t i n e n t 3 to the s u b j e c t o f managed c u r r e n c y . The Committee was f i r m i n r e j e c t i n g any s u g g e s t i o n s i n v o l v i n g a r e d u c t i o n i n the g o l d v a l u e of the pound. " I n t e r n a t i o n a l t r a d e , commerce and. 1. M a c M i l l a n Report - p a r a g r a p h 128, p.56. 2. P e a r s e , Arno, S. - The C o t t o n I n d u s t r y of Japan, C h i n a and I n d i a and i t s e f f e c t s on L a n c a s h i r e , I n t e r n a t i o n a l A f f a i r s , Vol.XI,pp.632-657, S e p t . 1932. 3. C a s s e l , Gustav - Monetary R e c o n s t r u c t i o n , I n t e r n a t i o n a l A f f a i r s , V ol.XI,No.5, Sept, 1932. 74 f i n a n c e a r e based on c o n f i d e n c e . One of the f o u n d a t i o n , s t o n e s on w h i c h t h a t c o n f i d e n c e r e p o s e s i s the g e n e r a l b e l i e f t h a t a l l c o u n t r i e s w i l l seek to m a i n t a i n so f a r as l i e s i n t h e i r power the v a l u e o f t h e i r n a t i o n a l c u r r e n c y as i t has been f i x e d by law, and w i l l o n l y g i v e l e g a l r e c o g n i t i o n o f i t s d e p r e c i a t i o n when t h a t d e p r e c i a t i o n has a l r e a d y come about de f a c t o . I t has f r e q u e n t l y been the case - we have numerous examples o f r e c e n t y e a r s - t h a t e i t h e r t h r o u g h the m i s f o r t u n e s of war, or m i s t a k e s of p o l i c y , o r the c o l l a p s e of p r i c e s , c u r r e n c i e s have f a l l e n so f a r below par t h a t t h e i r r e s t o r a t i o n would i n v o l v e e i t h e r g r a v e s o c i a l i n j u s t i c e s o r n a t i o n a l e f f o r t s and s a c r i f i c e s f o r w h i c h no adequate compensation can be e x p e c t e d . The v i e w may be h e l d t h a t our own case i n 1925 was o f t h i s c h a r a c t e r . The B r i t i s h c u r r e n c y had been d e p r e c i a t e d f o r some y e a r s . I t was o b v i o u s t o t h e whole w o r l d t h a t i t was an open q u e s t i o n whether i t s r e s t o r a t i o n to p a r was i n the n a t i o n a l i n t e r e s t and t h e r e i s no doubt i n our minds as to our a b s o l u t e freedom a t t h a t time to f i x i t , i f i t s u i t e d u s , a t a l o w e r par v a l u e c o r r e s p o n d i n g t o the then e x i s t i n g exchange. But i t would be to adopt an e n t i r e l y new p r i n c i p l e , and one w h i c h would u n d o u b t e d l y be an immense shock to the i n t e r n a t i o n a l f i n a n c i a l w o r l d , i f the Government o f the g r e a t e s t c r e d i t o r n a t i o n were d e l i b e r a t e l y and by an a c t o f p o s i t i v e p o l i c y t o announce one morning t h a t i t had r e d u c e d by l a w the v a l u e o f i t s c u r r e n c y from the p a r at w h i c h i t was s t a n d i n g t o some 1 l o w e r v a l u e . " I t must be remembered t h a t the above e x t r a c t 1.- M a c M i l l a n R e p o r t - p a r a g r a p h 128, p.110. 75 was w r i t t e n i n the e a r l y p a r t o f 1931 b e f o r e the s u s p e n s i o n o f g o l d , and does not now n e c e s s a r i l y r e p r e s e n t the o p i n i o n o f a l l the members on the Committee. The r e p o r t recommends t h a t i n so f a r as Great B r i t a i n i s a b l e , she s h o u l d i n f l u e n c e the i n t e r n a t i o n a l p r i c e l e v e l t o a p o i n t "a l o n g way above the p r e s e n t l e v e l and th e n to m a i n t a i n i t at the l e v e l t h u s r e a c h e d w i t h as much s t a b i l i t y as can be 1 managed." The i d e a of management i n monetary p o l i c y s h o u l d be the g u i d i n g aim a c c o r d i n g t o the recommendation. I t i s a d m i t t e d , however, t h a t i n t e r n a t i o n a l c u r r e n c y management i s dependent on 2 a c t i v e c e n t r a l b a n k i n g c o o p e r a t i o n . I n a d d i t i o n t o the g e n e r a l t h e s i s as o u t l i n e d above the Report p r e s e n t s a number o f i n t e r e s t i n g d e t a i l s o f wh i c h the more i m p o r t a n t are those c o n c e r n i n g more freedom to the 3 4 Bank o f E n g l a n d , the ec o n o m i z i n g o f r e s e r v e s , and the improve-5 ment i n the Bank's l i q u i d p o s i t i o n . T h i s l a t t e r s u g g e s t i o n was i n t e n d e d to p r e v e n t the n e c e s s i t y o f a l t e r i n g the d i s c o u n t r a t e when moderate g o l d d r a i n s t h r e a t e n e d . V a l u a b l e as were the recommendations o f the M a c M i l l a n Committee, i t i s u n l i k e l y t h a t Great B r i t a i n c o u l d have remained on the g o l d s t a n d a r d even i f time had a l l o w e d t h e i r complete a d o p t i o n . When v i e w i n g the work of the Committee a f t e r a two y e a r i n t e r v a l i t i s c l e a r t h a t i t u n d e r - e s t i m a t e d the i n t e r n a t -i o n a l a s p e c t s o f the problems w h i c h c o n f r o n t e d Great B r i t a i n . 1. M a c M i l l a n Report - p a r a g r a p h 275, p.117. 3. I b i d . - " 256, pp.110-111. 3. " - " 326, p.140. 4. " " pp.121-124. 5. " - " pp.147-152 P r i c e s throughout the w o r l d c o n t i n u e d to f a l l u n t i l the m i d d l e of 1932, and i t became i n c r e a s i n g l y d i f f i c u l t f o r d e b t o r c o u n t r i e s t o meet t h e i r o b l i g a t i o n s . Great B r i t a i n found h e r s e l f i n the p o s i t i o n o f b o t h borrower and c r e d i t o r , a s u b s t a n t i a l p a r t o f her s h o r t term l o a n s to South A m e r i c a , Germany, and o t h e r c o u n t r i e s b e i n g m e r e l y r e i n v e s t m e n t s o f f o r e i g n l i q u i d b a l a n c e s d e p o s i t e d i n London. Much of t h i s l i q u i d c a p i t a l was used by the b o r r o w e r s t o take the p l a c e o f l o n g term l o a n s w h i c h t h e y were u n a b l e to o b t a i n at the t i m e , and c o n s e q u e n t l y repayment would have meant economic c o l l a p s e i n the b o r r o w i n g c o u n t r i e s . Meanwhile l i q u i d b a l a n c e s were b e i n w i t h d r a w n from London to meet emergencies i n o t h e r c o u n t r i e s . The e f f e c t of these emergency w i t h d r a w a l s f i n a l l y engendered a p a n i c f l i g h t . Thus many s m a l l c o u n t r i e s f e a r e d f o r the s a f e t y of t h e i r " g o l d exchange" b a l a n c e s and the f l i g h t from the pound d e v e l o p e d r a p i d l y . The Bank o f England found i t n e c e s s a r y t o borrow 50,000,000 pounds, r e p a y a b l e i n g o l d , f rom the F e d e r a l Reserve Bank o f New Y o r k i n J u l y , 1931. T h i s sum, however, was i n a d e q u a t e , and the Bank of E n g l a n d was f o r c e d to a p p e a l to the government. The L a b o u r Government under the i n f l u e n c e of Mr. Snowden attem p t e d t o save the pound by f u r t h e r b o r r o w i n g from New Y o r k or P a r i s , but the terms were so onerous t h a t the Government was u n a b l e to e f f e c t them. I t i s thought t h a t the 1 terms i n c l u d e d a d r a s t i c economy i n unemployment e x p e n d i t u r e s , and t h i s i s s u e l e d t o the f o r m a t i o n o f the p r e s e n t N a t i o n a l Government. 1. C o l e , G.D.H. - The I n t e l l i g e n t Man's Guide Through W o r l d Chaos, p.101. 7 7 The N a t i o n a l Government i n s t e a d of s u s p e n d i n g the g o l d s t a n d a r d , n e g o t i a t e d a f u r t h e r f o r e i g n l o a n o f 80,000,000 pounds. By t h i s t i m e , however, the f l i g h t from the pound h a d . r e a c h e d such a magnitude t h a t g o l d had to be suspended i n September. I t was hoped t h a t the f a l l i n s t e r l i n g exchange would h e l p B r i t i s h i n d u s t r y , but any g a i n s were l a r g e l y n e g a t -i v e d by w i d e s p r e a d g o l d s u s p e n s i o n . At p r e s e n t t h e r e i s l i t t l e i n d i c a t i o n o f a r e t u r n to g o l d i n the near f u t u r e , because f a c t o r s beyond the c o n t r o l o f Great B r i t a i n would make a r e t u r n to g o l d p e r i l o u s i n the extreme. C l e a r l y Great B r i t a i n ' s problems a r e m e r e l y a phase of the i n t e r n a t i o n a l d e p r e s s i o n , and any r e a l s o l u t i o n must depend on i n t e r n a t i o n a l a c t i o n . T h i s i s o n l y b e i n g w i d e l y r e a l i z e d now, and i t may b e a r f r u i t at the coming World Economic C o n f e r e n c e . I n the e a r l i e r s t a g e s of the d e p r e s s i o n remedies were p u r e l y n a t i o n a l , and w h i l e t h e y were o f temporary b e n e f i t at the expense of o t h e r c o u n t r i e s , the a d v e r s e i n f l u e n c e s o f n a t i o n a l i s t p o l i c i e s i n the l o n g r u n r e f l e c t e d on the c o u n t r i e s w h i c h e x p e c t e d to reap the g a i n s . Thus a v i c i o u s system o f i n t e r n a t i o n a l t r a d e s t a g n a t i o n i s r e s u l t i n g from t a r i f f and exchange p o l i c i e s d e s i g n e d t o save the necks of t h e p e r p e t r a t o r s , but i n r e a l i t y these p o l i c i e s a r e s t r a n g l i n g the whole. Even Great B r i t a i n has abandoned f r e e t r a d e , and the u l t i m a t e course of the w o r l d economic s i t u a t i o n i s l e f t open to s p e c u l a t i o n . I t i s i m p o s s i b l e to w r i t e a c h a p t e r on the monetary h i s t o r y and problems o f Great B r i t a i n w i t h o u t becoming e n t a n g l e d w i t h the problems of the i n t e r n a t i o n a l d e p r e s s i o n . Furthermore 78 i t i s i m p o s s i b l e to form any f i n a l or s a t i s f a c t o r y c o n c l u s i o n s i n v i e w o f p r e s e n t c o n d i t i o n s . Up t o 19S9 the r o c k s i n the sea o f economics are r e a s o n a b l y w e l l marked, but from 1930 the c h a r t s a re i n d i s t i n c t and t h e s h o a l s a r e more numerous. 79 C h a p t e r X I THE CLAIMS OF THE UNITED STATES DOLLAR TO BE THE BASIS OF AN INTERNATIONAL MEDIUM OF EXCHANGE. The U n i t e d S t a t e s i s g e n e r a l l y r e f e r r e d t o as a new c o u n t r y w h i c h i s r e l a t i v e l y u n h i n d e r e d by t r a d i t i o n . At f i r s t g l a n c e i t might seem t h a t t h i s i s an i d e a l p r e r e q u i s i t e f o r the i n t r o d u c t i o n of managed c u r r e n c y . Because of t h i s v e r y newness Americans have been so much o c c u p i e d w i t h t h e i r own p r oblems t h a t t h e i r s i s a d i s t i n c t l y n a t i o n a l o u t l o o k . D u r i n g the n i n e t e e n t h c e n t u r y they e r e c t e d a d i p l o m a t i c w a l l around b o t h A m e r i c a s by means of the Monroe D o c t r i n e w h i c h t o l d the r e s t o f the w o r l d to s t a y home w i t h i t s guns. The queer t h i n g i s t h a t the b e n e f i c i a r i e s o f A m e rican p a t e r n a l i s m do n o t appear to be t h a n k f u l . They even r e s e n t the i n t r u s i o n o f American M a r i n e s when i t i s o b v i o u s l y done to s e c u r e t h e i r l i b e r t y a g a i n s t v i l l a i n o i i s r e b e l s . But why t r y t o fathom the i d i o s y n c r a c i e s o f L a t i n s when p r a c t i c a l measures w i l l get r e s u l t s ? A p a r t from d i p p i n g i n t o the f l e s h p o t s o f i n t e r n a t i o n a l r e l a t i o n s a few t i m e s , the Americans on the whole adopted the p o l i c y o f r i g i d n a t i o n a l i s m . C o n s e q u e n t l y we f i n d the U n i t e d S t a t e s w i t h a n e g l i g i b l e " c o l o n i a l empire" and w i t h o u t t e r r i t o r -i a l s p o i l s from the Great War. Her d i s t i n c t n a t i o n a l o u t l o o k i s perhaps best m a n i f e s t e d today by h e r c o n s i s t e n t r e f u s a l to become a member of the League o f N a t i o n s . Maybe the U n i t e d S t a t e s i s w i s e to adopt t h i s a t t i t u d e , but i t c e r t a i n l y does not encourage the w o r l d t o l o o k t o the American d o l l a r f o r l e a d e r s h i p . The g r e a t w e a l t h and d i v e r s i t y o f economic i n t e r e s t s has made the U n i t e d S t a t e s so l a r g e l y s e l f - c o n t a i n e d t h a t f o r e i g n t r a d e and w o r l d markets w i l l p r o b a b l y be f o r some time to come r e l a t i v e l y l e s s v i t a l t o her than t h e y a r e t o most c o u n t r i e s . I n o r d e r to b u i l d up i n t e r n a l i n d u s t r y the U n i t e d S t a t e s has d e v e l o p e d a system o f h i g h t a r i f f s t o keep out c o m p e t i t i v e f o r e i g n goods, and at the same time has been e n c o u r a g i n g h e r e x p o r t i n d u s t r i e s t o b u i l d up f o r e i g n m a r k e t s . W h i l e the A m e r i c a n s may j u s t i f y t he p o l i c y , o u t s i d e r s a re r e s e n t f u l . I t may n o t be too much to say t h a t to a l a r g e e x t e n t h e r e x p o r t p o l i c y i s a l u x u r y f o r which the t a x p a y e r s pay d e a r l y i n the form o f s h i p p i n g s u b s i d i e s and the p r e s e n t -a t i o n of a t t r a c t i v e m a i l c o n t r a c t s . The American C o n s t i t u t i o n i s composed of a s e t o f r i g i d r u l e s w h i c h p r o v e s t o be v e r y u n s a t i s f a c t o r y i n t i m e s of emergency, because i f i t i s p r e s s e d too f a r i t has a d e c i d e d tendency to b r e a k w i t h o u t b e n d i n g . The average American has an i n c u l c a t e d r e v e r e n c e f o r h i s b e l o v e d c o n s t i t u t i o n and i s u s u a l l y r e s i g n e d to w a i t w h i l e h i s clumsy p o l i t i c a l machine s l o w l y remedies h i s g r i e v a n c e . Whether r i g h t l y or w r o n g l y the ""world a t l a r g e has not a deep r e s p e c t f o r A m e r i c a n i n s t i t -u t i o n s and d i p l o m a c y , and as l o n g as t h i s c o n d i t i o n o b t a i n s the Am e r i c a n d o l l a r w i l l prove an i n f e r t i l e b a s i s f o r i n t e r n a t i o n a l c u r r e n c y . I t may be p o i n t e d out t h a t the w o r l d l a c k s a deep r e s p e c t f o r Hu n g a r i a n and Siamese i n s t i t u t i o n s , but t h e n , t h e y are not so i m p o r t a n t t o the w o r l d ' s w e l f a r e . I t may be t h a t much o f the w o r l d a t t i t u d e towards t h e U n i t e d S t a t e s i s b a s e d on f e a r and j e a l o u s y , but whatever the r e a s o n , i t i s l i k e l y to h i n d e r many forms o f i n t e r n a t i o n a l c o o p e r a t i o n . T h i s same independent s p i r i t has c h a r a c t e r i z e d A m e r i c a n f i n a n c i a l i n s t i t u t i o n s t o a marked degree. Two y e a r s a f t e r the f o r m a t i o n o f the n a t i o n a l government the F i r s t Bank of the U n i t e d S t a t e s was formed. T h i s bank was a c e n t r a l bank w h i c h had a m e l i o r a t i v e a f f e c t on the w i l d c a t p o l i c i e s of the numerous independent banks, and i n the l o n g r u n i t s c o n s e r v a t i v e management and e f f i c i e n t c o n t r o l o ver the a c t i o n s o f the independent banks p r o v e d i t s u n d o i n g . A u n i t e d o p p o s i t i o n i n f l u e n c e d Congress t o a b o l i s h the bank when i t s c h a r t e r e x p i r e d i n 1811. An orgy of w i l d c a t b a n k i n g ensued, and the r e s u l t o f the i n e v i t a b l e c r a s h was the e s t a b l i s h m e n t o f the Second N a t i o n a l Bank o f the U n i t e d S t a t e s . I t s r e c o r d o f e f f i c i e n c y i s s i m i l a r to t h a t o f i t s p r e d e c e s s o r , but p o l i t i c a l m a c h i n a t i o n s ended i t i n 1836. From t h a t time t o the C i v i l War American b a n k i n g h i s t o r y i s one of g e n e r a l d i s a s t e r , c h a r a c t e r i z e d by numerous f a i l u r e s and a m u l t i p l i c i t y o f unsound n o t e i s s u e s . I t i s o n l y f a i r , however, t o p o i n t out t h a t t h e r e were some banks, p a r t i c -u l a r l y i n the o l d e r s e t t l e d r e g i o n s , t h a t o p e r a t e d on sound b a n k i n g p r i n c i p l e s d u r i n g t h i s p e r i o d . P a r t l y as the r e s u l t of the c h a o t i c c u r r e n c y i n f l a t i o n o f the C i v i l War the e r a o f the n a t i o n a l b a n k i n g system made i t s appearance. S t a t e bank n o t e s were t a x e d out o f e x i s t e n c e and t h e i r p l a c e was t a k e n by the n a t i o n a l bank n o t e s w h i c h had a s t h e i r s e c u r i t y g overnment b o n d s . The s y s t e m was one o f t h o u s a n d s o f i n d e p e n d e n t b a n k s t o t a l l y d e v o i d o f c e n t r a l b a n k i n g c o n t r o l . W h i l e t h e s a f e t y o f t h e n a t i o n a l bank n o t e s was g u a r a n t e e d t h e i r q u a n t i t y depended on t h e amount o f t h e government d e b t , and on t h e c o m p a r a t i v e v a l u e o f bonds i n r e l a t i o n t o the i n t e r e s t r e t u r n f r o m t h e n o t e i s s u e . I n o t h e r words t h e s e s a f e n o t e s were p e r v e r s e l y e l a s t i c and had no r e l a t -i o n t o t h e c u r r e n c y n e e d s o f t h e c o u n t r y . The F e d e r a l R e s e r v e s y s t e m was i n a u g u r a t e d f o r t h e p u r p o s e o f p r o v i d i n g n o t o n l y a sound c u r r e n c y but an e l a s t i c one, a n d t o f u r n i s h a c e n t r a l i z e d b a n k i n g o r g a n i z a t i o n . T h e r e a r e t w e l v e f e d e r a l r e s e r v e banks s t r a t e g i c a l l y l o c a t e d t h r o u g h -out t h e c o u n t r y . E a c h i s i n c o r p o r a t e d , and i t s s t o c k i s h e l d b y t h e member ban k s w h i c h c o m p r i s e a l l n a t i o n a l b a n k s and any s t a t e b a n k s w h i c h c h o o s e t o a f f i l i a t e . A t t h e h e a d o f t h e s y s t e m i s t h e F e d e r a l R e s e r v e B o a r d , composed o f t h e S e c r e t a r y o f t h e T r e a s u r y , t h e C o m p t r o l l e r o f C u r r e n c y , and s i x o t h e r members c h o s e n by t h e P r e s i d e n t o f t h e u n i t e d S t a t e s s u b j e c t t o t h e a p p r o v a l o f t h e S e n a t e . E l a s t i c i t y o f n o t e i s s u e i s s e c u r e d b y p e r m i t t i n g t h e r e s e r v e banks t o r e d i s c o u n t s p e c i f i e d c o m m e r c i a l p a p e r i n e x c h a n g e f o r f e d e r a l r e s e r v e n o t e s . T h e s e n o t e s a r e s e c u r e d b y a l e g a l minimum o f g o l d , t o g e t h e r w i t h c o m m e r c i a l p a p e r . Thus by a l t e r i n g the r a t i o o f g o l d t o c o m m e r c i a l p a p e r b e h i n d t h e n o t e s , g o l d may be r e l e a s e d o r b u r i e d w i t h o u t a f f e c t i n g the v a l u e o f t h e A m e r i c a n d o l l a r . Hence th e F e d e r a l R e s e r v e A c t marks a d i s t i n c t a d v a n c e i n A m e r i c a n b a n k i n g p r a c t i c e . 83 The new system has had t o adapt i t s e l f to the war and p o s t war c o n d i t i o n s . The o r i g i n a l t h e o r y was t h a t t h e F e d e r a l Reserve Board would a d j u s t i t s d i s c o u n t r a t e a c c o r d i n g t o g o l d movements and the r a t i o o f i t s g o l d r e s e r v e s t o i t s l i a b i l i t i e s . The war f o r c e d t h e B o a r d to abandon the o l d i d e a l and t o absorb g o l d w i t h o u t undue c r e d i t i n f l a t i o n . The r e s u l t has been an a r t i f i c i a l maintenance of the d o l l a r . G o l d i s s t i l l a c c e p t e d a t i t s enhanced v a l u e so t h a t the l u x u r y o f s t a b i l i z i n g the d o l l a r a c c o r d i n g t o the A m e r i c a n p l a n i s v e r y e x p e n s i v e . As l o n g as t h e v a l u e o f g o l d i s s u p p o r t e d by the A m e r i c a n d o l l a r i t w i l l tend to f i n d i t s way t o t h a t c o u n t r y . The U n i t e d S t a t e s c o u l d g e t r i d o f t h i s s u r p l u s g o l d by i n f l a t i o n , but t h i s would mean a r e v e r s a l o f the Board's p r e s e n t p o l i c y . Some Americans a d v o c a t e the l o a n i n g o f huge q u a n t i t i e s of the m e t a l to f o r e i g n c o u n t r i e s , but t h i s , t o o , would i n v o l v e i n f l a t i o n and under p r e s e n t c o n d i t i o n s the r i s k w o u l d be g r e a t . A n o t h e r way t o reduce t h i s s u p e r f l u o u s g o l d p i l e would be to reduce the d o l l a r p r i c e of the m e t a l , but i t i s u n l i k e l y t h a t t h e r e e v e r w o u l d be a s u f f i c i e n t number o f i n t e l l i g e n t s e n a t o r s to p a s s a b i l l f o r t h i s p u rpose. The A m e rican f o r e i g n t r a d e p o l i c y w i l l not a l l o w h e r t o t r a d e g o l d f o r any g r e a t q u a n t i t y o f f o r e i g n goods, and i t i s u n l i k e l y t h a t any c o u n t r y w i l l buy much of i t f o r b u r i a l p u r p o s e s . I would suggest t h a t i t would be e a s i e r to change the law i n r e g a r d to f r e e g o l d m i n t i n g and f o r the B o ard to q u i e t l y d i s r e g a r d the g o l d s t a n d a r d , except i n so f a r as i t i s p o s s i b l e t o s e t t l e f o r e i g n b a l a n c e s . And so i t i s , except f o r the m o d i f i c a t i o n i n t r o d u c e d by t h e adverb " q u i e t l y , " and the s e n a t o r s would not know the d i f f e r e n c e . I f t h i s were done much of t h i s h i d d e n g o l d would f i n d i t s way i n t o the a r t s and the d o l l a r would not s u f f e r . Would the American b a n k i n g system be a b l e to c o n t r o l the v a l u e of a paper s t a n d a r d ? What i s the r e c o r d o f the F e d e r a l Reserve System i n money management? D u r i n g the war the F e d e r a l Reserve Board d i d not p r e v e n t a r i s e o f p r i c e s i n s p i t e o f the g o l d s t e r i l i z i n g p o l i c y . But to use t h a t argument a g a i n s t the F e d e r a l Reserve System would be g r o s s l y u n f a i r i n v i e w o f the r e c e n c y o f the A c t c r e a t i n g i t and i n vi e w o f tho s e abnormal c o n d i t i o n s . A f a i r answer t o the above q u e s t i o n s must be a t t e m p t e d from American post-war e x p e r i e n c e s . How are we t o e x p l a i n the boom o f 1920-E2? The answer t o t h i s q u e s t i o n i s p r o b a b l y t o be found i n the m i s u n d e r s t a n d i n g o f the t e c h n i q u e and use of the d i s c o u n t r a t e i n c r e d i t c o n t r o l . To a c e r t a i n e x t e n t the B o a r d i s t o be blamed f o r a t a r d y upward r e v i s i o n o f the r a t e but p r o b a b l y the most i m p o r t a n t r e a s o n f o r the boom was t h a t the bank r a t e f a i l e d to have the e f f e c t t h a t was e x p e c t e d . I t s i m p l y d i d not a c t i n the same way as a change i n the B r i t i s h bank r a t e does. The t r u e e x p l a n a t i o n f o r t h i s anomaly i s to be found i n the d i f f e r e n t use t o w h i c h c e n t r a l b a n k i n g r e d i s c o u n t f a c i l i t i e s a r e employed i n the A m e r i c a n system as compared to the B r i t i s h . When the F e d e r a l Reserve System was e s t a b l i s h e d i t was not a p p r e c i a t e d how n e c e s s a r y to C e n t r a l Bank c o n t r o l was t h e E n g l i s h t e c h n i q u e w h i c h s e c u r e d t h a t the advances of the Bank of En g l a n d t o the j o i n t s t o c k banks s h o u l d be n o r m a l l y n i l . Thus the Bank of E n g l a n d r a t e i s n o r m a l l y h i g h e r than i t pays t o r e d i s c o u n t w i t h i t so t h a t when the c o u n t r y banks f i n d i t n e c e s s a r y to s t r e n g t h e n t h e i r r e s e r v e s they must withdraw c r e d i t from the market, w h i l e the American member banks can r e d i s c o u n t and s t r e n g t h e n t h e i r r e s e r v e s w i t h o u t i n t e r f e r i n g w i t h the f l o w of c r e d i t . The F e d e r a l R e s erve System i m p l i e s t h a t r e d i s c o u n t w i l l be the normal t h i n g and as a consequence i t has been made easy f o r member banks to use thes e f a c i l i t i e s . P e r h a p s t h e u l t i m a t e cure f o r t h i s d i f f i c u l t y w i l l be found i n the abandonment of the commercial paper r e s e r v e f o r F e d e r a l Reserve n o t e s . I t must be n o t e d , however, t h a t t h i s e x p l a n a t i o n i s not u n i v e r s a l l y a c c e p t e d , and some w r i t e r s have even used t h i s p e r i o d of r i s i n g 1 p r i c e s to d i s c r e d i t the q u a n t i t y t h e o r y o f the v a l u e o f money. From 1923 t o 1927 i n c l u s i v e , the p r i c e l e v e l of the U n i t e d .States was r e a s o n a b l y s t a b l e and some c o n s i d e r t h i s a t r i u m p h of the F e d e r a l Reserve System. T h i s t r i u m p h , however, has been reduced by the d i s a s t r o u s boom of 1928-1929 and the subsequent d e p r e s s i o n . Some blame a low d i s c o u n t r a t e , some blame g o l d i n f l a t i o n , and some f i n d o t h e r i n f l u e n c e s w h i c h they blame. Undoubtedly t h e causes are h i g h l y complex, but i t i s impr o b a b l e t h a t the F e d e r a l Reserve System c o u l d have c o m p l e t e l y c o n t r o l l e d the s i t u a t i o n i n v i e w of i t s i n a d e q u a t e powers. S i n c e 1925 t h e r e has been a g r o w i n g tendency o f the member banks, e s p e c i a l l y those i n New Yo r k , to use r e d i s c o u n t f a c i l i t i e s f o r s h o r t term c r e d i t s o n l y . Then a g a i n , t h e r e has 1. B u r n s , A.F. - The Q u a n t i t a t i v e Theory and P r i c e S t a b i l i z a t i o n - The American Economic Review, V o l . X I X , p.179, 1931. 86 been a g r o w i n g d i s i n c l i n a t i o n f o r member banks to be i n debt to the F e d e r a l Reserve Banks because they f e a r an a d v e r s e i n f l u e n c e on t h e i r p r e s t i g e . Thus a bank tends to l e n d more f r e e l y when i t s debt to the c e n t r a l bank i s low and t o r e s t r i c t c r e d i t when i t s debt i s h i g h . Mr. R i e f l e r has shown t h a t the e x t e n t of member bank i n d e b t e d n e s s has a g r e a t e r e f f e c t on 1 i n t e r e s t r a t e s t h a n has the d i s c o u n t r a t e . I t would be v e r y p r o f i t a b l e t o determine more a c c u r a t e l y the e f f e c t o f bank i n d e b t e d n e s s on the volume of demand d e p o s i t s . I n c o n c l u s i o n we may note t h a t t h e r e i s a r e a s o n a b l e doubt as to t h e a b i l i t y of the F e d e r a l Reserve System as a t p r e s e n t c o n s t i t u t e d to c o n t r o l c r e d i t . The e f f e c t o f the d i s c o u n t r a t e i s u n c e r t a i n because i t depends on the c o o p e r a t i o n of thousands of member banks. I s i t r e a s o n a b l e t o suppose t h a t these member banks w i l l a c t as a body when i t i s d e s i r a b l e to e x e r t c e n t r a l b a n k i n g p r e s s u r e on c r e d i t and on the markets? The p r o s p e c t s o f the U n i t e d S t a t e s a d o p t i n g a managed paper s t a n d a r d a r e not v e r y f a v o u r a b l e because o f her g o l d problem and because of t h e c o n s e r v a t i s m o f her p e o p l e . I t i s suggested t h a t the A m erican p o l i c y o f i s o l a t i o n w i l l keep h e r out of any arrangements w h i c h w i l l peg h e r c u r r e n c y t o s t e r l i n g . When and i f managed s t e r l i n g becomes i n t e r n a t i o n a l we may e x p e c t to see t h e U n i t e d S t a t e s i n much the same p o s i t i o n as she i s to the League o f N a t i o n s today. 1. C u r r i e , L a u c h l i n - Member Bank Inde b t e d n e s s and Net Demand D e p o s i t s i n the F e d e r a l Reserve System - The Q u a r t e r l y J o u r n a l • of Economics, V o l . X L V I , pp.509-525, May 1932. 87 New Y o r k as an I n t e r n a t i o n a l Money M a r k e t . As p r e v i o u s l y remarked the war r e s u l t e d i n the a c q u i s i t i o n by the U n i t e d S t a t e s o f many f o r e i g n s e c u r i t i e s f o r m e r l y h e l d i n Europe and has made the U n i t e d S t a t e s the g r e a t e s t c r e d i t o r n a t i o n . T h i s meant t h a t New Y o r k was i n a p o s i t i o n t o l e n d money on a l a r g e . s c a l e and n e c e s s i t a t e d the development o f f o r e i g n departments i n many o f the i m p o r t a n t banks. W h i l e t h e i r e x p e r i e n c e does not e q u a l t h a t o f the B r i t i s h i n s t i t u t i o n s , g r e a t s t r i d e s have been made t o overcome t h i s d i f f i c u l t y . P e r h a p s the c h i e f d i s a d v a n t a g e under w h i c h New Yo r k l a b o u r s i s the l a c k o f a p u b l i c w h i c h i s w i l l i n g t o i n v e s t i n f o r e i g n s e c u r i t i e s . D u r i n g the p e r i o d from 1923 t o 1928 A m e r i c a n bond houses d i d succeed i n d i s p o s i n g l a r g e q u a n t i t i e s o f f o r e i g n i s s u e s t o the i n v e s t i n g p u b l i c , but these were l a r g e l y r e s o l d abroad when the W a l l S t r e e t boom a t t r a c t e d 1 f u n d s . Even when f o r e i g n s e c u r i t i e s were s e l l i n g a t t h e i r b e s t , A m e rican houses found i t n e c e s s a r y t o d i s p o s e of l a r g e q u a n t i t i e s i n Stockholm, Amsterdam, and o t h e r c e n t r e s . The boom o f 1928 and 1929 changed New Y o r k from a l e n d i n g to a b o r r o w i n g c e n t r e , w h i c h had the e f f e c t o f weakening he r i n t e r n a t i o n a l supremacy. The slump o f 1929 f u r t h e r weakened New Y o r k ' s p o s i t i o n i n the i n t e r n a t i o n a l market by f o r c i n g h e r a t t e n t i o n on domesti c p r o b l e m s . Many o f the American banks found t h a t t h e i r margins on b r o k e r s ' l o a n s had d i s a p p e a r e d and t h e y were l e f t i n the p o s i t i o n o f h o l d i n g f r o z e n a s s e t s . I f l i q u i f i c a t i o n were atte m p t e d w i t h t h e s e a s s e t s a f u r t h e r d e c l i n e i n s e c u r i t y p r i c e s would ensue, so t h a t t h e i r o n l y a l t e r n a t i v e 1. M a c M i l l a n R e p o r t , p.71. 88 at p r e s e n t i s t o h o l d them. There i s now a p l e t h o r a o f f o r e i g n bonds on the American market and i t seems u n l i k e l y t h a t the i n v e s t i n g p u b l i c w i l l absorb many f o r e i g n s e c u r i t i e s f o r some time to come. I t i s u n l i k e l y t h a t New Y o r k w i l l i n the p r o x i m a t e f u t u r e become the l e a d i n g f i n a n c i a l c e n t r e because h e r d o m e s t i c problems w i l l swamp i n t e r n a t i o n a l i n t e r e s t s . When economic r e c o v e r y has t a k e n p l a c e New Y o r k w i l l a g a i n be an a c t i v e f a c t o r i n i n t e r n a t i o n a l f i n a n c e , but t h i s i n t e r e s t w i l l be spasmodic because o f the n a t i o n a l s i t u a t i o n . The American p u b l i c , i n t h i s g e n e r a t i o n a t l e a s t , w i l l be i n t e r e s t e d i n s p e c u l a t i n g i n s t e e l i n p r e f e r e n c e t o i n v e s t i n g i n C h i l e a n C o n v e r s i o n bonds. I n t e r n a t i o n a l f i n a n c e must i n the l o n g r u n depend on c o n s t a n t i n t e r e s t r a t h e r than s p o r a d i c . C o o p e r a t i o n between New Y o r k and London. W h i l e New Y o r k and London were s t r u g g l i n g f o r f i n a n -c i a l supremacy the s t o r y o f t h e i r mutual r e l a t i o n s i s most g r a t i f y i n g . New Y o r k has always been most generous when i t came to s a c r i f i c i n g a n a t i o n a l g a i n f o r the sake of i n t e r n a t i o n a l s t a b i l i t y . T h i s c o o p e r a t i o n was p a r t l y due to the c o r d i a l r e l a t i o n s t h a t e x i s t e d between Mr. Montagu Norman and Mr. B e n j a m i n S t r o n g , l a t e Governor o f the F e d e r a l Reserve Bank o f 1 New Y o r k . The l a t t e r r e a l i z e d t h a t the f i n a n c i a l r e h a b i l i t a t i o n of Europe was more i m p o r t a n t t o a l l concerned t h a n a temporary advantage t o d o l l a r c r e d i t s . I n 19E5 New Y o r k g r a n t e d s u b s t a n -t i a l c r e d i t s to s t a b i l i z e the new B r i t i s h g o l d s t a n d a r d , when 1. The E c o n o m i s t , May 9, 1925. t h e i r w i t h h o l d i n g would have h e l p e d d o l l a r supremacy i n the i n t e r n a t i o n a l money f i e l d . A l s o t h e r e has been i n s e v e r a l 1 i n s t a n c e s m u t u a l c o o p e r a t i o n on d i s c o u n t p o l i c i e s . On the whole New Y o r k has been r e l a t i v e l y f r e e from p o l i t i c a l i n f l u e n c e , and i n the cases when p o l i t i c a l m o t i v e s a f f e c t e d f o r e i g n c r e d i t s the p r i m a r y purpose was economic. U n t i l 19E7 New Y o r k was p r o b a b l y the p r e m i e r f i n a n c i a l c e n t r e and i t was i n t h a t y e a r t h a t Governor S t r o n g e n a c t e d the l a s t of h i s f r i e n d l y measures i n s u p p o r t o f s t e r l i n g . I n o r d e r t o p r e v e n t a r i s e i n t h e London d i s c o u n t r a t e he l o w e r e d t h e New Y o r k r a t e . The l a t e Mr. S t r o n g has been s e v e r e l y c r i t i c i z e d i n some c i r c l e s f o r h i s l a s t a c t , because i t was thought t h a t t h i s was the cause of t h e 2 W a l l S t r e e t boom. I t i s v e r y u n l i k e l y t h a t t h i s had much 3; i n f l u e n c e , but somebody must be made the goat and dead men do not p r o t e s t v e r y v i g o r o u s l y . When the boom a t t r a c t e d f o r e i g n f u n d s t h e i r g r e a t volume t h r e a t e n e d the European exchanges and embarrassed the New Y o r k market. S e v e r a l t i m e s London r e l i e v e d the s i t u a t i o n by r a i s i n g the d i s c o u n t r a t e . I t i s p e r t i n e n t t o note t h a t most monetary thought o f the p r e s e n t day bases i t s c o n c l u s i o n s on c o n t i n u e d c o o p e r a t i o n 1. M a c M i l l a n R e p o r t - p.71-72. 2. Anderson, B.M. - "The F i n a n c i a l S i t u a t i o n , " Chase Economic B u l l e t i n , Vol.IX,No.6,p.4, November 22, 1929. E l l s w o r t h , D.W. - "The World's S h i f t i n g G o l d R e s e r v e , " C u r r e n t H i s t o r y , V o l . 3 6 , August 1932. 3. L a u g h l i n , J.Laurence -"Money, C r e d i t and P r i c e s , V o l . 1 1 . Noyes, C.R. - C l a i m s t h a t g o l d i m p o r t s were r e f l e c t e d i n s e c u r i t y p r i c e s , r a t h e r t h a n i n commodity p r i c e s - "Go l d i n f l a t i o n i n U n i t e d S t a t e s , 1921-1929," The Am e r i c a n Economic Review, Vol.XX,p.181,1930. 90 between London and New Y o r k . I t seems to me, however, t h a t i t i s unwise t o c o n s i d e r as permanent the e x p e r i e n c e s o f a decade. The Genoa R e s o l u t i o n s depend on t h i s c o o p e r a t i o n f o r t h e i r e f f e c t i v e consummation; so, t o o , do the i d e a s o f M e s s r s . Hawtrey, C a s s e l , E d i e , and o t h e r c o n s e r v a t i v e r e f o r m e r s . 91 C h a p t e r X I I THE CLAIMS OF THE FRANC TO BE THE BASIS OF AN INTERNATIONAL MEDIUM OF EXCHANGE. France as the w o r l d ' s t h i r d c r e d i t o r n a t i o n , h er s u p e r i o r l i q u i d f o r e i g n r e s o u r c e s , and her s p e c i a l p o s i t i o n w i t h r e s p e c t to Europe, e n t i t l e h e r to be c o n s i d e r e d i n a t r e a t m e n t o f i n t e r n a t i o n a l c u r r e n c y . U n f o r t u n a t e l y t h e r e i s an a i r o f m y s t e r y s u r r o u n d i n g r e c e n t F r e n c h f i n a n c i a l p o l i c y , w h i c h to a c e r t a i n e x t e n t c o m p l i c a t e s a c o n s i d e r a t i o n o f her c l a i m s . P e r h a p s i t i s not so much a m a t t e r . o f m y s t e r y , as i t i s a m a t t e r o f m i s u n d e r s t a n d i n g , w h i c h l e a d s t o so many c o n f u s i n g i n t e r p r e -t a t i o n s of her p o l i c y . The f a c t s as such a r e c l e a r , but the p a t t e r n w h i c h t h e y form i s c o m p l i c a t e d by the v a r y i n g amount o f s t r e s s w h i c h d i f f e r e n t w r i t e r s p l a c e upon them. W i t h t h i s p r e l i m i n a r y c a u t i o n i t s h o u l d be p o s s i b l e to de v e l o p a r e a s o n -a b l e e x p l a n a t i o n o f some o f the more obscure i s s u e s , and i n p a r t i c u l a r t o g i v e a s a t i s f a c t o r y t r e a t m e n t of the F r e n c h g o l d problem. W i t h r e f e r e n c e to h e r p o s i t i o n on the C o n t i n e n t , France e n j o y s c e r t a i n advantages w h i c h s u p p o r t h e r c l a i m . T h i s C o n t i n e n t a l i n f l u e n c e r e s u l t s from h e r p o l i c y o f e s t a b l i s h i n g d e f e n s i v e a l l i a n c e s o r un d e r s t a n d i n g s . ' B e f o r e the war h e r R u s s i a n a l l y was the c h i e f b e n e f a c t o r of t h i s p o l i c y , w h i c h was 1 m a n i f e s t e d by s u b s t a n t i a l F r e n c h l o a n s . S i n c e the war a 1. Fay, S.B. - The O r i g i n s o f the World War, V o l . 1 , pp.107-108. 92 number of the new European c o u n t r i e s have b e n e f i t e d at the expense of those c o u n t r i e s beyond the p a l e o f the new E n t e n t e . C o n s e q u e n t l y France has been ac c u s e d o f e x e r t i n g p o l i t i c a l 1 p r e s s u r e i n the F r e n c h money market, and w h i l e t h e r e may be n o t h i n g wrong w i t h t h i s p o l i c y from a p o l i t i c a l s t a n d p o i n t i t r e a c t s a g a i n s t the f r a n c i n those c o u n t r i e s not b e n e f i t e d . 2 I t i s c l a i m e d t h a t F r e n c h banks te n d t o r e f l e c t p o l i t i c a l d i s a g r e e m e n t , and i t i s not d i f f i c u l t t o show t h a t i n the n a s t few y e a r s g o l d has been w i t h d r a w n when A n g l o - F r e n c h 3 r e l a t i o n s became s t r a i n e d . I n June, 1929, Mr. Snowden*s a n t i - F r e n c h a t t i t u d e was f o l l o w e d by the w i t h d r a w a l o f g o l d ; and a g a i n at the Hague, Mr. Snowden's disagreement w i t h the F r e n c h r e p r e s e n t a t i v e s was f o l l o w e d by s i m i l a r a c t i o n . When the P a r i s Conference of R e p a r a t i o n s E x p e r t s t h r e a t e n e d f a i l u r e the r e d i s c o u n t r a t e on German b i l l s was r a i s e d and c r e d i t s were r e c a l l e d . The same s i t u a t i o n a r o s e when the N a t i o n a l S o c i a l i s t P a r t y i n Germany was v i c t o r i o u s . These f o u r examples are quoted by Mr. E i n z i g as a p r o o f o f the m a l i c i o u s i n f l u e n c e b e h i n d the F r e n c h money market. He may be r i g h t , but i t i s suggested t h a t a more l i k e l y e x p l a n a t i o n can be f o u n d . I t i s more p r o b a b l e t h a t F r a n c e had economic rea s o n s f o r w i t h d r a w i n g f u n d s from London r a t h e r than f r o m New York; f o r example, i t may have been thought t h a t the p r o s p e c t i v e r e m u n e r a t i o n f o r l i q u i d b a l a n c e s would be more f a v o u r a b l e i n New Y o r k . S i m i l a r l y 1. E i n z i g , P a u l - The F i g h t f o r I n t e r n a t i o n a l Supremacy, C o l e , G.D.H. - Op. C i t . 2. E i n z i g , P a u l - Op. C i t . 3. The Ec o n o m i s t . 93 t h e r e a r e o t h e r i n t e r p r e t a t i o n s of the German i l l u s t r a t i o n s i f one i s p r e p a r e d t o l o o k f o r them. The f a i l u r e o f the R e p a r a t -i o n s Conference would c e r t a i n l y r e a c t u n f a v o u r a b l y on the German economic s i t u a t i o n and i t i s not u n n a t u r a l fchat the F r e n c h banks showed c o n c e r n . The consequences o f the German e l e c t i o n a r e e a s i l y e x p l a i n e d i f we choose to a s s o c i a t e the i d e a s of s o c i a l -ism and nervous c a p i t a l i s m . The war d e a l t the f i n a n c i a l o r g a n i z a t i o n of F r a n c e a s e r i o u s blow, and as i s w e l l known the f r a n c was at the mercy of s p e c u l a t o r s from 1919 t o 1926. The g r e a t e s t bear i n f l u e n c e on t h e F r e n c h exchange d u r i n g t h i s p e r i o d was the f l i g h t f r o m the f r a n c , and i t was o n l y checked when i t appeared t h a t F r ance was about to d e f l a t e . The f r a n c was not s t a b i l i z e d a t the p r e -war p a r , however, and France made handsome p r o f i t s i n c a t c h i n g many o f t h e s e s p e c u l a t o r s . W i t h the s t a b i l i z a t i o n of F r e n c h money the f l i g h t of c a p i t a l was r e v e r s e d , and the exchange went h e a v i l y i n f a v o u r of France as thousands o f Frenchmen r e p a t r i a t e d t h e i r f o r e i g n f u n d s . The F r e n c h banks, however, d e c i d e d t h a t i t was t o t h e i r advantage to l e a v e a s u b s t a n t i a l p o r t i o n o f these funds abroad i n l i q u i d form, so t h a t the net r e s u l t t o these f o r e i g n b a l a n c e s was j u s t a t r a n s f e r o f c o n t r o l f r o m numerous s m a l l i n v e s t o r s to a s m a l l number of banks. The f o r e i g n l i q u i d r e s o u r c e s of France have been a c o n s t a n t w o r r y to the c e n t r a l banks concerned, and to the f i n a n c i a l w o r l d at l a r g e . A sudden s h i f t o f t h e s e c r e d i t s from one c e n t r e to a n o t h e r u p s e t s the f o r e i g n exchanges and 1 may prove e m b a r r a s s i n g to the markets a f f e c t e d . As a conseq-uence of t h i s danger the c e n t r a l banks of the c e n t r e s i n w h i c h t h e s e b a l a n c e s a r e m a i n t a i n e d are f o r c e d to keep a b n o r m a l l y h i g h r e s e r v e s and to m a i n t a i n a v e r y l i q u i d p o s i t i o n . The M a c M i l l a n Committee too k c o g n i z a n c e of t h i s p o s s i b i l i t y when 2 i t recommended a more l i q u i d p o s i t i o n to the Bank o f E n g l a n d . France has been s e v e r e l y c r i t i c i z e d f o r not i n v e s t i n g her l i q u i d a s s e t s i n l o n g term s e c u r i t i e s , and because she has 3 f a i l e d to do t h i s i t has been h i n t e d t h a t t h e r e i s some s i n i s t e p o l i t i c a l i n f l u e n c e b e h i n d the F r e n c h p o l i c y . I n c o n s i d e r i n g the s i t u a t i o n from the i n v e s t i n g a n g l e , however, i t i s perhaps not u n r e a s o n a b l e t h a t France was h e s i t a n t to i n v e s t i n l o n g term s e c u r i t i e s when i t i s remembered how u n c e r t a i n post-war f i n a n c i a l c o n d i t i o n s were, and i n v i e w of the e x i s t i n g economic c o n d i t i o n s i t i s not d i f f i c u l t to u n d e r s t a n d the F r e n c h a t t i t u d e 4 toward l o n g term l o a n s . Perhaps the a c c u m u l a t i o n of the F r e n c h g o l d r e s e r v e s has e x c i t e d more comment and s u s p i c i o n t h a n any o t h e r f a c t o r i n F r e n c h f i n a n c i a l p o l i c y . Most p e o p l e f i n d i t easy t o e x p l a i n the American r e s e r v e s because the r e a s o n s are c l e a r l y a s s o c i a t e d w i t h war f i n a n c i n g , but t h e y f i n d i t d i f f i c u l t t o u n d e r s t a n d how France accumulated so much g o l d i n the l a s t f i v e y e a r s . They remember the F r e n c h war s a c r i f i c e s , the c h a o t i c f r a n c , the F r e n c h war d e b t s , and f i n d i t i m p o s s i b l e to r e c o n c i l e them w i t h 1. Gregory, T.E. - op. c i t . , pp.36-37. 2. M a c M i l l a n R e p o r t . 3. E i n z i g , P a u l -4. Gregory, T.E. - op. c i t . , pp.18-21. the new g o l d r e s e r v e s . I t i s s m a l l wonder t h a t so many su s p e c t F r a nce of u s i n g shady methods t o b u i l d up a war o r p o l i t i c a l c h e s t . W h i l e t h e r e may be an element o f t r u t h i n t h i s p o p u l a r v i e w , the s i t u a t i o n can be e x p l a i n e d w i t h o u t p r e s u p p o s i n g France to be a buccaneer among the n a t i o n s . I n an attempt t o f i n d a r e a s o n a b l e e x p l a n a t i o n o f the F r e n c h g o l d i m p o r t s i t i s best to s t a r t w i t h an e x a m i n a t i o n o f those f o r c e s w h i c h would te n d t o cause a . f l o w o f g o l d to F r ance F i r s t . , . i t w i l l be remembered t h a t F r a n c e i s an i m p o r t a n t c r e d i t o r n a t i o n and i n consequence g o l d would tend to f l o w to F r a n c e . A c c o r d i n g t o the w e l l known C l a s s i c a l d o c t r i n e g o l d i m p o r t s t e n d to be r e f l e c t e d i n h i g h e r p r i c e s , w h i c h i n t u r n l e a d to c o n d i t i o n s f a v o u r a b l e to the e x p o r t o f the m e t a l u n t i l e q u i l i b r i u m i s a g a i n r e s t o r e d . But i n France g o l d i m p o r t s have not l e d to c o n d i t i o n s f a v o u r a b l e t o g o l d e x p o r t s . I s i t because France d e l i b e r a t e l y s t e r i l i z e d g o l d as c l a i m e d by some, o r i s i t an e f f e c t of economic and b a n k i n g c o n d i t i o n s ? I f the economic and b a n k i n g s i t u a t i o n i s r e s p o n s i b l e f o r F r e n c h g o l d a c c u m u l a t i o n , how d i d i t c o u n t e r a c t the tendency f o r g o l d to l e a v e F r a n c e ? T h i s u n u s u a l consequence of g o l d i m p o r t s can be e x p l a i n e d on s e v e r a l grounds, namely, (1) t a r i f f i n c r e a s e s w h i c h tended to l i m i t F r e n c h i m p o r t s and c o n s e q u e n t l y f o r e i g n c l a i m s on F r a n c e , (2) an abnormal demand f o r g o l d i n F r a n c e , (3) the r i g i d i t y and undeveloped c h a r a c t e r of F r e n c h b a n k i n g w h i c h would tend to l i m i t the e f f e c t o f g o l d i m p o r t s on p r i c e s , 1. B a l o g u e , T. - The Imports o f G o l d i n t o F r a nce -The Economic J o u r n a l , September 1930. E d i t o r i a l , J o u r n a l of C anadian B a n k e r s ' A s s o c i a t i o n , October 1930. 96 and (4} the W a l l S t r e e t c r a s h r e d u c e d the wide m a r g i n between domestic and f o r e i g n s h o r t term i n t e r e s t r a t e s , w h i c h made i t l e s s a t t r a c t i v e to m a i n t a i n f u n d s abroad. A l l o f the above f a c t o r s were i n f l u e n t i a l i n a t t r a c t i n g g o l d t o F r a n c e , but i t i s p r o b a b l e t h a t the immediate cause was the demand o f the . p r o v i n c i a l banks and of the Bank of France f o r g o l d to s t r e n g t h e n t h e i r r e s p e c t i v e r e s e r v e s . As soon a s the f r a n c was r e e s t a b l i s h e d the Bank o f France commenced t o i n c r e a s e i t s r e s e r v e s by d i r e c t w i t h d r a w a l s 1 from London. T h i s , d r a i n , however, was st o p p e d when the c e n t r a l banks agreed not to i n t e r f e r e w i t h each o t h e r ' s r e s e r v e s at t h e Washington Con f e r e n c e o f C e n t r a l Banks i n August, 19E7. T h i s agreement, of c o u r s e , d i d not a f f e c t t h e powers o f the F r e n c h j o i n t s t o c k banks to draw from abroad t o s t r e n g t h e n t h e i r own p o s i t i o n s . The u n d e r l y i n g r e a s o n s b e h i n d t h e demand f o r g o l d on the p a r t o f the j o i n t s t o c k banks a r e s e v e r a l , namely, (1) the d e s i r e t o s t r e n g t h e n t h e i r r e s e r v e s as i n d i c a t e d above, (E) the d e s i r e t o draw on f o r e i g n b a l a n c e s r a t h e r t h a n t o r e d i s c o u n t w i t h the Bank of France i n p e r i o d s of money s t r i n g e n c y , and (3) the i n f l a t i o n a r y c h a r a c t e r of the Government s a v i n g s bank w h i c h l e d t o a demand f o r r e s e r v e s to cov e r the s w e l l e d d e p o s i t s and c u r r e n c y . The r e a s o n f o r the u n w i l l i n g n e s s o f the F r e n c h j o i n t s t o c k banks to r e d i s c o u n t w i t h the C e n t r a l Bank i s t r a c e a b l e t o c o m p e t i t i o n o f the former w i t h the l a t t e r . The Bank of France has numerous branches throughout the c o u n t r y 1. The Ec o n o m i s t , June 11, 19£7. 97 w h i c h come i n t o d i r e c t c o m p e t i t i o n w i t h the b u s i n e s s o f the o t h e r banks. When the p r o v i n c i a l banks r e q u i r e d more currency-n o t e s t h e r e were two methods of o b t a i n i n g them, namely ( l ) b o r r o w i n g f r o m the Bank of France a g a i n s t t h e i r commercial p a p e r , w i t h the o b v i o u s d i s a d v a n t a g e o f a c q u a i n t i n g a c o m p e t i t i v e i n s t i t u t i o n w i t h t h e i r p r i v a t e b u s i n e s s , o r (2) c a s h i n g t h e i r f o r e i g n r e s o u r c e s and exchanging the g o l d r e c e i v e d f o r bank 1 n o t e s a t the Bank o f F r a n c e . The i n f l a t i o n a r y c h a r a c t e r o f the Government s a v i n g s bank, the " C a i s s e s des Depots e t C o n s i g -n a t i o n s , " i s due to a c o m b i n a t i o n o f f a c t o r s . Almost a l l s a v i n g s a c c e p t e d by t h i s i n s t i t u t i o n a r e i n v e s t e d i n government s e c u r i t i e s , and the debt r e d e m p t i o n a c t i v i t i e s of the government tend to t u r n the s a v i n g s back i n t o the hands o f the r e n t i e r s who tend t o r e d e p o s i t the p r o c e e d s i n the s a v i n g s bank. The v i c i o u s c i r c l e c o n t i n u e s t o s w e l l d e p o s i t s and c u r r e n c y , w h i c h i n t u r n l e a d s t o a demand f o r g o l d t o s w e l l the r e s e r v e s . Even though much of the i n c r e a s e d c u r r e n c y . i s s t e r i l i z e d i t has i t s 2 a f f e c t on the volume of g o l d i m p o r t s . Why have not these huge g o l d i m p o r t s a f f e c t e d c r e d i t condit i o n s and the p r i c e l e v e l t o a g r e a t e r degree? F i r s t , the b a n k i n g system o f France i s so p o o r l y a r t i c u l a t e d , and commercial b a n k i n g has deve l o p e d t o so s m a l l an e x t e n t , t h a t 3 cash r e s e r v e s o n l y s l o w l y s t i m u l a t e i n c r e a s e d bank c r e d i t , and s e c o n d l y , the F r e n c h peasant has a tendency to ho a r d . The 1. Wynne, W.H. - Fr a n c e and Go l d , J o u r n a l of C a n a d i a n B a n k e r s ' A s s o c i a t i o n , A p r i l , 1931. 2. B a l o g u e , T - Economic J o u r n a l , September 1930. Wynne, W.H. - J o u r n a l o f Canadian B a n k e r s ' A s s o c i a t i o n , October, 1930. 3. The E d i t o r , , J o u r n a l o f Canadian B a n k e r s ' A s s o c i a t i o n , O c t o b e r / 1930. 98 i m p o r t a n c e of the second f a c t o r i s d e b a t a b l e , and many a u t h o r -1 i t i e s c o n s i d e r i t t o be c o m p a r a t i v e l y s m a l l . To many o b s e r v e r s i t seems t h a t France has an i n s a t i a b l e demand f o r g o l d , and i t i s apparent t h a t i f the d r a i n c o n t i n u e s i t w i l l have a s e r i o u s economic consequence on the r e s t of the w o r l d , but what can be done about i t ? F i r s t , . n o t h i n g can be done, w i t h the hope t h a t u l t i m a t e l y t h e r e w i l l be a r e a c t i o n on the F r e n c h p r i c e l e v e l w h i c h w i l l r e v e r s e the f l o w . The o b v i o u s o b j e c t i o n t o t h i s l a i s s e z f a i r e a t t i t u d e i s t h a t the c o r r e c t i v e may come too l a t e . S e c o n d l y , w i d e s p r e a d i n v e s t m e n t i n f o r e i g n c o u n t r i e s would h e l p t o r e l i e v e the d i f f i c u l t y . There a r e , u n f o r t u n a t e l y two s e r i o u s o b s t a c l e s to p l a n , namely, (1) the u n c e r t a i n o u t l o o k f o r l o n g time i n v e s t m e n t s under p r e s e n t economic c o n d i t i o n s , and (S) the d i s i n c l i n a t i o n of the r e n t i e r s to f o r e i g n i n v e s t i n g a f t e r t h e i r r e c e n t u n f a v o u r a b l e e x p e r i e n c e s . T h i r d l y , i t has been suggested t h a t the Bank o f Fr a n c e engage i n open market a c t i v -i t i e s . F o r example, i f the Bank c o u l d purchase a c c e p t a n c e s and s e c u r i t i e s the a d d i t i o n a l c u r r e n c y c i r c u l a t e d w o u l d r e l i e v e the p r o v i n c i a l banks from the n e c e s s i t y o f i m p o r t i n g g o l d t o cover t h e i r c u r r e n c y demands. The d i f f i c u l t y w i t h t h i s suggest-i o n i s t h a t the Bank o f Fr a n c e i s by law p o w e r l e s s t o engage i n such a c t i v i t i e s , and t h e r e i s l i t t l e p r o s p e c t o f a change i n sentiment t h a t w i l l be f a v o u r a b l e t o these o p e r a t i o n s . F o u r t h l y , the s i t u a t i o n would be h e l p e d i f the Bank of F r a n c e i n c r e a s e d 1. B a l o g u e , Wynne, - op. c i t . 99 i t s b a l a n c e s abroad, but t h i s would be u n d e s i r a b l e because i t i s c o n s i d e r e d t h a t t h e y a r e a l r e a d y too l a r g e . A f i f t h s u g g e s t i o n i s more e n c o u r a g i n g , namely, c o o p e r a t i o n w i t h the Bank of I n t e r n a t i o n a l S e t t l e m e n t s . - By t h i s means i t i s p r oposed t h a t d e p o s i t s be p l a c e d to the c r e d i t of the Bank of France i n the Bank of I n t e r n a t i o n a l S e t t l e m e n t s . I n the l a s t a n a l y s i s t h i s s u g g e s t i o n i s m e r e l y a d e v i c e f o r e v a d i n g the l a w s t h a t 1 make the Bank of F rance p o w e r l e s s to p r e v e n t g o l d i m p o r t s . The r i g i d i t y o f the Bank o f F r a n c e ' s s t a t u t e s has r e n d e r e d the Bank open t o v e r y u n f a v o u r a b l e c r i t i c i s m . I n June, 1930, the Bank of E n g l a n d d i s c o n t i n u e d the p a y i n g out o f b a r s of f i n e g o l d because the s u p p l y had been d e p l e t e d , and 2 the Bank o f France r e f u s e d to accept b a r s of s t a n d a r d f i n e n e s s . T h i s meant t h a t g o l d had to be r e f i n e d b e f o r e i t was a c c e p t a b l e , and s i n c e o n l y a l i m i t e d amount c o u l d be r e f i n e d i n a g i v e n t i m e , the g o l d p o i n t was l o w e r e d . The F r e n c h o f f i c i a l e x p l a n a t i o n i s t h a t b a r s o f s t a n d a r d f i n e n e s s were u n a c c e p t a b l e because of m i n t i n g r e g u l a t i o n s . I t has. been contended t h a t t h e s e r e g u l a t i o n s c o u l d have been changed, and t h a t s i n c e F r e n c h 0 f c o i n s were i n f e r i o r f i n e n e s s t o s t a n d a r d g o l d no a d d i t i o n a l A burden would have been imposed i n m i n t i n g the b a r s . From t h i s i n c i d e n t i t has been i n f e r r e d t h a t England was t h e v i c t i m o f a F r e n c h attempt to weaken s t e r l i n g . On the o t h e r hand the v iew may be h e l d t h a t i t was a f r i e n d l y a c t d e s i g n e d t o r e l i e v e 1. Wynne, W.H. - op. c i t . , October 1930. 2. The E c onomist, E i n z i g , Economic J o u r n a l , September 1930. 1 the p r e s s u r e on the Bank o f En g l a n d ' s r e s e r v e s . I t i s u n l i k e l y t h a t F r ance has pursued a d e l i b e r a t e p o l i c y c a l c u l a t e d t o upset the money markets o f the w o r l d ( a n d p a r t i c u l a r l y t h a t of Io n d o n ) a s h e r p o l i c y can be s a t i s f a c t o r i l y e x p l a i n e d on economic grounds. The r e a d e r was warned a t the b e g i n n i n g of t h i s c h a p t e r t h a t we c o u l d i n t e r p r e t the f a c t s i n such a way as t o make France appear a r u t h l e s s buccaneer, as 2 or ^ a n i n n o c e n t v i c t i m o f economic f o r c e s . I n t h i s paper we w i l l l e a v e the f o r m e r i n t e r p r e t a t i o n w i t h Mr. E i n z i g , and w i l l base bur c o n c l u s i o n , w i t h some m o d i f i c a t i o n s , on the l a t t e r . Undoubtedly the cour s e of e v e n t s c o u l d have been b e t t e r c o n t r o l l e d i f the Bank o f France had been g i v e n some o f those powers w h i c h a r e e s s e n t i a l t o a modern c e n t r a l bank. W h i l e i t i s a d m i t t e d t h a t the F r e n c h p e o p l e a re c o n s e r v a t i v e and would be u n w i l l i n g t o g i v e wide powers t o t h e i r c e n t r a l bank, some c o n c e s s i o n s c o u l d have been made w h i c h would have g i v e n the bank g r e a t e r powers to d e a l w i t h the s i t u a t i o n , y e t w h i c h would not have r e q u i r e d them t o s u r r e n d e r t h e i r c h e r i s h e d c o n t r o l . However, i n making the above s t a t e m e n t , i t must be remembered t h a t the F r e n c h have t h e i r own v i e w s , and i n r e s p e c t to the s t a t u t e s g o v e r n i n g the Bank of France these v i e w s a r e o f more importance t h a n those of f o r e i g n e c o n o m i s t s . F o r example, some F r e n c h c i r c l e s have j u s t i f i e d t he l i m i t a t i o n o f c r e d i t on the grounds t h a t i t has ke p t the d i s c o u n t r a t e from f a l l i n g . 1. Keynes, John Maynard - Economic J o u r n a l , September 1930. 2. Reynaud, P a u l - France and G o l d , F o r e i g n A f f a i r s , V o l . 1 1 , No.2, pp.253-267, January 1933. Thus i t i s c l a i m e d t h a t the l o s s of i n t e r e s t on the g o l d r e s e r v e s was l a r g e l y made up by the e a r n i n g s o f the h i g h e r d i s c o u n t r a t e . What are the c l a i m s o f the f r a n c t o be made the b a s i s of an i n t e r n a t i o n a l c u r r e n c y ? The c h i e f c l a i m i s t h a t F r a nce i s the f i n a n c i a l c e n t r e f o r a number o f Europe's new c o u n t r i e s . A p a r t from t h i s t h e r e i s l i t t l e to be s a i d i n h e r f a v o u r . I n the f i r s t p l a c e she l a c k s modern c e n t r a l b a n k i n g f a c i l i t i e s , and s e c o n d l y , her g o l d p o s i t i o n makes i t a d v a n t a g -eous f o r h er t o m a i n t a i n the v a l u e o f the m e t a l . T h i r d l y , a s u s p i c i o n as to h e r f i n a n c i a l i n t e g r i t y has been w i d e l y c i r c u l a t e d , w h i c h , even though i t be founded on m i s u n d e r s t a n d i n g , i s opposed t o h e r c l a i m . 102 C h a p t e r X I I I THE POSSIBILITIES OF MANAGED STERLING AS AN INTERNATIONAL MEDIUM OF EXCHANGE. The B r i t i s h L a b our P a r t y i s a t p r e s e n t (September, 1 1932) c o n s i d e r i n g a p l a t f o r m w h i c h s h a l l i n c l u d e as one o f i t s p l a n k s the p o l i c y o f i n i t i a t i n g the system o f managed c u r r e n c y . To a c e r t a i n e x t e n t t h a t w h i c h appears to be an academic c u r i o s -i t y i n the U n i t e d S t a t e s t h r e a t e n s to be an e l e c t i o n i s s u e i n Great B r i t a i n . Whether the l a b o u r p o l i c y w i l l i n c l u d e d e f l a t i o n t o the g o l d p a r b e f o r e i t c o n s i d e r s managing the c u r r e n c y , w i l l depend l a r g e l y on the B r i t i s h i n d u s t r i a l s i t u a t i o n . There are many i n d i c a t i o n s t h a t s t e r l i n g w i l l be t h e f i r s t managed c u r r e n -cy and i t i s l i k e l y t h a t g o l d w i l l f o r some time to come p l a y an i m p o r t a n t r o l e i n the ex p e r i m e n t . B e f o r e managed s t e r l i n g can be made the s u c c e s s f u l b a s i s f o r an i n t e r n a t i o n a l medium o f exchange i t w i l l be n e c e s s -a r y f o r those c o u n t r i e s w h i c h w i s h to peg t h e i r c u r r e n c i e s t o s t e r l i n g t o b e g i n by managing t h e i r own houses. Supposing t h a t the c o u n t r i e s i n v o l v e d have managed c u r r e n c i e s , what i s g o i n g to be the e f f e c t on the exchanges? A c c o r d i n g t o P r o f e s s o r J.M. Keynes "the f o r e i g n exchanges w i l l be a l l o w e d t o l o o k a f t e r t h e m s e l v e s , and from day to day to f l u c t u a t e i n accordance w i t h the seasons and o t h e r i r r e g u l a r i n f l u e n c e s . " 1. The New Statesman, September, 1932. 103 I t i s my purpose to show how a l a r g e element of exchange s t a b i l i t y i s consonant w i t h p r i c e l e v e l c o n t r o l . B e f o r e I c o n t i n u e i t w i l l be w e l l to c o n s i d e r what i s i m p l i e d i n the p h r a s e "exchange s t a b i l i t y . " I t i s not c l a i m e d f o r a moment t h a t i t i s d e s i r a b l e or p o s s i b l e to s e c u r e e t e r n a l exchange s t a b i l i t y . I t i s a d m i t t e d t h a t c i r c u m s t a n c e s , such as d i f f e r e n t r a t e s o f n a t i o n a l p r o g r e s s , may cause i t t o be d e s i r a b l e to a l t e r the p e g g i n g r a t i o of two n a t i o n a l c u r r e n c i e s . A l l t h a t i s c l a i m e d f o r exchange s t a b i l i t y i s r e l a t i v e freedom from f l u c t u a t i o n f o r a r e a s o n a b l e p e r i o d of t i m e , w h i c h i n some cases may l a s t f o r a p e r i o d o f y e a r s . I t has l o n g been c o n s i d e r e d t h a t c u r r e n c y r e g u l a t i o n i s a n a t i o n a l r e s p o n s i b i l i t y , and I propose to e x t e n d the i d e a o f n a t i o n a l r e s p o n s i b i l i t y to cover the r e g u l a t i o n o f the exchanges. The f i r s t p r o p o s i t i o n , t h e n , i s to make the r e g u l -a t i o n o f the exchanges a s o c i a l s e r v i c e . I n o r d e r to g u a r d the exchanges from s e a s o n a l and i r r e g u l a r i n f l u e n c e s i t i s p r o posed t h a t government funds be e s t a b l i s h e d t o s u pport the exchanges when th e y t e n d to f a l l . Under u n u s u a l c i r c u m s t a n c e s the demand f o r f o r e i g n exchange may t h r e a t e n to d r a i n the s t a b i l i z a t i o n f u n d , and as a- consequence some method must be d e v i s e d t o s e c u r e t h i s f u n d a g a i n s t such a c o n t i n g e n c y . An u n u s u a l d i s t u r b a n c e o f the above n a t u r e might be o c c a s i o n e d by an i n v e n t i o n or a change i n f a s h i o n o r t a s t e . A chance a l i g n m e n t of bear i n f l u e n c e s might a l s o be the o c c a s i o n of such a temporary d i s t u r b a n c e , w h i c h would not j u s t i f y r e p e g g i n g a t a d i f f e r e n t r a t i o . Repegging would c o r r e c t the d i s t u r b a n c e f o r the time b e i n g but would not r e p l e n i s h the s t a b i l i z a t i o n f u n d , and as soon as the d i s t u r b a n c e had ended the p e g g i n g r a t i o would a g a i n have t o be a l t e r e d . I t i s suggested t h a t a s e v e r e temporary demand"on the s t a b i l i z a t i o n fund be met by the i m p o s i t i o n o f a g r a d u a t e d t a x on a l l f o r e i g n exchange. I t i s c l a i m e d t h a t t h i s d e v i c e would d i v e r t the p r o f i t s t h a t u s u a l l y f a l l to the exchange s p e c u l a t o r i n t o the s t a b i l i z a t i o n f u n d , and as a consequence the f u n d would tend to be s e l f - p e r p e t u a t i n g . F u r t h e r m o r e the i n c i d e n c e o f the p roposed t a x would f a l l on the consumers o f f o r e i g n goods so t h a t i n the l o n g r u n those who would g a i n most by exchange s t a b i l i z a t i o n would bear the g r e a t e r p a r t o f the c o s t . I t i s not e x p e c t e d t h a t t h i s t a x would be the o r d i n a r y c o n d i t i o n o f a f f a i r e , as i t i s d e s i g n e d to meet emergencies of a temporary c h a r a c t e r . I f a change i n the c h a r a c t e r o f a c o u n t r y ' s i n d u s t r y or l i v i n g s t a n d a r d s were to c r e a t e a permanent change i n the demand f o r f o r e i g n goods and s e r v i c e s , i t would be d e s i r a b l e t o r e p e g at a d i f f e r e n t r a t i o . A c o n c r e t e example of the e f f e c t of the p r o p o s e d exchange t a x w i l l make the above c l e a r e r . Suppose t h a t c o u n t r y 'A' d e v e l o p s a more i n s i s t e n t , a l t h o u g h temporary demand f o r the p r o d u c t s o f c o u n t r y 'B', w i t h the r e s u l t t h a t the s t a b i l i z -a t i o n r e s e r v e s a r e b e i n g endangered. I n o r d e r to p r e v e n t t h i s , c o u n t r y 'A' p l a c e s a t a x on a l l p u r c h a s e s o f f o r e i g n exchange and the amount o f t h i s t a x i s d e t e r m i n e d from a c o n s i d e r a t i o n , o f the q u a n t i t y o f exchange demanded, or l i k e l y t o be demanded. The t a x tends to reduce the demand f o r a l l f o r e i g n goods i n c l u d i n g t h o s e from c o u n t r y 'B', and i t a c t s i n e x a c t l y the same way as i f the market f o r c e s had been a l l o w e d t o r a i s e the p r i c e of f o r e i g n exchange, w i t h the e x c e p t i o n t h a t the p r o f i t s go t o the s t a t e r a t h e r than to the s p e c u l a t o r s . The r e s u l t , t h en, i s t h a t f o r e i g n goods become r e l a t i v e l y more e x p e n s i v e i n c o u n t r y 'A', and i n o r d e r to p r e v e n t a r i s e i n the g e n e r a l p r i c e l e v e l t h i s c o u n t r y d e f l a t e s i t s c u r r e n c y , or r e s t r i c t s i t s c r e d i t , or does b o t h . I t i s not proposed f o r a moment t h a t a t a x o f one p e r c e n t s h o u l d be a p p l i e d to the exchange o f comntry 'B', two p e r c e n t to the exchange of c o u n t r y TC', and none a t a l l to the exchange of c o u n t r y 'D'. I f the exchange f o r c e s s h o u l d tend to go a g a i n s t a c o u n t r y as m a n i f e s t e d by an abnormal r u n on i t s r e s e r v e f o r p u r c h a s i n g i t s own exchange, an e q u a l t a x on a l l f o r e i g n exchange would c o r r e c t the d i s t u r b a n c e w i t h o u t o p e r a t i n g i n the manner of a p r e f e r e n t i a l t a r i f f . The d e v i c e f o r c o n t r o l l i n g the exchanges as d e v e l o p e d above, however, i s by no means the o n l y method, and i n d e e d , may not be the most d e s i r a b l e under c e r t a i n c i r c u m s t a n c e s . R e c e n t l y the A u s t r a l i a n Government has i n f l u e n c e d the exchanges by ( l ) e n f o r c i n g a p r e s c r i p t i v e r i g h t to a l l f o r e i g n exchange o f f e r e d , and (2) by p l a c i n g embargos on the i m p o r t of a number of commodities. The South A f r i c a n Government has a t t e m p t e d to c o n t r o l the exchanges by l i m i t i n g the q u a n t i t y of f o r e i g n exchange t h a t can be p u r c h a s e d by any one p a r t i c u l a r i n t e r e s t . These l a t t e r d e v i c e s are open to the o b v i o u s c r i t i c i s m t h a t they are not i m p a r t i a l and are even d i s c r i m i n a t i n g . I n a c t u a l 106 p r a c t i c e , however, i t may be d e s i r a b l e or n e c e s s a r y to s u p p l e -ment an exchange t a x by one or more of these o t h e r c o n t r o l s . H a v i n g o u t l i n e d the t h e o r y o f a d e v i c e f o r s e c u r i n g exchange s t a b i l i t y between managed c u r r e n c i e s , i t might be d e s i r a b l e to c o n s i d e r some of the p r a c t i c a l a s p e c t s o f s e t t i n g up machinery f o r c o n t r o l . The most p e r f e c t d e v i c e would c o n s i s t of a c e n t r a l a u t h o r i t y w i t h f u l l power t o r e g u l a t e the economic l i f e and p o l i c i e s o f a l l the c o u n t r i e s concerned. I t would i n v o l v e c o n t r o l o f t a r i f f r e l a t i o n s , t a x a t i o n , and many o t h e r n a t i o n a l d e t a i l s , w h i c h would be almost i m p o s s i b l e f o r any c o u n t r y to c o n s i d e r . T h i s p l a n c l e a r l y b e l o n g s i n the r e a l m s of i n t e r n a t i o n a l U t o p i a s . A more r e a s o n a b l e p l a n i s t h a t o f 1 c e n t r a l b a n k i n g and t r e a s u r y c o o p e r a t i o n . Mr. Gregory a d m i t s t h a t t h i s might be d e s i r a b l e f o r t h o s e c o u n t r i e s w h i c h have e x t e n s i v e economic r e l a t i o n s w i t h London, but he b e l i e v e s t h a t the Dominions, i n p a r t i c u l a r , would r e s e n t any measure o f c o n t r o l by Great B r i t a i n i n the same way as t h e y r e s e n t e d . p d l i t i c a l c o n t r o l by Downing S t r e e t . I t i s not h a r d t o agree w i t h him t h a t the d i f f i c u l t i e s i n v o l v e d a r e " r e a l , " but h i s p r i n c i p a l p o i n t o f c r i t i c i s m i s h a r d l y l o g i c a l . I n the f i r s t p l a c e economic c o o p e r a t i o n i s f a r from p o l i t i c a l c o n t r o l , as i t i n v o l v e s freedom to withdraw and makes p r o v i s i o n , f o r a l l concerned t o share i n t h a t c o n t r o l . S e c o n d l y a Dominion might w e l l e n t e r i n t o a c u r r e n c y u n i o n i f i t were thought t o be 2 advantageous to i t , w h i l e no Dominion would see an advantage t o 1. G regory, T.E. - op. c i t . , pp.86-89. 2. C a s s e l , G. - op. c i t . , V o l . X I , p.671, September 1932. 107 p o l i t i c a l c o n t r o l . The two s i t u a t i o n s , t o my mind, are h a r d l y comparable. I n c o n s i d e r i n g f o r e i g n u n i o n s w i t h s t e r l i n g Mr. G r e gory s t r e s s e s the problem of n a t i o n a l i s t s e n t i m e n t , and w h i l e t h a t f a c t o r i s i m p o r t a n t , the l i b e r t y t o w i t h d r a w would l a r g e l y m i t i g a t e t h i s o b j e c t i o n . The v e r y i d e a o f an i n t e r -n a t i o n a l c u r r e n c y u n i o n presumes t h a t a c o u n t r y would not d e s i r e t o become a member u n l e s s t h e r e were m a t e r i a l advantages to be g a i n e d . I t might be o b j e c t e d t h a t the d i f f e r e n t n a t i o n a l economic i n t e r e s t s would p r e c l u d e a l a s t i n g c u r r e n c y u n i o n . For example South A f r i c a w i s h e s to m a i n t a i n the v a l u e of g o l d , Canada may w i s h t o m a i n t a i n the d o l l a r at a h i g h e x t e r n a l v a l u e because of her r e l a t i o n s w i t h the U n i t e d S t a t e s , and A u s t r a l i a may w i s h t o p l a c e a low v a l u e on the pound because o f her d e b t o r p o s i t i o n . T h i s o b j e c t i o n may be answered by s a y i n g t h a t any member of an i n t e r n a t i o n a l c u r r e n c y u n i o n can • " e s t a b l i s h ' . i t s p a r w i t h s t e r l i n g at the e x i s t i n g r a t e . Mr. Gregory f u r t h e r o b j e c t s t h a t c o u n t r i e s l i x e A u s t r a l i a would f i n d i t t o t h e i r advantage to i n f l a t e and a l t e r the p a r . I t i s d i f f i c u l t to see the f o r c e o f t h i s o b j e c t i o n when i t i s remembered t h a t those c o u n t r i e s have the same l i b e r t y t o i n f l a t e whether t h e y a r e i n a c u r r e n c y u n i o n o r n o t . P o s s i b l y t h e s e o b j e c t i o n s a re based on a m i s u n d e r s t a n d i n g of the aims o f a c u r r e n c y u n i o n , because he te n d s t o r e g a r d the p ar o f exchange as some i n v i o l a t e i d e a l , w h i c h cannot be a l t e r e d w i t h o u t d e s t r o y i n g the u n i o n . O b v i o u s l y i t would be u n d e s i r a b l e t o m a i n t a i n a permanent exchange p a r , and i n t r u t h i t would be i m p o s s i b l e i f n a t i o n a l c u r r e n c i e s were t r u l y managed. A l o w e r i n g o f the p e g g i n g r a t i o would c r e a t e a h a r d s h i p on those who had to make f o r e i g n r e m i t t a n c e s , b u t , on the o t h e r hand, c a p i t a l would m i g r a t e much more f r e e l y i n the form o f l o a n s i f i t were a s s u r e d t h a t i t would be r e p a i d i n the n a t i o n a l managed c u r r e n c y . What a r e the chances of an i m p e r i a l o r i n t e r n a t i o n a l managed c u r r e n c y u n i o n based on s t e r l i n g ? I n a l a r g e measure they are dependent on the d e c i s i o n s to be made at the I n t e r n a t -i o n a l Economic Conf e r e n c e w h i c h i s s c h e d u l e d t o meet i n A p r i l 1933. I f r a d i c a l changes a r e made i n war debt and r e p a r a t i o n s p o l i c i e s and i n t a r i f f and g o l d p o l i c i e s , t h e r e i s g r e a t l i k e l i -hood t h a t the g o l d s t a n d a r d w i l l be r e e s t a b l i s h e d . These changes w i l l i n v o l v e a g r e a t r e d u c t i o n i n war* d e b t s and t a r i f f s , and the r e l e a s e o f impounded g o l d . I n o t h e r words g o l d w i l l have to be r e d i s t r i b u t e d and i t s movements must be p e r m i t t e d to 1 m a n i f e s t t h e i r u s u a l economic consequences. The c o n c e s s i o n s t h a t would have t o be made by the U n i t e d S t a t e s and F r a n c e a r e so g r e a t t h a t i t i s q u e s t i o n a b l e i f they would be of s u f f i c i e n t magnitude to renew the l i f e of the g o l d s t a n d a r d . I f the changes to be e f f e c t e d by t h i s C o n f e r e n c e are not great:, i t i s l i k e l y t h a t the w o r l d w i l l be d i v i d e d i n t o two camps as a t p r e s e n t , namely, those who adhere t o g o l d , and those who a r e on an i n c o n v e r t i b l e paper b a s i s . The p r o b a b l e 1. E l l s w o r t h , D.W. - Op. c i t . , p.544, August 1938. consequences of the p r e s e n t system, i f not a l t e r e d hy t h i s C o n f e r e n c e , w i l l he a s t r e n g t h e n i n g of c u r r e n c y management and the u l t i m a t e a d o p t i o n o f a c u r r e n c y u n i o n based on s t e r l i n g . Once such a u n i o n were s t a r t e d i t s g r o w i n g i mportance would draw many o t h e r i n c o n v e r t i b l e c u r r e n c i e s i n t o the f o l d . The U n i t e d S t a t e s and France would p r o b a b l y be the o n l y r e m a i n i n g g o l d s t a n d a r d c o u n t r i e s . 110 C h a p t e r X I ? THE CANADIAN SIDE OF THE PROBLEM The Canadian bank note i s s u e has always been n o t e d f o r i t s e l a s t i c i t y . Banks a r e p e r m i t t e d to i s s u e n o t e s based on t h e i r a s s e t s to the e x t e n t of t h e i r p a i d up c a p i t a l and a d d i t i o n a l q u a n t i t i e s must have as t h e i r s e c u r i t y government n o t e s o r g o l d . An e x c e p t i o n to the above r u l e i s made d u r i n g the crop moving season (September 1 s t - F e b r u a r y 2 8 t h - 29th) when the banks are a l l o w e d t o i s s u e e x c e s s c i r c u l a t i o n t o the amount o f 15$ of t h e i r combined c a p i t a l and r e s e r v e f u n d s . T h i s e x c e s s c i r c u l a t i o n i s s u b j e c t t o a 5$ t a x . The B a n k i n g system c o m p r i s e s l e s s than a dozen b r a n c h b a n k i n g i n s t i t u t i o n s and because of keen c o m p e t i t i o n each bank t e n d s to push the c i r c u l a t i o n of i t s own n o t e s , and to p r e s e n t the o t h e r bank n o t e s w h i c h i t r e c e i v e s i n the course o f b u s i n e s s f o r r e d e m p t i o n . These two opp o s i n g f o r c e s guard a g a i n s t note i n f l a t i o n , y e t a t the same time cause the p u b l i c t o have a l l t h e n o t e s w h i c h i t demands. The weakness of the Canadian b a n k i n g system i s to be found i n the absence of a c e n t r a l bank, a l t h o u g h t h i s weakness has not m a n i f e s t e d i t s e l f i n a g l a r i n g f a s h i o n because of c l o s e i n t e r - b a n k c o o p e r a t i o n . Thus i f i t i s a d v i s a b l e f o r Canada to go o f f the g o l d s t a n d a r d a t any time the t a c i t agreement of the I l l banks' not to ship gold may bring about the desired r e s u l t without the intervention of formal measures. While the system works admirably as f a r as note issue i s concerned no check i s e f f e c t i v e for the control of c r e d i t . Thus i f one bank f e e l s that credit i s being extended too f r e e l y i t can only retrench at the expense of l o s i n g customers to i t s competitors. Obviously no bank i s run on such highly a l t r u i s t i c p r i n c i p l e s . To give Canada credit s t a b i l i t y a central bank patterned somewhat a f t e r the Bank of England i s sadly needed. The English Central banking system would s a t i s f y Canada's need much better than would the American Federal Reserve system, because the l a t t e r i s designed f o r the pooling of much scattered small reserves. That condition does not hold i n Canada because Canada i s e s s e n t i a l l y a land of big banks with nation wide i n t e r e s t s . If a central bank were established to control the discount rate i t i s l i k e l y that the currency side of the problem would be l a r g e l y s e l f - r e g u l a t i n g . What are the prospects f o r a Canadian central bank? Up t i l l the present popular demand for the establishment of such an i n s t i t u t i o n has been increasing and a growing body of public men i s supporting the reform cause. The banks, however, are unanimous i n t h e i r opposition, and i n recent reports to shareholders and to the public, special mention i s made of the u n d e s i r a b i l i t y of a Canadian central bank. Usually i t i s argued that a central bank i s not necessary to the Canadian banking system and that i t may actually r e s u l t i n harm. No d e t a i l s of the harm that might a r i s e , however, are given and 112 the p u b l i c i s l e f t t o draw on i t s i m a g i n a t i o n as to the p o s s i b l e n a t u r e of th e s e e v i l s . O b v i o u s l y a Canadian c e n t r a l bank might l e a d to a r e s t r i c t i o n o f freedom and t o g r e a t e r s u p e r v i s i o n , but i t i s l i k e l y t h a t the Canadian banks are f e a r f u l o f super-c o n t r o l and tend to u n d e r e s t i m a t e the g a i n s w h i c h would a c c r u e . I t i s t o be e x p e c t e d t h a t t h e Canadian banks w i l l c o n t i n u e t o oppose c e n t r a l b a n k i n g r e f o r m , and t h e i r s u c c e s s w i l l depend on the t r e n d o f p u b l i c o p i n i o n and on t h e t r e n d of economic c o n d i t i o n s as t h e y a f f e c t Canada.. An a l t e r n a t i v e p l a n t h a t may be suggested i s t h a t of c o n t r o l by b a n k i n g and T r e a s u r y c o o p e r a t i o n t h r o u g h a s p e c i a l department t o be e s t a b l i s h e d i n the Canadian Banker's A s s o c i a t -i o n . T h i s department would be e n t r u s t e d w i t h the c o l l e c t i o n of r e l e v a n t s t a t i s t i c a l d a t a and be r e s p o n s i b l e f o r the d e t e r -m i n a t i o n o f c u r r e n t p o l i c y ; and any d e c i s i o n made by t h i s department would be b i n d i n g on a l l member banks. I t i s not proposed t h a t such a system would r e p l a c e a c e n t r a l bank, but i f the e s t a b l i s h m e n t of a c e n t r a l bank were s u c c e s s f u l l y opposed, some measure of monetary c o n t r o l c o u l d be e f f e c t e d by t h i s arrangement. At p r e s e n t Canada i s b u f f e t e d between her American d o l l a r and s t e r l i n g i n t e r e s t s . One s e c t i o n o f o p i n i o n f a v o u r s i n f l a t i o n t o such a degree t h a t the Cana d i a n d o l l a r c o u l d be pegged to the paper pound a t t h e t r a d i t i o n a l r a t i o , w h i l e a n o t h e r s e c t i o n i s i n f a v o u r o f m a i n t a i n i n g the e x t e r n a l v a l u e o f the Canadian d o l l a r a t a h i g h l e v e l so t h a t i t can be r e s t o r e d t o a p a r w i t h the American d o l l a r . I n the l o n g r u n l i s i t w i l l p r o b a b l y be t o Canada's advantage t o peg to the pound at such, a r a t i o t h a t h e r d o l l a r w i l l be a p p r o x i m a t e l y e q u a l t o the A m e r i c a n d o l l a r . I f a managed Canadian c u r r e n c y were pegged t o the managed pound, i t i s l i k e l y t h a t i t would have an adverse e f f e c t on American l o a n s to Canada. On the o t h e r hand, i t i s l i k e l y t h a t r e c e n t u n f a v o u r a b l e exchange e x p e r i e n c e s w i l l t e n d to make Cana d i a n l o a n s , i n so f a r as p o s s i b l e , p a y a b l e i n Canadian money. Appendix A A CONSIDERATION OF SOME POSSIBLE OBJECTIONS TO THE PROPOSED EXCHANGE TAX. On f i r s t c o n s i d e r a t i o n i t might he thought t h a t the proposed exchange t a x would he l i a h l e t o abuse by revenue s e e k i n g f i n a n c e m i n i s t e r s . Such a f e a r , however, i s g r o u n d l e s s , as abuse of t h i s measure o f exchange c o n t r o l would b r i n g about a u t o m a t i c r e t a l i a t i o n . An example w i l l make t h i s c l e a r e r . Suppose t h a t t h e m i n i s t e r o f f i n a n c e o f c o u n t r y 'A' c o n c e i v e d the i d e a o f augmenting p u b l i c revenue by an u n j u s t i f i e d t a x on a l l f o r e i g n exchange. I n r e s p e c t t o the volume o f t r a d e the new t a x would a c t i n the same manner as an i n c r e a s e d t a r i f f . S i n c e t h i s e x c e s s i v e l y h i g h t a x would make i t i m p o s s i b l e t o c l e a r the a v a i l a b l e s u p p l y of f o r e i g n exchange, the s u r p l u s would be o f f e r e d oh o t h e r exchange m a r k e t s , w h i c h would a c t as a bear i n f l u e n c e on a l l f o r e i g n exchanges. A u t o m a t i c a l l y those c o u n t r i e s which were a f f e c t e d by the new t a x would have t o p r o t e c t t h e i r s t a b i l i z a t i o n r e s e r v e s by t a x i n g a l l o f f e r i n g s o f f o r e i g n exchange i n t h e i r own markets. I n t h i s manner a new e q u i l i b r i u m would be e s t a b l i s h e d w i t h a d i m i n i s h e d volume o f f o r e i g n t r a d e , and i t i s l i k e l y t h a t the g a i n from the exchange t a x would not e q u a l the l o s s i n o t h e r t a x e s whose amount i s d i r e c t l y dependent on the volume o f t r a d e . F o r e i g n goods would be r e l a t i v e l y more e x p e n s i v e i n a l l the c o u n t r i e s i n v o l v e d by fit I I the new t a x a t i o n . F o r e i g n exchange t a x a t i o n f o r revenue p u r p o s e s d i f f e r s from customs revenues i n t h a t the former o f f e r s a u t o m a t i c r e t a l i a t i o n w h i l e the l a t t e r does n o t . Thus exchange t a x a t i o n i s not l i k e l y t o he abused by i n t e l l i g e n t f i n a n c e m i n i s t e r s , but t h e r e i s always danger o f temporary d i s t u r b a n c e to the exchanges by the a c t i o n of u n i n t e l l i g e n t m i n i s t e r s . P r o b a b l y the b e s t way t o make exchange t a x a t i o n f o o l p r o o f would he t o p l a c e the power i n the hands of the c e n t r a l b a n k i n g a u t h o r i t i e s , or even w i t h an i n t e r n a t i o n a l b ureau. I t might be argued t h a t the t a x c o u l d be evaded by b o r r o w i n g f u n d s or s e l l i n g s e c u r i t i e s i n a f o r e i g n market i n o r d e r t o s e c u r e f o r e i g n exchange, and t h a t as a consequence the t a x i s i n a p p l i c a b l e . I t i s t r u e t h a t the t a x c o u l d be evaded i n t h i s manner, and f u r t h e r m o r e such an e v a s i o n would not be i n i t s e l f u n d e s i r a b l e , because the t a x i s not d e s i g n e d f o r revenue p r o d u c i n g p u r p o s e s , l e t us f i r s t c o n s i d e r the above " e v a s i o n " i n the l i g h t o f the p r e s e n t system. I f f o r e i g n exchange r i s e s i n response to an i n c r e a s e d demand a p e r s o n may evade the exchange premium by b o r r o w i n g abroad o r by s e l l i n g s e c u r i t i e s f o r f o r e i g n f u n d s . The net e f f e c t o f h i s d e a l i s to tend to r e l i e v e the demand f o r f o r e i g n exchange and t o t e n d to l o w e r the premium. My s u g g e s t i o n i n v o l v e s the s u b s t i t u t i o n o f a t a x f o r the premium, and i f a p e r s o n were to evade the t a x by b o r r o w i n g f o r e i g n funds he would tend to r e l i e v e the p r e s s u r e on the s t a b i l i z a t i o n f u n d and i n f l u e n c e f o r c e s w h i c h would t e n d to l o w e r the t a x . The economic e f f e c t s would be the same i n e i t h e r c a s e , b u t , of c o u r s e , t h e p e r s o n who evades the t a x or it L III premium i s g a m b l i n g i n f u t u r e s . A n o t h e r case to c o n s i d e r i s t h a t i n w h i c h the demand f o r f o r e i g n exchange i s l a r g e l y i n e l a s t i c . A case o f t h i s n a t u r e must be c o n s i d e r e d abnormal as i t would most l i k e l y a r i s e under u n u s u a l c i r c u m s t a n c e s such as (1) a n a t i o n wide economic c a t a s t r o p h e , e.g., a crop f a i l u r e , (S) the i m p o s i t i o n of an i n d e m n i t y , and (3) n a t i o n a l d i s o r d e r s consequent to i n f l a t i o n o r to c u m u l a t i v e government d e f i c i t s r e p r e s e n t e d by f o r e i g n l o a n s . I n a l l these extreme cases the o n l y s o l u t i o n w ould be to r e p e g the n a t i o n a l c u r r e n c y a t a l o w e r r a t i o . Under the p r e s e n t system the same t h i n g i s e f f e c t e d by abandoning the g o l d s t a n d a r d . The scheme t h a t I have p r o p o s e d i s not meant to c o v e r c h a o t i c c o n d i t i o n s as i n the case of f i s c a l mismanag-ement, n o r i s i t meant to s o l v e the Young r e p a r a t i o n s dilemma. I n the cases o f (2) and (3) t h e y may be so extreme t h a t i t would be w o r t h l e s s to aim at exchange s t a b i l i t y . I n the case of l l ) , however, a d i s t u r b a n c e may r e a s o n a b l y be e x p e c t e d to be temporary, as i t i s v e r y u n l i k e l y t h a t n a t i o n a l crop f a i l u r e s would p r e v a i l f o r many y e a r s i n s u c c e s s i o n . Temporary r e p e g g i n g would p r o b a b l y be the b e s t s o l u t i o n f o r a d i s t u r b a n c e o f the l a t t e r n a t u r e . The r e c e n t e x p e r i e n c e s o f A u s t r a l i a w i l l b e s t s e r v e as an i l l u s t r a t i o n o f d i s t u r b a n c e s o f the above n a t u r e . A u s t r a l i a , perhaps more than most c o u n t r i e s , underwent a p e r i o d of r a p i d e x p a n s i o n , p i l e d up c u m u l a t i v e d e f i c i t s , and borrowed f r e e l y from abroad t o cover them. When the slump came i n 1929, A u s t r a l i a , l i k e o t h e r c o u n t r i e s , found h e r domestic i n d u s t r i e s in IV and f o r e i g n t r a d e s e v e r e l y c r i p p l e d . . A u s t r a l i a , however, • u n l i k e most c o u n t r i e s , had e x c e s s i v e f i x e d c harges t o meet abroad. S i n c e these charges formed a l a r g e p a r t o f h e r demand f o r f o r e i g n exchange i t may be s a i d t h a t h e r demand was r e l a t i v e l y i n e l a s t i c . I f A u s t r a l i a and a l a r g e p a r t o f the w o r l d had been pegged to a managed s t a n d a r d , such a c o n d i t i o n , i n so f a r as i t was caused by c o n t r o l l a b l e f a c t o r s , would n o t have o c c u r e d . I f A u s t r a l i a ' s p l i g h t had been caused by a n a t u r a l c a l a m i t y , o r by the i m p o s i t i o n o f an i n d e m n i t y , the i l l u s t r a t i o n would have been more v a l u a b l e f o r our purpose. I n c o n c l u s i o n we may s t a t e t h a t the proposed exchange t a x would f i n d i t s p r i m a r y employment i n c o n t r o l l i n g a tempor-a r y demand o f an e l a s t i c n a t u r e . I f a new demand f o r exchange (s u c h as might be caused by the i m p o s i t i o n of an i n d e m n i t y ) i s i n e l a s t i c , the t a x i s not a p p l i c a b l e . I t must be remembered t h a t t h i s emergency t a x i s d e s i g n e d to f i t c e r t a i n s i t u a t i o n s , and t h a t i t must not be a t t e m p t e d to bend e v e r y s i t u a t i o n t o f i t the t a x . Furthermore the t a x does not i n v o l v e a change i n the economic system. The economic consequences would be j u s t the same as b e f o r e , a r b i t r a g e r s would s t i l l make t h e i r p r o f i t s , and i t i s p o s s i b l e t h a t a few o f ' t h e o l d exchange s p e c u l a t o r s would f i n d t h e i r way i n t o the g r a i n p i t s . So f a r as I can see t h i s a p p e ndix answers the most l i k e l y o b j e c t i o n s t o the employment o f exchange t a x a t i o n as an emergency measure f o r exchange s t a b i l i z a t i o n . Appendix B A DETAILED CONSIDERATION OF SOCIAL JUSTICE IN RELATION TO THE SELECTION OF PRICE INDEXES. T h i s a p p endix i s d e s i g n e d to g i v e a more d e t a i l e d account of a l t e r n a t i v e o p i n i o n on p r i c e i n d e x e s t h a n was d e s i r a b l e i n the main body o f the t e x t . M a n i f e s t l y the o b j e c t of p r i c e l e v e l s t a b i l i z a t i o n i s to secure i n d u s t r i a l s t a b i l i t y and a t the same time to r e n d e r j u s t i c e to d e b t o r s and c r e d i t o r s . The d i f f i c u l t y i s t h a t the i d e a o f g e n e r a l s t a b i l i t y i s i n c o n -s i s t e n t w i t h i nnumerable independent v a r i a b l e s , and a l l t h a t r e a l l y can be done i s to choose f o r c o n s t a n c y one r e a l or composite v a r i a b l e . As a consequence numerous c h o i c e s are i n f a c t made, but any p r e f e r e n c e i s l a r g e l y a r e f l e c t i o n o f the p a r t i c u l a r i n t e r e s t s emphasized by those who make a s e l e c t i o n . Then, t o o , t h e r e i s a d i f f e r e n c e o f o p i n i o n as t o what c o n s t i t -u t e s s o c i a l j u s t i c e as between c r e d i t o r and d e b t o r . I n v i e w of the v a r i e t y o f r e p u t a b l e o p i n i o n i s i t any wonder t h a t b a n k e r s are shy o f managing c u r r e n c y w h i c h p u r p o s e s to s t a b i l i z e a w i l l - o ' - t h e - w i s p ? One s c h o o l o f thought i n s i s t s t h a t c r e d i t o r s s h o u l d be r e p a i d a sum o f money of e q u a l p u r c h a s i n g power t o t h a t w h i c h t h e y l o a n e d . A n o t h e r s c h o o l i n s i s t s t h a t s o c i a l j u s t i c e demands t h a t c r e d i t o r s are e n t i t l e d to share i n r e l a t i v e s o c i a l g a i n s and to bear t h e i r p r o p o r t i o n o f r e l a t i v e s o c i a l l o s s . I I That i s t o say, i f p e r c a p i t a p r o d u c t i o n i s d e c l i n i n g or i n c r e a s i n g the r e n t i e r s h o u l d he r e p a i d l e s s o r more p u r c h a s i n g power as the case may r e q u i r e . T h i s i d e a l c o u l d he a c c o m p l i s h e d hy s t a b i l i z i n g the l e v e l o f p e r c a p i t a money incomes. I f money incomes were s t a b i l i z e d and due a l l o w a n c e were made f o r changes i n p o p u l a t i o n , p r i c e s would t e n d to f a l l w i t h i n c r e a s i n g i n d u s t r i a l e f f i c i e n c y , and the average money income would have a g r e a t e r p u r c h a s i n g power. A m o d i f i c a t i o n o f t h i s p l a n i s to be found i n the s u g g e s t i o n o f money-wage s t a b i l i z a t i o n . I f money-wages were s i n g l e d out f o r s t a b i l i z a t i o n , s t a b i l i t y would ten d t o be r e f l e c t e d i n o t h e r forms of money incomes, so the r e a l d i f f e r e n c e between the p l a n s i s s m a l l . I t i s d o u b t f u l , however, i f o r g a n i z e d l a b o u r would c o n s i d e r the i d e a f a v o u r a b l y . Mr. C a r l Snyder's Index; T h i s i n d e x has the advantage o f b e i n g r e p r e s e n t a t i v e o f a l l the commodities and s e r v i c e s t h a t a r e bought and s o l d . I t i s composed of f o u r d i v i s i o n s , namely, 1 w h o l e s a l e p r i c e s , 2 r e t a i l p r i c e s , 3 wages, and 4 r e n t s . O b v i o u s l y the i n d e x i s not w e i g h t e d to f a v o u r the p a r t i c u l a r i n t e r e s t s of c r e d i t o r s , as i t was d e s i g n e d t o measure f l u c t u a t -i o n s i n the v a l u e o f money. Some econ o m i s t s f a v o u r t h i s i n d e x 1 as b e i n g g e n e r a l l y the most s a t i s f a c t o r y f o r s t a b i l i z a t i o n . The Cost of l i v i n g Index: S i n c e c r e d i t o r s as w e l l as o t h e r s 2 are consumers, i t i s c l a i m e d by Mr. W.I. K i n g t h a t i t i s to the l o n g r u n advantage of c r e d i t o r s to have the p r i c e l e v e l o f 1. H a b e r l e r , G o t t f r i e d - The Measurement o f the Value o f Money, J o u r n a l of the American S t a t i s t i c a l A s s o c i a t i o n , Supplement, March 1929. 2. K i n g , W.I. - Index Numbers E l u c i d a t e d , pp.209-214. / VP i n c onsumption goods s t a b i l i z e d . He i s f u l l y aware t h a t the i n t e r e s t s o f a l l consumers a r e not the same, and as a conseq-uence h i s c o s t of l i v i n g i n d e x i s a w e i g h t e d average r e p r e s e n -t a t i v e o f ( l ) urban employees, (2) f a r m e r s , (3) farm l a b o u r e r s , (4) f a m i l i e s s p e n d i n g $5,000 p e r y e a r , and (5) f a m i l i e s s p e n d i n g $25,000 per y e a r . S t a b i l i z a t i o n of the w h o l e s a l e commodity p r i c e l e v e l : T h i s i n d e x i s the f a v o u r i t e of the monetary r e f o r m e r s f o r r e a s o n s which w i l l be c o n s i d e r e d l a t e r . I t i s c l e a r l y a p r o d u c t i o n i n d e x and l e a v e s out of c o n s i d e r a t i o n the c o s t s o f d i s t r i b u t i n g and m a r k e t i n g . S t a b i l i z a t i o n of W h o l e s a l e P r i c e s of F r e e l y R e p r o d u c i b l e Commodities: T h i s s u g g e s t i o n i s made by Mr. Hudson B. H a s t i n g s who c l a i m s t h a t l a n d r e n t o r any income.from s c a r c e n a t u r a l r e s o u r c e s s h o u l d not be i n c l u d e d i n a p r i c e i n d e x . I t i s c l a i m e d t h a t g a i n s or l o s s e s t h r o u g h changes i n t e c h n o l o g i c a l e f f i c i e n c y s h o u l d not be shared by the owners o f n a t u r a l r e s o u r c e s . One i s tempted t o c o n c l u d e t h a t Mr. H a s t i n g s i s one of those p e o p l e who s t i l l make a sharp d i s t i n c t i o n between l a n d and o t h e r forms of p r o p e r t y . The above p l a n s have been c o n s i d e r e d i n o r d e r o f d i m i n i s h i n g advantage to the c l a i m s of the r e n t i e r . From the s t a n d p o i n t o f b u s i n e s s s t a b i l i t y , however, t h e r e i s almost unanimous agreement t h a t the w h o l e s a l e commodity p r i c e i n d e x i s i n the l o n g r u n the most s u i t a b l e . I n the s h o r t r u n , though, 1. H a s t i n g s , Hudson, B. - The B e s t Index Number f o r S t a b i l i z a t i o n P u r p o s e s , the J o u r n a l of the A merican S t a t i s t i c a l A s s o c i a t i o n , Supplement March 1928. ' w IV i t i s by no means the b e s t . I t i s p o s s i b l e t o make a w h o l e s a l e i n d e x t h a t w i l l r e a c t t o the c r e d i t c y c l e v e r y c l o s e l y , and l i k e w i s e i t i s p o s s i b l e t o make one t h a t i s c o m p a r a t i v e l y i m p e r v i o u s to c r e d i t c y c l i c i n f l u e n c e s . The l a t t e r i s chosen as the most s u i t a b l e i n d e x f o r p r i c e s t a b i l i z a t i o n by Mr. A.H. 1 Hansen o f the U n i v e r s i t y o f M i n n e s o t a , because he b e l i e v e s t h a t i t would m o d i f y the extremes of the b u s i n e s s c y c l e , y e t would p e r m i t some c y c l i c v a r i a t i o n w h i c h b o t h he and Mr. D.H. 2 R o b e r t s o n h o l d t o be d e s i r a b l e i n a dynamic s o c i e t y . Up to t h i s p o i n t t h i s a ppendix has been m e r e l y a h i s t o r y of c o n f l i c t i n g o p i n i o n . I am g o i n g to v e n t u r e a few c o n c l u s i o n s o f my own. I n the f i r s t p l a c e a l l t h e above mentioned w r i t e r s assume t h a t t h e r e i s one be s t i n d e x f o r t h e i r p u r p o s e , but t h i s i s not n e c e s s a r i l y t r u e . I t i s c o n c e i v a b l e t h a t an i n d e x w h i c h might f a v o u r the r e n t i e r at one time might not do so at a n o t h e r . F o r example the l o s s e s t h r o u g h d e f a u l t might o u t w e i g h t h e g a i n s t o be d e r i v e d f r o m s e c u r i n g the r i g h t to be r e p a i d an e q u i v a l e n t p u r c h a s i n g power, and under d i f f e r e n t c i r c u m s t a n c e s the g a i n s might outweigh the l o s s e s . I t i s i n d e e d d i f f i c u l t to c o n c e i v e a c o n c r e t e example u n l e s s d e p r e c i a t e d c u r r e n c y i s supposed, but such a c o n s i d e r a t i o n i s not i m p o s s i b l e . S e c o n d l y most of the above w r i t e r s have f a l l e n i n t o the e r r o r o f Mr. I r v i n g F i s h e r by making s t a b i l i z a t i o n of a s e l e c t e d i n d e x t h e i r u l t i m a t e g o a l , i n s t e a d o f c o n s i d e r i n g an i n d e x as a g u i d e . 1. Hansen, A.H. - Economic S t a b i l i z a t i o n i n an Unbalanced W o r l d , pp.312-313. 2. R o b e r t s o n , D.H. - B a n k i n g P o l i c y and the P r i c e l e v e l , p.22. V I would suggest t h a t a l l o f the above p r i c e i n d e x e s have t h e i r p l a c e i n c u r r e n c y management. To my mind s t a b i l i z -a t i o n o f Mr. Snyder's i n d e x would be the most e q u i t a b l e as a g o a l , p r o v i d e d t h a t o t h e r t h i n g s remained the same. That i s t o say, i f b u s i n e s s s h o u l d a t any time be, u n d u l y d e p r e s s e d or even t h r e a t e n e d w i t h undue d e p r e s s i o n some c o n c e s s i o n s h o u l d be made i n monetary p o l i c y . The amount o f d i v e r g e n c e needed t e m p o r a r i l y or o t h e r w i s e from Mr. Snyder's i n d e x would be i n d i c a t e d by the w h o l e s a l e commodity i n d e x . Mr. Hansen's c h o i c e o f i n d e x e s would f i n d i t s p l a c e i n announcing c r e d i t c y c l e movements and would be i n v a l u a b l e as a g u i d e t o c o u n t e r a c t i n g p o l i c y . I cannot agree w i t h Mr. Hansen and Mr. R o b e r t s o n i n b e l i e v i n g t h a t the c r e d i t c y c l e need be f o s t e r e d or t h a t p r o v i s i o n need be made f o r i t , because i t w i l l u n d o u b t e d l y m a n i f e s t i t s e l f i n some degree no m a t t e r how e f f e c t i v e i s the c o n t r o l ; i n d e e d , the major w o r r y i s the problem o f c o n t r o l . I t may seem t h a t I am a d v o c a t i n g the s t a b i l i z a t i o n of an average of i n d e x numbers, but t h a t i s not my purpose. I am m e r e l y s u g g e s t i n g t h a t most i n d e x e s have t h e i r uses as g u i d e s to c u r r e n c y management, and am e x p r e s s i n g a p r e f e r e n c e f o r s t a b i l i z a t i o n o f t h a t of Mr. Snyder i n so f a r as i t i s d e s i r a b l e . E x p r e s s e d i n a g e n e r a l way, i t i s d e s i r a b l e to g i v e r e l a t i v e c o n s t a n c y to the most i m p o r t a n t dependent and independ-ent v a r i a b l e s , p r o v i d e d the s o c i a l g a i n s a r e not outweighed by the l o s s e s r e s u l t i n g from the movements of u n r e g u l a t e d v a r i a b l e s when they t e n d to move out of l i n e . I t may be o b j e c t e d t h a t these s u g g e s t i o n s would g i v e a n y t h i n g but s t a b i l i t y t o p r i c e s , but i f the g o a l of s t a b i l i z a t i o n o f the one s e l e c t e d i n d e x i s not l o s t t o s i g h t , I t h i n k t h a t r e a s o n a b l e s t a b i l i t y c o u l d be s e c u r e d . O b v i o u s l y i f th e s e s u g g e s t i o n s were t o be f o l l o w e d g r e a t e r l i b e r t y o f c e n t r a l b a n k i n g a c t i o n would be n e c e s s a r y than i f one p a r t i c u l a r i n d e x were t o be made the a b s o l u t e g o a l of monetary p o l i c y . BIBLIOGRAPHY B e c k h a r t , Benjamin Haggott, F o r e i g n B a n k i n g Systems, Henry H o l t & Company, 1929. • Brown, W i l l i a m Adams, E n g l a n d and the New G o l d S t a n d a r d , K i n g & Son, 1929. C a s s e l , Gustav, The C r i s i s i n the World's Monetary System, O x f o r d U n i v e r s i t y P r e s s , 1932. 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