The Gold Situation .sx By DENNIS ROBERTSON .sx Is gold the villain of our industrial tragedy ?sx Mr. Dennis Robertson differs from many authorities in doubting whether the present shortage and uneven distribution of gold is responsible for our present depression .sx HOW do the banks , in a country such as England for what I have to say would need certain modifications if we were to apply it in detail to other countries how do the banks arrive at decisions about the volume of loans and investments they make , and therefore of the means of payment they provide ?sx The answer is that they act in such a way as to keep a certain proportion prescribed by law or custom , between these means of payment and their cash reserves .sx But in these cash reserves they include not only what you and I would call cash , but the balances which they hold with the .sx Central Bank of the country .sx Now the Central Bank can affect the amount of these balances by its own behaviour .sx Suppose , for instance .sx it sells me 100 worth of war-loan in return for a cheque on the Westminster Bank , it will be able to dock the Westminster Bank's balance with itself by 100 , and the Westminster Bank will have to cut down its loans or investments accordingly .sx And the reverse will happen if the Central Bank takes it into its head to buy securities in the market instead of selling them .sx It would seem at first sight then that in such a country the ultimate control over the total volume of this means of payment rests with the Central Bank ; and this is an important part of the truth .sx A Brake on the Banks .sx But it is not the whole truth :sx for in a country with a gold standard there are limits to the extent to which the Central Bank can exercise its discretion in that matter without getting into trouble .sx For a gold standard consists of two sets of rates .sx The first and more fundamental deals with the interchangeability between money and gold ; the Central Bank is put under obligation to buy gold from all comers at a fixed rate , and also to sell it on demand at a fixed rate and under prescribed conditions .sx The second set of rates , the object of which is to ensure that the Bank is always in a position to obey the first , deals with the quantitative relations between money and gold .sx These .sx secondary rules vary very much in different countries , and do not usually seem very well adapted to the object which they are supposed to serve .sx In England , for instance , the bankers' balances with the Bank of England which , as I have tried to show , are the hub of the whole system , are not regulated by law at all :sx instead we have a rule that all Bank of England notes in excess of 26 million must have a gold backing of 100 per cent .sx a rate which is really a survival of a time , now passed away , when bank notes were the chief form of payment , and when people were entitled to change them into golden sovereigns .sx on demand .sx Limitations of the Gold Standard .sx In most countries it is the proportion between the Central Bank's gold and either its notes or its total liabilities that is regulated by law .sx This is not really very satisfactory either :sx for , as has often been pointed out , it is rather like saying that in order to ensure that there shall never be a shortage of taxi-cabs , a certain proportion of the taxi-cabs in existence must always be standing on the ranks , The upshot of the whole matter is that there is always a certain amount of play in a modern monetary system , of which a Central Bank can take advantage in framing its decisions about the quantity of means of payment which it allows to be created :sx but that in the last resort this play is limited by the obligations imposed by the gold standard .sx Whether we think this a good thing or not will depend partly on whether we happen to like the looks of our own Central Bank .sx If we regard it as a stupid or weak-kneed creature , which is incapable of taking intelligent charge of events , or which is liable to put its money-creating powers too .sx easily at the disposal of a needy Government , we shall be relieved that its capacity for mischief is kept within bounds by a golden chain .sx But if we have cause to think it not only public-spirited and disinterested , but even possessed of the rudiments of a brain , we may well feel .sx inclined to regret that it is thus hampered in discharging the primary domestic task of Finance namely , the task of seeing that step is kept between the amount of saving committed .sx the care of the banking system and the amount of real new capital created with the banking system's aid .sx For it will easily be seen that under a gold standard it is quite possible for the public to be swamping the banks with savings , and yet for the banks to be unable to transform those savings into real industrial capital , because the country's gold reserve is not sufficient to form the basis for an increase in their loans or investments .sx Equally , it is quite possible , if the country is flush of gold , for he banking system to augment the volume of industrial capital without having been given any mandate to do so by the public .sx Thus prices rise or fall , and savings are stolen from the public or drip away down the drain , through the operation of that very gold standard on which our fathers relied to give us stability .sx The Movement of Gold .sx I must now try to connect up this matter of gold explicitly there has been an implicit connection all along with what I said last week about the difficulties that may arise , especially ( older post-War conditions , in making payments abroad .sx If the people of one country become abnormally anxious to obtain foreign money whether in order to buy goods with it , or to pay interest with it , or to lend it on a foreign stock exchange what will happen ?sx For a start , the financiers who deal in foreign money will protect themselves by putting up its price in common language , the exchanges will turn against the country in question .sx If there were no gold standard in operation this process might go on a very long way , as we saw in the years after the War , and perhaps lead to the country's monetary system collapsing altogether , Indeed , it is just because of this possibility that most practical people are in favour of maintaining the gold standard , in spite of the objections to it which I have pointed out .sx But if there is a gold standard , the process cannot go beyond the point at which it becomes cheaper to buy gold from the Central Bank of the country , and send it abroad to be turned into foreign money , than to buy foreign money directly front the financiers .sx What happens next depends on how far the Central Bank is prepared to utilise the element of play of which I have spoken .sx For three months in the summer of 1929 the Bank of England allowed gold to ebb away to the United States and France at an enormous rate without ostensibly turning a hair , and something of the same kind has been happening again in recent months .sx But there is , as I have said , a limit to this element of play .sx Sooner or later , under a gold standard , the Central Bank will have to see to it that the rates of interest on loans are put up in the country from which gold is flowing , and thus tempt foreigners to buy that country's money in order to lend it at the high rates .sx But this may be only a temporary cure :sx in order to effect a more radical one , the Central Bank may have , by the same rise in interest rates and other methods , to curtail the power of its citizens to buy goods , thus discouraging the import of goods into the country and stimulating their export , and so helping to restore equilibrium in the balance of payments .sx That is where the difficulties begin , as the Australians in particular , but not they alone , have been finding in recent months :sx for this process of curtailment of buying power is a painful one , involving a check to enterprise and to the formation of industrial capital , and bringing bankruptcies and unemployment in its train .sx The Gold Balance .sx From this brief survey of the working of the gold standard there seem to me two opposite lessons to be learnt .sx First , neither the world , nor even the British Empire , is yet an economic family , and it is no use pretending that it is .sx We are not yet ready to see any one nation , by multiplying its own means of payment , draw indefinitely on the resources of the world .sx In so far as the gold standard is a means of pulling up with a jerk a nation which is trying it on , so to speak , it is performing a useful function which has got to be performed sonnehow .sx But secondly , the gold standard sometimes seems to bring its elephants into battle when they would be better waiting behind a hill .sx If a number of Frenchmen or Americans get a fit of wanting to stuff their money up the chimney , or into a particular kind of share , as the case may be , all the world has got to know about it .sx One is sometimes tempted to think not , as is often said , that the gold standard nowadays does not work smoothly , but that it works too smoothly that gold steps to and fro across the sea on too small it provocation .sx Would it be better if , instead of going by aeroplane , as is increasingly the case , it were not allowed to travel except in the slowest and leakiest type of sailing-ship ?sx If that seems too reactionary , here at least is a problem worth the attention of the financial doctors of whom I am to speak next week .sx The present complaint against the gold standard is that there is not enough gold , and that what there is is badly distributed between countries .sx Some great authorities are inclined to twin causes a major share of responsibility for the present world depression .sx Personally , I do not find it easy to go so far as that .sx Take first the question of distribution .sx America holds two-fifths and France one-seventh of the world's monetary gold the former has about six times and the latter more than twice as much as this country .sx In order to be fair to these two countries we must remember one fact about each of them .sx Judged by the test of proportions , America does not come so badly out of it :sx the proportion of centrally held gold to total bank deposits is not much greater there than here say , ten per cent .sx as against six per cent .sx As to France , it was inevitable and in the world's interest that her home price-level , measured in gold , should rise above the very low level at which it was left by the stabilisation of the franc at 124 to the ; and this naturally involved some importation of gold as backing for an increase in her note-issue .sx I suggest that their swollen gold hoards are a symptom rather than a cause of more fundamental difficulties ; and in particular that we can scarcely regard them as a major cause of the great world slump .sx For if they were it is hard to explain why that slump should have both started first and run its most riotous course in gold-stuffed America .sx Will Production Outstrip Population ?sx The total supplies of monetary gold are still increasing at the rate of 1.7 per cent .sx a year ; and though that rate of increase will decline as the stock increases while the annual output declines , it will still , even in 1950 , according to the best available estimates , exceed the one per cent .sx per year which is the estimated rate of growth of the world's population .sx