Money

The problem of future currency policy was considered at the Genoa conference in 1922, at which all Europe was represented, together with Japan and the British Empire. The price level had fallen far from its highest point, but was still substantially above the pre-war average. Recommendations were adopted in favour of a development of the gold exchange standard in order to guard against too great a competition for gold, but at the same time it was proposed that the central banks of the world should co-operate and regulate credit with a view to preventing undue fluctuations in the purchasing power of gold. That meant that the economy of gold arising from the use of the gold exchange standard, while being used to guard against an undesirable appreciation of gold or fall of prices, should not be pushed so far as to cause an unde sirable depreciation of gold, or rise of prices.

Price Stabilization.

The general use of paper money has placed the entire monetary stock of gold in the hands of the central banks in the form of gold reserves. It is they who control the market for gold. They stand ready to buy and sell gold in un limited quantities at fixed prices, that is to say, in each country, at prices fixed in its own monetary unit. In order to prevent fluctua tions in the wealth value or purchasing power of gold, they must prevent fluctuations in the wealth value of the monetary units. By credit regulation a central bank can expand or contract the con sumers' income and the consumers' outlay, and so can elevate or depress the price level. But in order to carry out an internationally concerted policy of price stabilization, the central banks as a group must be prepared to regulate credit independently of their gold reserves. The price level being held stable, they must be prepared to buy or sell gold, and to see their gold reserves increase or decrease, without modifying their credit policy. To expand or to contract credit would be to raise or lower the price level. This policy of price stabilization by international action, though it has gained very general recognition, is still in an experimental stage. The price level is exposed to many non-monetary influences affecting particular products or groups of products, such as varia tions in crops, discovery or exhaustion of mines, changes in manufacturing processes. The policy of stabilizing the wealth value of gold requires not that an index number of prices should be kept rigidly fixed, but that those variations which might arise from purely monetary causes should be prevented.

The course of foreign trade and the balance of payments intro duce a further complication. A change in the balance of payments modifies the relations between the internal and external price levels. If a country suffers from a shortage of production of foreign trade products, or if it has to make an exceptional external payment, its imports must be curtailed relatively to its exports in order to adjust its visible trade to its new balance of payments.

If it is to retain the gold standard, there must be a contraction of credit to bring about a shrinkage of the consumers' outlay.

In the same way a country which experiences increased pro ductivity or receives an exceptional payment from abroad main tains equilibrium by expanding credit and bringing about an in crease in the consumers' outlay. In the one case the price level of home trade products rises in comparison with that of foreign trade products, in the other it falls. If world prices remain stable, internal prices must rise or fall, and to that extent the price level in the country affected will not be perfectly stabilized.

The preceding sections have been written on the assumption that paper money is convertible into gold. The Genoa plan is based on the continued general use of the gold standard. Pro posals have been put forward (particularly by Mr. J. M. Keynes) for applying the policy of stabilization of purchasing power to a paper currency entirely dissociated from gold. The practicability of such a plan is a matter of controversy, and the general return to the gold standard throughout the greater part of the world has made the question an academic one. Apart from schemes of the type favoured by Mr. Keynes, paper money dissociated from gold is a monetary disease. The abuse of paper money became so prevalent during and after the World War, that it has been given an almost disproportionately important place in latter-day monetary theory.

War Finance and Inflation.

The overwhelming exigencies of war drive a country to supplement its tax revenues by borrow ing money on a great scale. The amount that can be borrowed from investors is limited to what they can be induced to save. It may not be enough. The Government can neither relax its efforts nor leave its liabilities unpaid. It has recourse to temporary borrowing. Banks lend by creating credit ; they create the means of payment out of nothing. Inflation occurs. The consumers' income and the consumers' outlay are swollen, consumption is stimulated, stocks of goods are drawn on, prices rise and the foreign exchanges become unfavourable. There results an outflow of gold. The accepted method of stopping an outflow of gold, a contraction of credit, is not available, and it becomes impossible to continue to provide gold for export. Either the convertibility of paper money into gold is suspended or the export of gold is pro hibited; in either case the gold standard ceases to operate. Infla tion increases the unspent margin. In a country where bank credit, is the principal medium of payment, the money portion of the un spent margin increases after an interval; the requisite increase of the note issue is a condition of the credit expansion, for the banks cannot lend to the Government unless they are assured of whatever supplies of legal tender money may be demanded by their deposi tors. In a country where bank credit is little developed and paper money is the principal medium, the Government will probably be driven at an early stage to borrow direct from the central bank and to take out the proceeds in paper money. The Government may even shorten the process by printing paper money for itself and paying its creditors with it.