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Money and Foreign Exchange After 1914

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Money and Foreign Exchange After 1914 a^ntttEU IntnerBltH ffiibtarg Jtljata. Weai 5nrb * • —i • BOUGHT WITH THE INCOME OF THE SAGE ENDOWMENT FUND '' THE GIFT OF . , HENRY W. SAGE 1891 Cornell University Library The original of this book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924032521605 MONEY AND FOREIGN EXCHANGE AFTER 1914 MONEY AND FOREIGN EXCHANGE AFTER 1 9 14 By GUSTAV CASSEL AUTHOR OF "the WORLD's MONETARY PROBLEMS" THE MACMILLAN COMPANY 1922 All rights reserved Pkintbd ih Great Britain FOREWORD In this book I have aimed at presenting a coherent account of the fortunes of the world's monetary system from the outbreak of the War up to the present time. In my two Memoranda to the League of Nations I endeavoured to give an analysis of the world's monetary problem, as it presented itself at the time when the Brussels Conference was being arranged, and one year later. Those Memoranda, however, are written for a narrow circle of experts, and are therefore in a somewhat concentrated form. To suit a wider public a broader representation of the problem is desirable, and it is particularly desirable that greater attention be paid to the course of events that has led up to the situation in the face of which the task of restoring a sound monetary system has now to be taken up. For all future time the period through which we are now living will come to form one of the most important chapters in monetary history, and it will likewise offer the richest materials on which to draw for studjdng the question of the effects of a misguided monetary policy. A book of the character suggested thus undoubtedly has a task to fulfil. Only the task is of such dimensions that one's powers will never prove adequate to meet the demands made upon them. vi FOREWORD I am much indebted to Mr. Leonard Bucknall Eyre, B.A. (Gonville and Caius College, Cambridge), for the very valuable assistance he has rendered me in preparing the English edition. GUSTAV CASSEL. / DjUBSHOLMj I March, 1922. CONTENTS PAGE FOKEWOED V ABOLITION OF THE GOLD STAKDARD 1 CREATION OF ARTIFICIAL PURCHASING POWER 9 THE RISE IN PRICES 19 THE GROWTH OF THE VOLUME OF THE MEANS OF PAYMENT ... 26 ARITHMETICAL EXPRESSIONS FOR INCREASE IN CIRCULATION AND RISE IN PRICES - 33 SCARCITY OF COMMODITIES AND ITS BEARING ON THE RISE IN PRICES ... 52 THE INFLUENCE OF INFLATION ON GOLD - - 63 THE EXCLUSION OF GOLD - - - - 79 THE DISCOUNT POLICY AND ITS EFFICIENCY AS A REGULATOR OF THE MONETARY STANDARD - 101 THE EXCHANGE RATES - - - - 137 DEVIATIONS FROM PURCHASING POWER PARITIES - 147 POPULAR MISCONCEPTIONS - - - - 163 RELATIONS TO EARLIER THEORIES ON THE EXCHANGES 170 INFLATION AFTER THE WAR - - - 187 REFORM PROGRAMMES .... 203 THE ACTUAL OPERATION AND EFFECTS OF DEFLATION 230 THE RETARDED DIMINUTION OF THE CIRCULATION - 242 THE PROBLEM OF STABILISATION - . - 254 INDEX - - 283 MONEY AFTEE 1914 ABOLITION OF THE GOLD STANDARD "^)C„ The first thing that happened in the financial sphere upon the outbreak of the World_^aji was that the existing gold standandjas abandoned—not only in the belligerent countries, but also in the majority of neutral states. Upon the entrance of the United States into the War, corresponding steps were taken in that country. A realisation of this fact is of fundamental importance for a proper understanding of all that occurred later. From the moment of the outbreak of war, the various currencies had in the main to be regarded as free paper currencies, and consequently as currencies which were not limited to any metal, and therefore were not in any relation to one another. Only an economic theory which from the very outset takes cognisance of a system of free currencies can be in a position to offer a true and intuitive picture of the essential points in the develop- ment which followed. Wherefore, it is of primary im- portance to realise that the value of the monetary unit in a pure paper currency can manifestly only be based upon the scarcity in the provision made by the country for means of payment, and that, therefore, the responsi- bility for the value of the currency, in cases where the gold standard has been abandoned, must exclusively lie with those in whose hands rests this provision of the means of payment. 1 2 MONEY AFTER 1914 When I say that the gold standard was abandoned, I refer to an actual fact. Its form one has everywhere sought as far as possible to avoid, and it may, therefore, be possible to assert, with a certain amount of plausibility, that the gold standard has not been abandoned—nay, even that it still obtains. But from an economic point of view that has no meaning. Economics have only to reckon with facts. When the essential conditions for a gold standard are removed, then the gold standard, as viewed from an economic standpoint, is abolished. The fact that a country has a gold standard impUes that the currency of that country is bound up with the metal gold in a fixed ratio of value, so that the price of gold in the currency of the country is fixed'—^not absolutely, it is true, but so that it varies only within narrow limits. In so far as other forms of currency are valid within the country, such currency must clearly be redeemable in gold coin (or at any rate in a certain weight in gold). But this is not sufficient to maintain the fixed parity between the currency and gold. If the gold standard is to be effective, one must be able to obtain for a certain quantity of gold, lying either at home or abroad, a certain sum in the currency of the country, and, vice versa, one must be able to obtain for such a sum a certain quantity of freely disposable gold. The guarantees for this are, in the first place, the right of the possessor of the gold to free import and free coinage ; and, in the second place, the right of the possessor of the country's gold coins to free export and free smelting. Besides, it is, of course, necessary that the coinage of the country be of full value. For this reason the Mint Laws generally lay particular stress upon the issuing of guarantees for the quality of the coins in circulation. But these guarantees are of no value whatever, unless the still more fundamental guarantees just mentioned are properly fulfilled. ABOLITION OF THE GOLD STANDARD 3 Now, however, all these guarantees have been violated during the War, and in particular the right to receive for a certain amount in currency a certain amount of freely disposable gold was in general discontinued immediately upon the outbreak of the War. Whether this was caused by suspending the redemption of notes, or by the aboUtion of the right to dispose over gold, is not the point : actually the gold standard is equally abandoned in both cases. If one withdraws the right to erport it and to smelt it down, then gold loses all its usefulness except as the country's coinage, and the redeemability of the currency in gold becomes then a mere pretence. In this connection the conditions for the redemption of notes in Denmark during the War perigd are particularly striking. In the National Bank's Report of the 31st July, 1919, occurs " the following sentence : From the month of March, 1916, the right to refuse the redemption of notes with gold has not been exercised, when there was no reason for believing that an illicit export of gold was contemplated, and by a Royal Decree dated the 30th July, 1919, it was laid down that redemption in gold coin may be refused when, in the bank's judgment, sufficient guarantee is not forthcoming that the gold wiU not be utilised in a manner contrary to the interests of the Danish monetary system." One can get over the difficulty still more neatly, as was done in England for a long time, not by introducing—even formally—an export prohibition law, but at least by actually preventing any kind of inconvenient export. Such a method makes no difference either way: from an economic point of view the gold standard has in any case ceased to exist. The most immediate cause of the gold standard being suddenly dispensed with on the outbreak of war was the desire to preserve as far as possible untouched the gold reserves of the central banks. The extraordinary un- — 4 MONEY AFTER 1914 certainty as to the future which governed the world during the first days of the War would in all probability have led to a sharply rising demand for gold as a means to the maintenance of wealth, and as a means of payment, especially to abroad. The central banks, therefore, had to reckon with the possibility of being speedily deprived of their gold, if they continued to redeem their notes and other bonds in gold. The loss of gold cash reserves—nay, even a considerable reduction of them would, it was supposed, seriously affect the general confidence in the central banks' note issues, and thereby in the future of the currency. Indeed, the central bank was, as a general rule, legally bound to retain a certain drain amount of gold in cover for its notes ; a substantial on the gold reserves would have involved the neglect of, that duty, and therefore had to be prevented. j Thus right from the beginning the maintenance of the gold reserves stands out as the one essential factor, while the protection of the currency itself was more or less entirely disregarded.
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