Review: South African Currency Author(s): Edwin Cannan Review by: Edwin Cannan Source: The Economic Journal, Vol. 30, No. 120 (Dec., 1920), pp. 519-530 Published by: Wiley on behalf of the Royal Economic Society Stable URL: http://www.jstor.org/stable/2222874 Accessed: 27-06-2016 09:30 UTC Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at http://about.jstor.org/terms JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. Royal Economic Society, Wiley are collaborating with JSTOR to digitize, preserve and extend access to The Economic Journal This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:30:27 UTC All use subject to http://about.jstor.org/terms 1920] SOUTH AFRICAN CURRENCY 519 tively more rapid here than in other countries, might stimulate our export trade and afford enough aid to public finance through the channels of industry and commerce to offset the difficulties which would be encountered in other respects. The pros and cons of high prices and low prices and the movements of prices in general involve the balancing of many factors beyond these. It would go beyond the scope of this notice to enlarge further upon this proposal than to add that, admirable as much of the essay is, the author has not made out a convincing case for the experiment he recommends. It is natural enough that business men to whom credit is a necessary of life should desire to see it cheap and abundant. But they ought to know, better than most people, that control of prices and denunciation of vendors are, ineffective instruments to cheapen either credit or goods. "Things are in the saddle and ride mankind." Even bankers, financiers, and money-lenders are Dart of mankind. HENRY HIGGS SOUTH AFRICAN CURRENCY Union of South Africa. Report of the Select Committee on Embargo on Export of Specie. Printed by order of the House of Assembly, June, 1920. (Cape Town: Cape Times, Ltd., Government printers. Pp. xlvi+574+xxvi.) IF we had been asked in 1913 " What are the chances of South Africa deserting the gold standard in case of a European war? " we should probably have unhesitatingly rejected the idea as beyond the bounds of possibility, and, if we knew a little history, we should have backed our opinion by quoting the classic case of California, the gold-producing State of the American Union, holding firm to gold duriing the American Civil War. But now, at the end of September, 1920, the South African pound sterling is not only depreciated far below the value of the 113 grains of fine gold required to make a sovereign (or its equivalent, $4 87 in Canadian or American gold coin), but well below the 91 grains which will buy 4-87 Canadian paper dollars, and even a little below the 82 grains which will buy an English, Australian, or New Zealand paper pound. To any Rip van Winkle who went to sleep in 1913 and awoke in 1920 this would be an astonishing phenomenon. The great gold-producing Dominion with a paper standard more below its par with gold than any other in the British Empire ! No. 120.-.VOL. XX. N x This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:30:27 UTC All use subject to http://about.jstor.org/terms 002() TIlE ECONOMIC JOURNAL [DEC. If our Winkle's awakening took place in South Africa and he inquired of the most intelligent and well-informed persons he would be likely to meet there why these things were so, he would probably be told that the cause was a scarcity of gold in South Africa due to its illicit exportation. "Illicit exportation! " we can imagine him exclaiming, "do you mean to say that you have prohibited the export of gold and yet have not enough? Why, when I went to sleep you were exporting over thirty millions a year, and yet you had plenty-more than enough, in fact, as the value of gold in other commodities was falling. What has happened? Have the mines given out?" "Oh dear no! " the answer would be; "of course, the gold output goes on being exported quite openly and lawfully. That is only a 'commercial product,' just the same as wool (see Minutes, Q. 202). The ex- portation which has troubled us and which we have tried to pre- vent, is the exportation of gold coin, and when we said 'gold' just now we meant that, as you would have known if you had not been asleep all this time." Winkle, unsatisfied, might go on to inquire why it should be legitimate and healthy to export 440 oz. of uncoined gold and ruinous smuggling to export exactly the same weight of fine gold in the form of 1869 sovereigns, but to this question it is not,likely that he would get any intelligible answer. The explanation of the whole puzzle, like most explanationis of economic facts, must be historical. During the war it was supposed to be a military measure of the first importance to "prevent gold getting into the hands of the enemy," and it was believed that one good measure towards this end was for each country, including in that term detached parts of the British Empire, to prohibit all unlicensed carrying out of gold, not only to the enemy, but to any part of the world. The war seems also to have somehow revived, not only among belligerents, but even among neutrals, the mediaeval fear of losing the currency. Consequently prohibitions of the exportation of any kind of gold, and also of the melting down of gold coin for any purpose what- ever, became almost universal. A century ago such legislation was everywhere ineffective and consequently gets little more than passing notice in the controversies of that time. But in the modern world, in islands such as the United Kingdom, Australia, and New Zealand, conditions are different, and infractions of the law can be kept within such small limits as to become practically unimportant. This makes it possible in such countries to issue enough paper money to bring the value of the unit of account This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:30:27 UTC All use subject to http://about.jstor.org/terms 1920] SOITT AFRICAN CURRENCY 521 below its par with gold without taking away its redeemability in (or, as is usually said, its convertibility into) gold coin. As some- one said in one of the old bullion debates, gold imprisoned in the coin is degraded to the level of the paper. We do not run to the Bank of England and demand sovereigns in exchange for our Bradburies, because we know that, as law-abiding people, we cannot use sovereigns otherwise than as currency, and that as currency they are worth no more than Bradburies, though as free gold they would be worth 39 per cent. more. When a paper currency is convertible into free gold, it cannot go below its par with gold, because its convertibility limits the quantity of it which can be put into and kept in circulation: when it is con- vert,ible only into a coin which cannot be used otherwise than as currency, it can be issued just as freely as if it were wholly irredeemable, and with the same effect on the general purchasing power of the unit of account. Hence the fall below par of the British and Australasian pounds. On the outbreak of the war the British Government induced the mine-owners to agree to hand over the whole output of the mines to it, so that the Union of South Africa had no need to concern itself with the export of uncoined gold; but it very naturally fell in with the prevailing fashion of prohibiting the export of coin. It further proceeded to make it easier for the banks to enlarge the paper currency by allowing them to issue ?1 and 10s. notes, the old limit having been ?5. If the exporta- tion of coin could have been stopped as effectively as it was in the United Kingdom and Australasia, the South African banks would then have been in as proud a position as the Bank of England under the Restriction of 1797-1821, and nothing except their fear of the eventual removal of the embargo on export would have stood in the way of South African pounds falling to the value of Polish marks or Russian roubles. It is true that, unlike the Bank of England notes of 1797-1821, their notes were still convertible into coin, but that convertibility would have been a hollow mockery like the present convertibility of the Bradbury. But South Africa's intercourse with the rest of the world is not so easy for a Government to control as that of the United King- dom and Australasia, partly because the Union is not an island, and partly because two sections of the population-Natives and Indians-do not belong to the governing democracy and also have connections with the outside. Consequently extensive smuggling out of gold coin was possible, and was sure to take place if made profitable. N N 2 This content downloaded from 198.91.37.2 on Mon, 27 Jun 2016 09:30:27 UTC All use subject to http://about.jstor.org/terms 522 THE ECONOMIC JOURNAL [DEC.