To the Editors.
Sirs,—
I must admit being still unconvinced by F.F.'s reply to me in the November issue. He says I "completely fail to show why they are so exchangeable (sovereigns for paper currency) if the note does not represent the sovereign." Whilst one would have thought that the very fact that in a less restricted market than at home—the restrictions of the market being due to penal laws operating against the use of sovereigns other than as currency—it is customary to offer and receive more than the face equivalent for gold in exchange for notes, would be at least a colourable imitation of a "show" if more proof be required than the cases I have cited— assuming them to be true, which can easily be proved.
It may help to remind F.F. that before the war gold stood at £3 17s. l0½d. per oz. and the figure just now is about £6 2s. 4d. with the same amount of gold contained in the sovereign as at the lower figure ; which means, obviously, that the actual value of the sovereign as gold at the present time is at least 34s., and that would be the price obtainable here if it were not for the severe penalties fixed by law for using sovereigns for the gold contained in them instead of as currency.
If the functioning of our gold standard is so automatic as F.F. contends, why is it necessary for the authorities to impose penalties in order to prevent the free use of gold as a commodity as distinct from its functioning as currency ? One is aware that it is an old offence to melt down sovereigns, but previously to the war, when British currency was normal, it was an offence which was winked at, and it was not until the abnormal conditions brought about by the war arose that the law was put into active operation again in this connection. As a matter of fact, when foreign debts are being discharged in gold, sovereigns are not used as the form of payment, but bullion is used in order to ensure that the full market price of the gold is obtained ; when the currency was normal this did not matter, but now it is obviously a very big item.
The point can be somewhat clarified when it is mentioned that in Mexico the standard of currency is gold, and when the price of gold advances in any particular degree the "Mex" gold dollar is reminted in a smaller size, and the Mex dollar is now smaller in dimensions than a three-penny bit, whereas five years ago it was nearly as large as a sixpence. The same rule is adopted there with silver, so that silver coins are of a diminutive size owing to the high price of silver.
F.F. says "the differences in the rate of exchange" quoted by me "represents largely the state of government and other credits of those countries." That statement would hold good if it were not for the fact that in the localities I mentioned so much more is offered for the sovereign than is obtainable for English paper money.
I quite agree that a paper currency convertible into gold on demand cannot be inflated, but that does not alter the fact that a currency can, and is, inflated when so much paper is issued that the gold to convert it is no longer obtainable at the banks—nor even a small portion of it—and as a consequence the rates of exchange between the locality of inflation and those where the inflation has not occurred are adversely affected. What F.F. does not seem prepared to take into consideration is that it is necessary to make penal laws in order to stop folk from selling sovereigns as gold, and I repeat that if the subject were as automatic as he insists this would be quite unnecessary.
As for the note being "treated with the same respect as the sovereign," that is not the case, and I would suggest that in ninety-nine cases out of a hundred if the alternative were offered the gold would be jumped at, and if the recipient were a person who was likely to take advantage of present conditions, ere long those golden goblins would be in other hands and have assumed different shapes, and the vendor would be chuckling over the extra pieces of paper currency which had accrued to him over the transaction.
In conclusion, I must point out that my argument is not that the inflation of currency is the cause of high prices because whilst I know that this inflation is one of the effects of the war, I know it is not all of them.
D. W. F.
The Answer.
D.W.F. is still unconvinced because he goes abroad to examine something that can only be explained by a close examination here. All his supposed arguments are bogies raised by himself to his own confusion. They have no bearing whatever on the subject. For instance, he harps on the fact that the sovereign will fetch more abroad than the pound note, all the while forgetting that the latter is not legal tender abroad. Notes can be exchanged for sovereigns at the Bank of England on demand. If the sovereign would buy more than the note it would be demanded. That the currency note is everywhere accepted, and sovereigns are not demanded, proves that the note is accepted as the equivalent of the sovereign. In other words, the note, being convertible, obviously represents the sovereign and not something less than the sovereign—which would be the case if inflation had taken place.
Another point that has no bearing on the subject, but which mystifies D.W.F., is the high price of gold to-day compared with the pre-war price. It has already been pointed out that gold may rise in price because of increased demand without affecting currency. In any case, inflation and a rise in the price of gold are far from being the same thing, as D.W.F. seems to think. Gold is used for other purposes than coining. The usual method of paying debts abroad is to buy up foreign bills, but if bills are at a premium it may be cheaper to export gold. An increased demand for this will doubtless send up its price, but if it leaves a margin over the method of buying bills it will be preferred. Our correspondent's mistake lies in supposing that these movements have anything to do with currency. The rise in the price of gold has taken place outside the sphere of currency as a result of competition amongst traders.
The reference to Mexico likewise has no bearing, on the subject. All it does is to show that D.W.F.'s pet obsession—the high price of gold—is universal. Apart from that, the Mexican practice only results in inconvenience, because it calls for fresh calculations and readjustment of prices with every new issue.
Again, D.W.F. speaks of so much more being offered for the sovereign abroad than is obtainable for English paper money. The latter, however, is not used for exchange purposes because bills are far more convenient. If he means by "English paper money" something other than currency notes there is no point to his contention, because such paper will be outside the ordinary currency and subject to fluctuations like gold and bills.
Next my critic talks of localities where the inflation has not occurred. Where are they? According to his own statement debts between countries are paid in bullion. Equal quantities of gold are of equal value all over the world. Bullion is the world currency for that reason, and its use as a means of adjustment between nations confines each national currency within its own borders. Therefore, to talk of localities where the inflation has not occurred is absurd. The paper money of no country, not even excepting the United States, is worth so much abroad as gold.
D.W.F. winds up by denying that his argument is that "the inflation of currency is the cause of high prices," and then declares that "inflation is one of the effects of the war" ; but if inflation exists without prices being affected there is no point to his remark. If he means the reverse of what he says, he is still wide of the truth, because it must be obvious that had notes never been issued, and instead the sovereign continued to circulate, prices would still be where they are to-day. The banks may or may not have sufficient gold to pay out likely demands—D.W.F. declares emphatically they have not; there may or may not be a shortage of gold in the country. But the fact remains that every currency note issued is legal tender for, and is guaranteed as representing the sovereign—the latter being obtainable on demand.
If the amount of gold in reserve—or in a country—had any bearing on prices, we should expect the latter to fall when gold was pouring into a country. But the reverse was the case in the United States, where prices continued to rise while gold was pouring into the country from Europe.
As D.W.F., however, agrees that "a paper currency convertible into gold on demand cannot be inflated," the question I first asked in the July "S.S." remains unanswered. Neither D.W.F. nor anyone else has been able to show that the currency of this country is inflated. Instead, our correspondent by this last admission, and by his failure to prove that the note does not represent the sovereign, fails to establish anything to the contrary. Consequently there is nothing left but to reaffirm the statement previously made, that prices are high because rings and trusts have been formed by capitalists to force prices up and keep them up.
F. Foan
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