September 22, 1931: Message on the Gold Standard
GREAT BRITAIN'S DEPARTURE FROM THE GOLD STANDARD
THE PRESIDENT. I have been asked by two of your members to discuss something of the British demonetization or departure from the gold standard. I can only do that by way of background. I cannot make a public statement in the matter.
I think you will understand that this situation has been pending for a good many months. There has been a large amount of British investment in the United States, and that amount, estimated by the Department of Commerce, aggregates something over $1,500 million. That is not flight of capital but steadily increasing expenditures here which naturally affects the exchanges. It has taken place not only in the past few months but for some years back. That, of course, has affected the problem of exchange. There has been some piling up of immediate cash in our banks from that quarter.
The course resolved upon by the British Government creates some temporary dislocations in the international world, but they are due more to the confusion arising out of readjustment of quotations and values than in their effect on the values of either securities or commodities.
The first effect of the decrease in the gold value of the pound is a rise in prices of commodities in Great Britain, at least in all international commodities where the price is made by international action, such as in wheat and other raw materials. There is involved a large amount of transaction based on the readjustment of those prices. A certain amount of confusion comes out of that, and the effect on our commodity markets has been a decrease in prices. There has been a rise in price in England in consequence and our prices are practically unchanged yesterday and today.
The fact that the pound is taken off its fixed value of $4.86 is not the abandonment of the gold standard even for the pound; as international commerce revolves in these days all transactions will be measured in some gold value, whether in dollars, francs, gulden, or any other of the fixed gold currencies. No transaction can take place unless it has some basis of measurement of that character. It really means that the fixed gold standard has been abandoned and a variable standard adopted which may change momentarily. But in any event all values in international commerce are bound to revolve on gold values or some measuring stick in gold. It is more or less a case of abandoning a fixed standard and adopting a variable one so far as international commerce is concerned.
The effect in England will undoubtedly be to increase exports, which amounts to price reduction compared with the standard of measurement in gold, and it should act as a stimulant and thus should increase employment and increase the demand again for raw materials. Obviously, it amounts to a reduction in standards of living temporarily in those commodities which are imported, of course raw materials, but wages and rank will lag behind. Production costs will be lower, and consequently, exports will be stimulated.
The tendency also may be to decrease imports to some extent especially for highly competitive goods. On the export side, the effect is not going to be very material on the United States because there are comparatively small volume of British and American goods which are highly competitive in neutral markets. A study made some time ago of the Argentine showed that there were only about 10 percent of the exports of the United States to the Argentine and correspondingly 10 percent of the British exports to the Argentine that were competitive. We are exporting goods which we can peculiarly produce to the best advantage, and it might mean competition in respect to that small fraction over toward the neutral market. But it would not be any appreciable volume.
There might be some decrease in imports into Great Britain, especially in luxuries, but our trade with Great Britain consists largely of raw materials and manufactured goods. If there is stimulation of British exports our exports would be more likely to increase than decrease. I mention that only to indicate that the effect of it is not as far-reaching as some people may think.
On the financial side there are no consequential balances of American banks in England. They will always have sufficient of their own capital. So there are no losses there of any consequence at all. All together the action, no doubt necessary on the British side, is not, we feel, going to have any great effect in the United States. The probabilities are that it will considerably improve the situation in England, and we will benefit in the long run. In any event, when there is a question pending over the world's economic life, the actual realization of it is much less severe on us than is the constant possibility of it such as has been the case for the past 3 or 4 months. All together if we are going to have an important economic shift it is better to have it over than to have it hanging about.
You will realize also that this is not the first time that the pound has been off the gold basis. I do not know of any nation in the world which manages to maintain through its national life the gold value of its currency. There was a long period in the United States after the Civil War when we certainly could not maintain it. The pound was off the gold basis from some point in the war to 3, 4, or 5 years afterwards, but gradually the economic situation readjusts itself. These things are temporary and go back again to their original position.
And that is all I have today.