Alfred Charles Davidson. Australian Quarterly. Volume 80, Issue 5. September-October 2008.

During the last century the great trading Nations of the world have adopted gold as the standard of value and medium of exchange. It is necessary to bear in mind that gold is a commodity just as is wheat or wool, and that it has had to win its way to this position in competition with other commodities. The final contest was between silver and gold. One school of thought held it possible to have a double standard known as “Bi-metallism.” Gold, however, has been adopted as the single standard for the reason that there is no other standard which has so many advantages and so few disadvantages.

It is possible that I may be charged with descending to platitudes, but it may be wise to mention at the outset of an article such as this, that in human affairs it is impossible to obtain perfection. This is a point that seems to be generally overlooked when attacks are made upon the gold standard. Those of us who support this standard do so realising that certain disadvantages can be urged against it, but those disadvantages are small compared with the disadvantages which attach to any other standard so far proposed. The advantages, however, are very great.

All trade is barter, the exchange of goods for goods. It is only to be expected that the man in the street often overlooks this fundamental principle. We are so accustomed to using money as a means of record for all our daily transactions, and in the buying and selling of commodities both in internal and external trade, that money comes to have an importance that it is not entitled to in our minds. Money is merely a medium of exchange to do away with the inconvenience of having to exchange commodities directly the one for the other. It would be very awkward for the baker who wished to have a turkey for his Christmas dinner to have to induce someone to supply him with one when the supplier would have to accept dozens of loaves of bread in exchange for the bird. Bread would be of no use to him in that quantity. This is where money comes in as a medium of exchange.

Before the War the British Empire, as one of the great trading communities of the world, was on the gold standard. As part of the British Empire, Australia also was on the gold standard.

To put it simply, this meant for us that in earlier times the banks were compelled to give gold in exchange for their notes whenever demanded by the holder of the note, and more recently when the Commonwealth note succeeded those of the trading banks, the note issuing authority had to be prepared to give the holder sovereigns in exchange for notes should he so desire.

“A gold standard country then is one in which, for all practical purposes, all kinds of money are ultimately convertible into full-bodied gold money, and that full-bodied gold money is itself freely convertible into ordinary gold and freely exportable.”

During the War, the Governments resorted to a tremendous increase in borrowing in order to finance it. This great increase in Government borrowing led to a great increase in the note issue and in currency generally. It brought about inflation. This in turn made it necessary to prohibit exchange of notes for gold, and in that way the Australian note became inconvertible. This inconvertible note went to a discount. The discount increased during the War, until a sovereign was worth several shillings more than 20/- when valued in Australian notes.

At the close of the War there were two courses open. One was to adopt a policy of deflation, gradually bringing the value of the note back to the value of the sovereign, that is, to 1231/4 grains of standard gold and about 4.87 in gold dollars. The other was to reduce the metal standard to the depreciated value of the note. This is known as devaluation.

It is probably the greatest achievement that has ever been known in economic history that the British Empire following upon the example of Great Britain decided to adhere to its former standards, to adopt a policy of deflation, and succeeded, in its purpose within so few years. The gold standard was restored in April, 1925.

The return to the gold standard brought many and great advantages. The most important was that the return to the gold standard reduced the great difficulties attached to external trade during the period of inflation and departure from the gold standard, It gave to the great trading nations of the world a uniform measure of value upon which to base their trading transactions. These difficulties were due to the fact that with an inconvertible note the Australian 1 [pounds sterling] represented by the Australian note became divorced from the English 1 [pounds sterling] represented by the English note. This made exchange operations very difficult and uncertain, which in turn increased the difficulties of importers and exporters as to the prices that they would have finally to pay or receive. In just the same way we had no common basis for trading with other foreign countries outside the British Empire, e.g., the Australian paper pound had no common basis for comparison with the U.S. gold dollar. Thus to the ordinary fluctuations in exchanges while on the gold standard were added the difficulties of trading between countries without a common standard of value. The benefits of having a common standard of value and medium of exchange among trading communities and countries are beyond estimation.

The great benefits of the gold standard carry with them great responsibilities. To maintain the gold standard we must be prepared to allow the free import and export of gold in all circumstances, and to maintain the convertibility of the Australian note without exception. It must be impossible for the note-issuing authority to refuse to give gold for notes, no matter for what purpose they may be required: for trade, for hoarding, for export, or for internal currency.

We have now reached a stage in the history of Australia when we are too grown up to be granted the latitude given to children. The world will not now overlook our resort to artifices instead of standing firmly on recognised principles. The great question that Australia will be called upon to face in the near future, if it has not already arisen, is that we cannot hold out to the world that we represent our policy as a policy of sound finance, that we are determined to maintain the gold standard, unless we are prepared to pursue in practice those operations which the maintenance of the gold standard will demand of us.

First of all, we must be prepared to give gold for our notes whenever demanded and in whatever quantity. Secondly, we must be prepared to export gold when our trading and financial position makes it such that gold can be demanded from us, and similarly to import when necessary. There is much to be lost by shirking these responsibilities. The world at large is not to be bluffed. If we have been spending too much, if the position in Australia is such that we have been living, so to speak, beyond our means, and if, as a consequence, our price levels are high and out of line with the rest of the world, we must be prepared to allow our exchange rate to move towards, and even reach, the gold export point. This is the position to-day. We must then allow those who have to make payments abroad to withdraw gold from the note issuing authority and export it if they are able to do so at a better rate than can be obtained by buying exchange on London, or on whatever place to which they may require to send the money.

For the note-issuing authority to place a partial or total restriction on the export of gold must break down the convertibility of the Australian note. It must in time create difficulties and disorder in the exchange market and have a serious effort both on our export and our import trade. But, there is a more serious aspect still, and that is the repudiation of the gold standard,. The demand for gold for export is a sure indication to us that we have got out of line with the rest of the world. It may be for one or more of several reasons, e.g., that our prices are too high, that our currency and credit are, excessive, or that we have been over-trading or over-spending. If we are wise we shall permit the export of gold to settle our commitments punctually on due date, and take the proper steps to set our house in order.

The Nation should act in such circumstances in the same way that a prudent merchant would do, and take steps to bring his position into line with the conditions obtaining about him.

The proper corrective is to raise the rate of interest to all sections of the community in Australia. This would be done by the Commonwealth Bank with the assistance of the trading banks. It would, we may suppose, raise its rate of interest on all advances, say, 1 per cent. per annum, and further, if necessary. Experience has shown that an upward alteration of less than 1 per cent. in the rate of interest is seldom effective. Raising the rate of interest would have the effect of checking demands for money and credit. It would tend to limit the demand for accommodation to the genuinely productive sections of the community. It would have the further effect of tending to stop over-buying and overtrading; to encourage exports and discourage inports, and so to rectify the conditions of trade and of our relationship with the outside world which had created the remand for gold for export in having forced the rates of exchange up to a point at which it was profitable to export gold.

Australia is too far developed to-day to claim the right to ignore the principles of sound finance. We must either adhere to the gold standard and be prepared to use the proper and recognised correctives whenever the occasion so demands or sacrifice it. We may not resort to artifices, such as refusing to issue gold for notes when demanded, or placing an embargo on the export of gold. If we owe money to the outside world, and if we wish to preserve our good name as an honourable people, we must pay it when demanded in terms of our individual contracts. Any refusal to do this is repudiation, is an act of bankruptcy.

It may make clearer the question of the maintenance of a gold standard in Australia, to give a brief description of the methods adopted by the Bank of England in its relationship to the London money market.

London is a free market for gold, i.e., there is in London an open market for the purchase and sale of gold.

The Bank of England has to go Into this market and compete there on equal terms with other buyers whenever it requires supplies of gold in addition to any amounts sent to it direct.

The Bank does not control or interfere with the movements of gold, either for export or import or internally. The market is absolutely free so far as the actual movements are concerned. In addition, gold can also be obtained for notes at the Bank with the sole restriction that the amount of gold required is not less than 400 fine ounces; that is to say, the Bank is not required to give gold in trivial quantities a sovereign for a 1 [pounds sterling] note or five sovereigns for a 5 [pounds sterling] note.

The only control exercised by the Bank of England is through the Bank’s discount rate declared every Thursday. If the export of gold grows to an extent which reduces the amount of gold held by the Bank beyond what is considered a safe minimum to hold as a backing for the note issue, the Bank uses its discount rate as a corrective. The rate is raised. Should this not prove effective it may be raised still further until it does become effective.

Should the position not respond to the raising of the rate, the Bank has a means of compelling the market to come to it for finance, which will make the rate effective.

The Bank sells Government securities in the market which has the effect of withdrawing money from the market until such time as the market is compelled to borrow from it at the rate fixed.

Australia has reached another of the great turning points in its history. We will prove ourselves yet again to be a nation capable or facing difficulty, capable of doing the right thing, of following the right ideal and sound principles, even at some sacrifice, may be? Will our financial leaders see to it that the gold standard is maintained at all costs.? That Australia’s name is kept untarnished in the great, world of finance and trade?