Evening star., 1933-12-29
BY DIR. O. M. w. SPRAGUE,
Professor of Banking and Finance.
Harvard Business School.

Harvard Business School
l"HE establishment Of a monetary
| system and the determination
| of monetary policies that will
i yield q dollar Of reasonably
stable purchasing power in the
future Is an entirely different prob
lem from that with which we have
been concerned in the examination of
monetary and business policies di-
rected toward the immediate need OF
bringing about a trade recovery and
rise in prices. Assuming that that
happy state has now been reached, ]
shall, in this article, consider the
permanent monetary arrangements
which it will then be desirable to es-
tablish.
Broadly speaking. we need a none
of credit and currency will increase
with growth in the volume of trade
| of activity as to induce unhealthy ad-
vances in prices or other undesirable
| developments.
which will SO function as to check
wide departures from economic
equilibrium between the various trad
! ing countries.
These detectives cannot be obtained
by monetary means alone, but we may
reasonably expect that monetary ar
rangements shall be such as to exert
powerful influence in attaining them
An improved international gold stand
! ard, in my judgement, affords the
! greatest promise of reaching the de-
| sired objective. 1t would seem to be
| the obviously wise course to build the
| monetary system Of the future upon the
! foundation of existing knowledge and
experience. Recognizing defects in the
working Of the gold standard IN the
past, we should seek to overcome them
| by specific and definite notifications
of statutory limitations and better
banking practices.
Stocks Now Are Ample.
The first requirement of satisfac'
| tory monetary system is that there shall
be a metallic base which will permit
such expansion Of credit and currency
as shall correspond to growth in the
future volume of trade. 1t is, of course
possible that the output Of gold from
the mines may prove inadequate for the
purpose. As monetary gold stocks art
now ample, this is net a serious matter
at the moment, but 1t is a contingency
that can be met during long perioo
of declining gold production by very
gradual reduction in statutory reserve
requirements Of the Federal Reserve
banks and Of central banks in othel
countries.
In order still further to insure ar
adequate metallic base for credit anc
currency, some part Of the reserves o.
central banks might well be composed
of silver. How far it may be desirable
ultimately to 90 in this direction car
hardly be determined in advance. A
comparatively small percentage woulc
be sufficient to establish the practice
let us say, 10 per cent. Such use Of
silver should also be accompanied by
international arrangements designed te
steady its price.
The advantage to be derived from
more stable price Of silver has beer
somewhat exaggerated by many Wne
favor action regarding this metal. II
could have no direct bearing upon the
trade or purchasing power Of British
India because British India tor long has
| been upon a gold or sterling basis.
From a currency point OF view varla'
tions in the price OF silver are only sig'
| nifcant in the case of China 1t should
| be further borne in mind that any ar
rangement designed to increase The uSt
| of silver in central banks should In
| clude provisions designed to establlsh
| stable value for silver not very far abovf
| its value at the time the arrangements
were put into effect A decidedly hlgnel
nrice for silver than now obtains woulc
he unwelcome in China just as 1t Woulc
be unwelcome in most OF the countrle;
now on a paper basis to return 10 golo
on the basis of a very considerable ap-
of thpjr currency.
After making certain that the supply
of gold and silver shall be sufficient tc
provide an adequate metallic base lol
credit and currency, it is also necessary
to protect that metallic base Itself from
dininution by influences OF a non
monetary character. In view OF recent
experience the future danger OF hoard
inc will be far greater after the return
to gold than in former times after there
has been a return to the gold stanoaro
When, for example, Great Britain
returned to gold in 1925, there was con-
fdence throughout the world that that
country would remain on gold indef1-
nitelv. or at least until there might De
another great war. Having departed
from gold in time of peace, uncertain
ties will linger for generation or more.
Anv untoWard circumstances are nKely
to lead to a revival of Withdrawals Tor
boarding purposes. Similarly, In tne
United States, departure from gold at
a time when gold stocks we're ample Is
| certain to leave fears that similar action
may be taken on some future occasion
Base Is Simplest Problem.
In these circumstances I suggest that
before returning to the gold standard
II is essential that an agreement be
reached between the principal countries
of the world that their central banks
shall only make deliveries of gold be-
tween themselves and that arrange
ments be made for the exclusive pur-
chase of new gold from the mines by
| the various central banks, they in turn
| furnishing such amounts OF gold as may
be required for industrial uses.
| The provision of metallic base ade-
uuate to support whatever amount OF
currency and credit may be needed Is
the simplest part of our problem. Eco
nomic and price stability require In
| telligence and foresight in the use OF
credit, as we'll as an adequate volume
Appropriate measures, when economic
activities are sensitive to influences ex-
erted by the quantity and cost OF creoit
are necessary.
In periods of depression the situation
Is insensitive to these influences. 1t Is
only in periods of business activity that
a potent influence can be exertec
through credit policy. But to know wher
| action should be taken we cannot rely
EXCLUSIVELY upon any price index. Com
modify prices may be reasonably stable
as was the case between 1926 and 1929
and vet the economic situation be such
as to require decided action II stability
is to be maintained.
It would have been possible early II
1928 by credit action to have checked
many Of the unhealthy developments
which brought on the depression-no1
merely speculation on the Stock EX'
| chance hut also excessive foreign lend.