Associate Professor of Political Economy, McGill University"
CANADA is not at present on a gold basis. Although the Government does not admit that its demand notes are not redeemable in gold, and probably does actually redeem such as are presented for redemption, it effectually destroys all incentive to the holder of such notes to demand their redemption by depriving him of two of the most elementary property rights in the gold which he obtains in exchange for them—the right to send it wherever he wishes, and the right to change its form if he so desires. He cannot export it from the country, and he cannot melt it down for bullion. This means that Canadian money paper is not redeemable in real gold, gold with no strings tied to it, gold which will be the absolute property of the holder.
Canada can go on a gold basis tomorrow', by removing the existing limitations on the uses to which gold can be put—by permitting export and conversion into bullion. As this is the natural and invariable practice of all gold-standard nations in time of peace, it is not necessary to argue in favor of it. The entire burden of proof rests on those who claim that the gold basis should not be restored at the present time; and the only argument w'hich can be received from them is the argument that to restore it at the present time would involve serious risks. But since all the risks that could possibly result from the restoration of the gold basis could be instantly neutralized again by the re-enforcement of the prohibition on export, this amounts to saying that the only argument against the permission of export, that’ is, against the restoration of the gold basis, is the danger that we might have to revert once more to its prohibition.
Let it be admitted at once that this is a serious argument, that indeed, if well founded, it is probably a sufficient argument against the immediate freeing of gold from its restrictions. It would be more detrimental to the stability of credit, the confidence of business, and the repute of Canada abroad, to restore the gold basis today and then be compelled to abandon it again, than not to restore it until it is absolutely certain that it can be maintained. The question for consideration, therefore, is the degree of probability that Canada will not be able to maintain the gold basis if it is now èstablished, or, alternatively, that the cost of maintaining it will be greater than the benefits result ing.
What are the Risks
THE sole danger to which Canada would expose herself by permitting the export of gold is that of an actual exportation so great as to reduce our domestic gold reserves below the amount necessary to maintain faith in the security of the currency. This can only be brought about by the circumstance of our imports of goods and our obligations for interest and principal on foreign debts exceeding our exports of goods and our claims for interest and principal from our foreign debtors, and our being unable to adjust the balance by further foreign borrowing, on terms not too onerous.
Even if we admit for the moment that there is a possibility of our imports and our debt obligations combined exceeding, at times during the next few years, our exports and our claims against our foreign debtors (and it is true that our annual interest obligations to outsiders probably exceed the amount of our favorable trade balance as shown in the last two years, of somewhat over fifty million dollars a year), is it conceivable that we could experience any difficulty in obtaining from the United States, the world’s present
reservoir of gold, any supplies of that metal which might temporarily be necessary in order to enable us to meet this deficit and maintain our domestic gold reserves at whatever level we might think proper? No one doubts the ability of Canada in the long run to produce a sufficient surplus of goods over above her consumption to pay her foreign creditors every cent that is due them; but if, by reason of an abnormally poor crop or some other cause, that surplus should not be available in one particular year, is it any less dignified or less safe to obtain a loan by negotiation than to enforce a loan by depriving those who possess claims-forgold in Canada of the right to get their gold and do what they wish with it?
To retain the present prohibitions means that instead of relying on our credit among the nations for the adjustment of a possible unfavorable balance, we rely insteadupon the effects of a depreciated currency for preventing that unfavorable balance. But we have already had some experience of the latter method, and it was not brilliantly successful. A very heavy depreciation of our currency was permitted some two years ago, and its most immediate effect was not the curtailment of our imports, but rather their temporary expansion; for depreciated money and a rising price level led to extravagant profits in many lines of business and consequent heavy purchases of luxury goods. In the long run a depreciated currency doubtless does cure an unfavorable balance of trade, but it only does so through a long and painful process and often after first enhancing the disease.
What Restoration Would Mean
THE present prohibition of gold export means a Canadian currency subject to unlimited fluctuations in purchasing power. The restoration of the gold basis means a Canadian currency whose purchasing power is at least as stable as the best standard hitherto in use among civilized nations can make it, and cannot under any circumstances vary materially from that of the nation with whom we do the largest amount of business and from whom we must, until Great Britain herself is on a gold basis, expect the largest amount of credit support.
A depreciated Canadian dollar did not attract any proportionately large amount of investment from gold-standard countries in spite of the immense profits it offered for it impaired the confidence of such investors. A Canadian dollar at par with gold, even though not itself a gold dollar, is attracting^ foreign investment, and is actually in itself a proof of confidence. But a Canadian dollar which is actually a gold dollar, and which the Canadian Government undertakes to preserve as a gold dollar through any difficulties less overwhelming than those of a world war—surely such a dollar would give us a better claim on the confidence and the support of outside investors than any compromise currency.
Our present gold reserve (October 31, 1922) consists of 93 ká millions in the Treasury, 10 millions in the Central Gold Reserve, and 92 millions (including subsidiary coinage) in the banks; a total of 195 ká millions. It is capable of being increased and will probably be increased during the next two months by part of the proceeds of the abnormally high cash reserves now held by the Canadian banks in New York, amounting to 95 ká millions of deposits with American banks and 195 ká million's of call loans. On this basis we have outstanding a volume of currency Continued on page 59
Continued from page 4
consist:ng of 178 J4 millions of bank notes and 197 millions of Dominion notes (exclusive of those contained in the Central Gold Reserve, which are themselves the basis of an equal amount of bank notes') : a total of 3753 2 millions.
What of Our Potentialities?
THE ratio of gold to notes is not as high as it has been at other times in our history, but it is by no means so low as it has been at times since the war. And it is not the gold that one has that matters, so much as one’s ability to get more. Canada could add another hundred millions to this reserve if she chose to do so, but it would cost her six or seven millions a year in interest and it would not be worth while unless the present reserve were brought a good deal lower. It is worth remembering that the existing reserve need not be reduced by any other means than the redemption of Dominion notes, and that every such redemption cuts into the supply of currency available in the country. It is highly questionable whether as much as a hundred millions of notes could be redeemed, and thus a hundred millions taken out of the reserve, without reducing our currency supply below our requirements and thus causing prices to fall below the level prevailing in the United States which would automatically curtail imports, stimulate exports, and thus restore the gold supply.
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