Thomas Tooke

Gold Backing Levels of Currencies before and after 1913.

In Gold vs monetary base on May 12, 2012 at 1:56 am

In 1913 Kemmerer wrote.

[…]

Why the is deflation necessary? The strong reason for deflation is that our present gold base is altogether inadequate safely to support the present paper money and deposit currency circulation. While this is true of the United Sates it is true to a much higher degree of most other advanced countries of importance.  The safety and security of our economic organization demand that there be a reasonable relationship between the size of the metallic base and the size of the superstructure of circulating media it supports. Long experience gave each country a rough idea of what that proportion should be under the conditions existing prior to the great war. Of course there were variations in this proportion from season to season but there was in each country a fairly recognized norm about which these seasonal movements fluctuated. A suggestion of how far some of the leading countries have departed from that ratio of mettalic reserve to note and deposit currency circulation that pre-war experience had shown to be the wise one will be found in figures given in the following paragraphs. Unfortunately the metallic reserve ratios of many countries of prewar days and those of today as officially published are not strictly comparable because of changes wrought by the war in currency and banking organization, in methods of computing reserves, and in the character of published statistics.

The figures given below therefore should be considered only rough approximations. Where they err, they are more likely to err on the side of understating the decline in the metallic ratio since pre-war days than in overstating it, for in belligerent countries the war strain encouraged making of as good as a showing as practicable.

The bank notes outstanding from the issue department of the Bank of England on May 20th, 1914, were P52.6 millions against which the issue department held a gold coin and bullion reserve of P 34.2 millions or 65 per cent, which was fairly normal percentage. On March 3rd, 1920, the outstanding bank notes of the issue department were P 131.4 millions, and there was outstanding in addition (March 4) government currency notes to the amount of P 327.5 millions. The combined outstanding note circulation was therefore P458.9 millions. Against these notes there was a combined gold coin and bullion reserve on March 3 and 4, 1920, of P 141.4 millions or 31 per cent. On May 20th, 1914, the Bank of England was carrying a reserve of 43.6 per cent against its deposits, which was a fairly normal percentage, and on March 3rd, 1920, this reserve had fallen to 19.6 per cent.

On December 26th, 1913, the Bank of France was carrying in its vaults a metallic reserve of 62.1 per cent against its notes and deposit liabilities combined, which was about a normal reserve; and on March 4th, 1920, this reserve had declined to 9.3 per cent. The metallic reserve against notes and deposits of the Bank of Italy declined from 71.2 per cent on May 20th, 1914 to 11.2 per cent on October 31st, 1919. That of the National Bank of Belgium decreased from 31.7 per cent on June 11th, 1914, to 5.1% per cent on February 26th, 1920. The Bank of Japan held a metallic reserve of 43.2 per cent on June 30th, 1914, and one of 38.0 per cent on March 6th, 1920.

The metallic reserve of the German Reichsbank was 43.73 per cent on December 31st, 1913, and 2.17 per cent on February 23rd, 1920. For the Austro-Hungarian Bank the metallic reserve declined from 73.6 per cent on June 25th, 1914, to 0.53 per cent December 31st, 1919. In Russia the condition is much worse, where the situation is aggravated, as it is in Germany, by huge issues of paper money in addition to ordinary bank notes.

The neutral countries of Europe are generally supposed to have their banking positions strengthened by the war. These countries are mostly countries of comparatively small populations (Spain being the largest with less than 21,000,000), and of secondary importance as factors in the world´s market for gold.

For the Bank of Spain the ratio of the metallic reserve to circulation and deposits increased from 46.76 per cent on December 27th, 1913 to 62.4 per cent on February 28th, 1920. For the Netherlands Bank there was an increase from 52.4 per cent on March 31st, 1914, to 55.79 per cent on February 28th, 1920. For the National Bank of Switzerland there was a decline from 62.9 % per cent on June 11th, 1914 to 60.5% per cent on February 23rd, 1920. The Bank of Norway showed a decline from 39.7 per cent on June 15, 1914, to 31 per cent on February 23rd, 1920; and the Bank of Sweden a decline from 36.8 per cent on June 13th, 1914, to 31.9 per cent on February 21st, 1920. Every one of these neutral countries has experienced a great increase in the volume of metallic reseve in its national bank, but three out of the five national banks have expanded their bank notes and deposits more than proportionately with a consequent reduction in the percentage of reserve; and one of the other two has not improved its reserve position very much.

[…]

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