218. Production Of Gold

Underlying the whole question of gold movements - the passage from one market to another of great quantities of specie - is the fact that of the gold now annually produced, a good deal more than half originates in countries which have no great need for a circulating medium, and must be distributed to the banking centers of the countries which have and which produce no gold themselves. The production of gold in 1908 was $430,000,000, of which $150,000,000 originated in Africa and about $80,000,000 in Australasia. Practically all of this new gold has, in the first place, to make what might be called a primary movement from the mines to some center from which it can be redistributed. London is that center; has been from time immemorial. Imports of virgin gold into London between the years 1905 and 1908 inclusive amounted to $700,000,000. Of this amount London retained but $67,000,000. The remainder was all distributed to other countries - $205,-000,000 to France, $170,000,000 to the United States, and the balance scattered among other countries.

It is important to note the conditions under which this distribution of gold takes place. The gold market in London is held every Monday morning. On that day there is a public auction of the new gold which has arrived during the past week. The brokers representing the various foreign banks and the local banks as well, come prepared to bid for the new gold according as the exchange on various points allows them. The Bank of England is required by law to buy all the gold offered it at the rate of 77 shillings, 9 pence per ounce (that is to say, gold of the fineness of British sovereigns, .916-2-3). Above this amount the brokers can bid according to the urgency of the demand on the part of the principals whom they represent. Gold very fre-quently sells very much above 77 shillings, 9 pence - during the panic of 1907, in fact, the rate went up as far as 78 shillings, 2 pence per ounce.

219. Distribution Of Gold

But after the gold has been taken in London and sent to various foreign centers it does not follow that the distribution is complete. Financial conditions obtaining at those points may make it possible for the time being for representatives of bankers at those points to go into the London market and get gold by bidding for it, but later these conditions may so change as to necessitate a further readjustment. Frankfort, for instance, may be in a position to obtain a good part of the gold arriving during some week in London, but in a very short time it may come about that Paris may be able to draw most of that gold from Frankfort. And so there is a continuous movement set up, after the first radiating of the gold from London, which might well be called a secondary distribution. When exchange is high gold goes out and when exchange is low gold comes in. It may seem almost too elementary to mention this, but for a clear understanding of the various influences which govern gold movements it is indispensable that the idea should be firmly established how the movement takes place along the lines of exchange rates. When exchange on a point is high it indicates primarily a scarcity of exchange and a great demand. Consequently when the demand comes to exceed the supply some other medium of exchange must be found and gold goes out. Conversely with regard to imports, when exchange on any point is exceedingly low, as for instance when it is possible to buy a pound sterling in New York at $4.84 or $4.83, gold naturally tends to come in. When a pound can be obtained at so low a rate it is possible to go into the foreign markets and pay a premium for gold. It is the simple idea that when a draft on any place, local or foreign, can be cheaply obtained, it is possible to go into that place and pay a high price for anything which you may happen to want to buy.

The difference between gold exports and imports is, after all, merely a matter of view point. We consider that we are shipping gold to London; London considers that she is importing gold from the United States. It is one and the same thing, merely a question as to how you look at it. Understanding the causes which make exchange high and thus causes gold to flow from one country to another is understanding the causes which govern both exports and imports of the metal.