PRESIDENT EAYRS introduced the speaker.

PROFESSOR DAY was received with applause, and said:

I thank you for the opportunity of addressing this Club--a privilege which I highly prize--and I thank you, Mr. President, for the kindly words in which you have introduced me. I will speak to you about the Bank for International Settlements. On the 16th of September, 1928 the six Governments most concerned with Reparation payments agreed at Geneva to set up a Committee of Experts for the purpose of drawing up proposals for a complete and final settlement of the reparation problem. The chairman of this Committee was the American, Owen D. Young, and their proposals are known as the Young Plan, without implying that Mr. Young had any more to do with it than any other member. It was one of the proposals of the Young Plan that a Bank for International Settlements should be established. Before discussing this Bank, it is advisable to remind ourselves of the outstanding features of the Young Plan as contrasted with the Dawes Plan which has been operating since 1924. The Young Plan fixedwhich the Dawes Plan did notthe total amount of annuities which Germany has to pay and the period during which the payments have to be made. According to the Plan the last payment will be made on the 31st March, 1988. This definite fixing of the final payment is clearly a factor of great importance; it gives Germany the encouragement of seeing the end of the road, and an inducement to co-operate, which were both formerly lacking.

The second great change was the handing back to Germany of the transfer problem. Under the Dawes Plan, Germany's obligation was definitely limited to providing the money in German Reichsmarks and the business of getting it out of Germany into foreign currencies was entrusted to the Transfer Committee of the Allied creditors. Now under the Young Plan the Transfer Committee vanishes and it is Germany's obligation herself to deliver the annuities in foreign currencies to the value of 660 million Reichsmarks a year unconditionally, and, as to the residue, with the safeguard of conditional postponement of transfer for a period not exceeding two years. It was also part of the plan that the nonpostponable 660 million Reichsmarks should be mobilised or commercialised; that is to say, bonds should be sold to the investing public to an amount representing the capitalised value. This would enable the Creditor countries to receive the capital values at once, leaving the annuity payments to be handed over to the bondholders.

The Young Plan, restores fiscal autonomy to Germany; it involves the abolition of the various foreign Commissions at present operating in Germany--the Agent-General for Reparations, the Transfer Committee, the Commissions for Industrial Debentures and so forth--but it requires some external, financial, and non-political authority to act on behalf of the Creditor Powers in the receipt and distribution of the annuities, in co-ordinating and controlling the arrangements for the commercialisation of the unconditional annuities, and for cognate purposes. It was for these responsibilities that the Young Plan advocated the establishment of the Bank for International Settlements.

The plan of the Bank was outlined in the Young Report; on the 14th of November, 1929 a special Organisation Committee at Baden Baden drafted and published the Charter of the Bank and we are now waiting for the necessary treaties between the Powers to provide the basis for the application of the trust agreement. The Bank is to be located at Basle and to receive a charter from the Swiss government; its capital is to be 500 million Swiss francs, the subscription of which is guaranteed in equal parts by the Central Banks of the seven Powers concerned; Britain, Germany, France, Belgium, Italy, Japan and the United States. Special arrangements, however, had to be made to meet the case of the United States. If that country is willing to cooperate officially--which is most improbable--the Bank's charter definitely stipulates for the Federal Reserve Bank of New York--and not the Federal Reserve Board--to be the representative, but if the Federal Reserve Board of New York is not allowed to co-operate, an invitation will be extended to some private banking institution or group.

The management of the Bank is to be vested in a Board of Directors composed of the Governors of the seven Central Banks or their nominee substitutes, also seven persons representative of finance, industry, or commerce, one nominated by each Governor. The Bank of France and the Reichsbank have each an additional appointee so long as the reparation payments are incompleted. If any other country has subscribed to the capital of the Bank, its Central Bank may submit the names of four candidates of that nationality for a directorship. From the lists so submitted the existing Board may elect by a two-thirds majority not more than nine persons. The only way, therefore, in which Canada could be represented on the Board is for some person or institution in Canada to receive and take the opportunity to subscribe towards the capital. The Board will then by a two-thirds majority select some Canadian financial institution--as we have no Central Bank--to nominate four candidates, and one of them might be elected.

Strictly speaking, the shareholders as such have no voting rights, but arrangements are made for a general meeting to be attended by nominees of central banks and these nominees have voting rights in proportion to the number of shares subscribed in their country.

Thus the control of the Bank is entirely in the hands of Central Banks. That is an important point. The job of the Bank is mainly a technical job, and they want it kept in the hands of technical experts, and to keep out the politicians as much as possible. Important alterations in its constitution are only possible by an Act of the Swiss Government in agreement with the governments signatory to the proposed international treaty.

What is the Bank supposed to do? In so far as the Bank is to be an organ of external administration of the German annuity payments, it is obvious that some such authority had to be established and that, when established and handling such large sums, it is bound to have considerable influence in the money markets of the World. The real interest of the new institution, however, does not lie there. A much greater importance and a much more powerful role have been forecast for it. It is the logical result of banking progress and the coping stone of the edifice of the financial organisation of the World. Just as in most countries of the World the banking system has been given coherence and leadership and made stronger and more economical by the establishment of a Central Bank--or, at least, of the central banking principle--so in the World as a whole is there to be this Super Bank, co-ordinating, steadying, and strengthening,--perhaps eventually establishing a rational control of the purchasing power of gold. These are big claims and big hopes, but they are circumspectly forshadowed in the Young Plan. "The use of the Bank's credit by central banks within moderate limits, and over short periods, may in time become a normal function scarcely different in its exercise from the use of control bank credit by banks and bankers." "In the natural course of development, it is to be expected that the Bank will in time become an organization, not simply, or even predominantly, concerned with the handling of reparations, but also with furnishing to the world of international commerce and finance important facilities hitherto lacking. Especially is it to be hoped that it will become an increasingly close and valuable link in the co-operation of Central Banking institutions generally--a cooperation essential to the continuing stability of the World's credit structure." This Bank is to be a great and promising experiment in an untried field. The centralization of the World's gold reserves in its keeping would render possible and safe, when necessary, a greater expansion of credit and thus avoid that indefinitely long stretch of falling prices, with all their depressing influence on trade, which otherwise, and failing the discovery of new gold mines, is thought by many to be inevitable. People who refuse to believe that the Central Banks of the World would be willing to trust part or most of their gold to the keeping of such a Bank overlook the fact that much of the reserves of the Central Banks has since the War been increasingly kept in foreign centres as earmarked gold or as what the Germans call devisee : foreign credits easily liquidated.

The Bank for International Settlements might be a great and promising experiment, but like all innovations it encounters opposition. There are people who think that the Bank has enough to do as Trustee for the Reparation payments, that any ambitious enterprise tacked on to that will endanger the Bank's success, and they are strenuously opposed to it being made the field for experiments by the doctrinaire advocates of price stabilisation. Some English people see in it a threat to the international prestige of the Bank of England: some French fear it is a device to bring about Anglo-American financial dominance; and some Americans regard it as a consolidation of European interests to oppose American financial power. More serious, because more potent, are the suspicions of the Central Banks themselves. Just as the commercial banks of any country usually instinctively oppose the establishment of a Central Bank, so the Central Banks may dislike this Super Bank, fearing its encroachment on their preserves. It is for this reason that the Organisation Committee have curtailed the proposed powers of the Bank by inserting the veto clause which forbids any financial operation by the Bank in any market or any currency unless the Central Bank directly concerned assents, though this does not apply to the withdrawal of funds from any market if no objection has been raised to the introduction of such funds. It is for the same reason also that the new Bank is not to be allowed to issue bank notes, to accept bills of exchange, or to lend to Governments.

Obviously, the success of the Bank will depend very largely on its management. A board of 25 directors representing seven or more nationalities and not all familiar with each other's language does not sound too promising, and will throw much of the responsibility on the President who is to be elected by the Board for three years and can be re-appointed. It is rumoured--I do not know that this is right but I am passing it on to you--that the first president is to be an American, and the name of a Chicago banker is mentioned--somebody accustomed to being shot at, I suppose--(Laughter) and that the first general manager is to be a Frenchman. The chief danger is that the Bank may try to do too much too soon, but there is no reason to suppose this danger is not realized.

Summarising, the essential reparation functions of the Bank are such as to form a solid reason for its existence; beyond that, if the Central Banks of the World keep deposits with the Bank, it can act as a clearing house for international indebtedness, helping to stabilise the foreign exchanges and going far to eliminate the costs and risks now incurred in the shipping and reshipping of gold. Beyond that again, the Bank may in time provide a cure for the one great fault of the gold standard: that gold does not maintain a stable purchasing power. And away beyond all that, let us hope a time may come when we shall be willing to trust to the integrity and skill of the World's best brains rather than to that somewhat mythical thing, the intrinsic value of bullion.

I have said that the one great fault of the gold standard is that gold does not maintain a stable purchasing power. This is only another way of saying that the general level of prices does not remain steady, that, for example, in 1920 the American dollar could only buy you a little more than a quarter of what it would have bought you in 1896. Now, I have not time to argue out the case that fluctuations in the general price level are an evil. Sir Josiah Stamp has gone so far as to say they are the greatest social evil of our time. They are an evil, a very serious evil, and the World, by tying its monetary units to the value of gold has, while gaining many not-to-be-despised advantages, let itself in for the evil of a fluctuating price level.

For, as we advance in knowledge and power, the output of wealth, of consumable commodities, is ever increasing year by year. Unless our output of money keeps pace with this enormous increase of trade, there is at once a tendency to falling prices. A larger quantity of goods can only be exchanged for the same amount of money as before, if the goods are priced at a lower figure. When, therefore, during the Nineteenth century, there was a stupendous increase in the volume of World trade, there would have been a very great and very detrimental fall in the price level but for the fact that there were a few fortunate gold discoveries and, more important still, people invented acceptable substitutes for gold: bank notes at first and, later, cheques. And in so far as this volume of purchasing power is not backed 100% by gold, we call it credit. But there are limits to which this credit expansion can go: limits which are really psychological in nature. So long as people accept fiduciary money on the understanding that it can be turned into gold on demand, so much gold must be kept by all credit-issuing authorities that the amount will be fully adequate to meet the demands of all who are likely to demand it. It is obvious that these demands will vary from time to time and from place to place, and when at any time and place an increase has not been fully anticipated and arrangements have not been made to meet it completely, a financial panic results.

Now, if every Bank keeps enough gold to meet all probable demands at all times, it is keeping more than it needs at all times except the worst emergencies. It could afford to keep very much less if emergency supplies could be easily obtained, and hence the fundamental advantage for any country of centralising gold reserves, rendering them mobile, and able to be utilised whenever there is a special call upon them. Centralisation of reserves, of course, is of no help if all banks equally and at the same time demand assistance, but this seldom or never happens. The strain starts somewhere and by support given there at once, the danger to the rest is averted. It was found that, when the Federal Reserve System had centralised the gold of the United States, the amount of gold required as a reserve against liabilities could be with safety very considerably reduced; the gold was economised. That is the point I want to make

that the centralisation of gold reserves reduces the amount of gold that is necessary, considering the psychological factors, to support a given amount of credit.

Now, let us look at the future. So far as we can see, man will continue his wonderful progress in the development of natural resources, more and more goods will be turned out for the market year by year. Unless we can increase the volume of purchasing power proportionately, prices will fall and fall, with all the handicap to business activity which falling prices inevitably bring. And this set-back to trade with its attendant unemployment and distress is largely unnecessary. It would not happen if prices kept up. Prices can be kept up if the purchasing power is increased, but how can this be done if new gold mines are not conveniently discovered just at the right time and to the right amount? It cannot be done by an extension of credit, since credit, generally speaking, has already been extended as far as the existing basis permits. Nor can it be done by the use of any further substitutes for gold which, even if one could think of any, would only imply extension of credit. The only solution seems to be to economise the gold we have; in the first place by withdrawing it from domestic circulation where it is not needed, and this has already been done in most countries; in the second place, by centralising it all, not merely in the central reserves of each country, but in one great central fund for the World. If that were done--and this new Bank makes it at least possible to attempt--we could avoid to a large extent that period of falling prices which otherwise is going to be an unnecessary handicap to business enterprise and to the progress of material welfare throughout the World.

This, putting it as briefly as possible, is how things would work. Suppose the output of goods in any country--say, Canada, if you like--increases greatly. To prevent prices falling, credit is extended. Under present conditions, this would lead to a drain on Canadian gold reserves unless other countries also maintained their own proper price levels. The assumption is that, if we develop the co-operation of central banking authorities, they will all aim at keeping their price levels steady. In so far as mistakes are made and price levels get out of gear, a country can be helped out by the new Bank. Instead of allowing Canadian dollars going to a discount, the Bank will lend its credit and provide foreign exchange at the stable parity rate. But the Bank cannot lend its credit like this unconditionally and permanently. The assumption behind the loan is that as soon as, or even before, it became necessary for any country to borrow from the Bank, that country will take, or will have taken, the necessary steps to correct what went wrong. If they had extended credit too far so that their price level, instead of remaining steady, had got out of gear with the price levels of other countries, they would have to restrict credit until the equilibrium was restored and their indebtedness to the Bank paid off. The only theoretical difficulty is what would happen if a country, which had been borrowing from the Bank, refuses to take the necessary steps. What powers of compulsion can the new Bank have? And the answer is, so far as I can see, that it has none, but that it would cut its loss and boycott the country. The advantage, however, of belonging to the World system of credit control would be so great that no country would willingly face expulsion, and hence no powers of compulsion are necessary.

For myself, I can only repeat that I regard the Bank as a great and promising experiment. I trust that it will not be stillborn through a blind American abstention. A year ago the Governor of the Federal Reserve Board stated that he had become convinced that participation in World affairs was a matter of enlightened self-interest for the United States, and he is right. I trust that the Bank will not be crippled by national suspicions or professional jealousies, and I hope that, as it proves its worth and its reliability, its powers may be so extended as to enable it to fulfill completely the wonderful possibilities of service to mankind that are already discernible. (Loud Applause.)

President Eayrs thanked the speaker for his exceedingly lucid exposition of what to many was an involved and intricate subject.