ECONOMISTS' REPORT.

Press, Volume LXVIII, Issue 20488, 5 March 1932, Page 19

ECONOMISTS' REPORT.

Jks Committee in its report^says:— He prosperity of New Zealand has Inb closely dependent on two main fictor*—the movement of export prices ttl the volume of overseas borrowing, lite export prices rise, New Zealand bnb to benefit, for several reasons. Vim it is remembered that pastoral QM daiiy products alone account for am/ half the total national income ttlH par cent, of the total value of ttfttta, the significance of changes in of primary products will be Appreciated. It is a well-known W that farm costs, and the expenses placing farm products on the marMi novo much less readily than marin jrioea. Hence, when export prices tiara tends to be a proportionately pltou rue in prices at the farm. to'the relative fixity / of> farm «*t», the net income of the farmer (cab'to rise in even greater proporttau Thus, pending an internal adjustto the- higher prices, the farmer * * set sain over the rest of the com•■ity. The expansion of farm producthereby stimulated, and the fardemand for other goods is in- £****&• Injthia way the prosperity in iodttstries stimulates prosperity «* other industries. Furthermore, when «P°rt prices rise, New Zealand benebecame it is a debtor country. VftrMM obligations are fixed in terms currencies. Hence, with f ' r * ee * ®*P r esßed in such currenft smaller quantity of exports is to meet external interest obli•J* 3 ® 0 * In other words, the amount of ig*®We required to pay interest on exJy remains unchanged, while income of the community is ' er ® " a * Bo 4 tendency for im'ELSt 08 '° behind export prices, imports are, in the main, manuJ?®jproducts, the prices of which '23? M the prices of food>2Rs: ** w materials. A rise in exen benefits the community *»J«iole, because a given volume of JP®*> will exchange for an increasing ■*wwe of imports. CAUSES OF THE DEPRESSION. i measured by present standards jy 7®*ra 1928 and 2929 are now begin|g!|pto bo regarded as years of prosI l"™'' , ®ogh at that time business *" w looking forward to a recovery th «7 believed to be a trade -twmoil, in certain important re- » aituatiorf in 1928-29 ras I different from the at the present time. In a export prices were compara- »» while import prices were L in any previous period since ad were still falling. Hence xportg represented purchasing r a nigh volume of imports. tt g position was sound »and the ■JJosits to advances was high, •ppeared to be set for a con- * Prosperity, but a change of already preparing. The movo- ® expenditure in relation to ! far from favourable; com- • wholesale prices, nominal ?. r ' sin ß and retail prices had 8 b for several years, thus .°?' avour able movement ■iquatnal costs and Belling was increasing i n Emigration and de- » 1921 2 9 Vel ° f CXPOrt ValU6B fspltal Expenditure. I of business activity in those austained only by the con-

♦— . Loss of National Income. REDUCTION IN INTEREST AND WAGES. Balancing Costs and Prices. ITHE PRESS Special Servico.] WELLINGTON, March 4. The report of the Committee of Economists charged by the Government with the task of examining the financial and budgetary position of the Dominion was released for publication to-day. The members of the Committee were Dr. James Hight, Rector of Canterbury College (chairman), Professor H. Belshaw; Auckland University College, Professor D. B. Copland, Dean of the Faculty of Commerce at Melbourne University, Professor A. H. Tocker, Canterbury College, and Mr A. D. Park, Permanent Head of the Treasury. The Committee has discussed at length the basis of past prosperity and the over-capitalisation which came with the post-war boom,, the causes of the depression, the loss of national income, the distribution of loss: of income, and the general effects of the depression on public finance. The problem of readjustment is stated under the following three heads: (1) To remove price disparities by increasing the receipts of farmers, or decreasing internal costs, or by a ' combination, of both; (2) To spread the loss resulting from the depression more evenly over the community; and (3) To balance the national and local body budgets. The Committee dismisses as unwise any expectation of adjustment through a substantial rise in export prices, and states as a fundamental requirement the removal of the disparity between farm costs and farm selling prices. As part of this problem the Committee examines the exchange rate problem, and it points out advantages, and also disadvantages, of a high exchange rate. » Tho Committee recommends adjustment in fixed charges —interest and rent —and in wages. The reduction in fixed money charges suggested is a reduction of 20 per cent., and in wages a reduction of 10 per cent. It also mentions that in view of the changed economic situation undue restrictions on working conditions should be relaxed.

tinuance of the policy of expanding public works with borrowed money. There was injected into the country from abroad during the few years preceding 1929 added spending-power amounting to about £sm. net per annum. Changes in the transport system and the demand for hydro-electric development resulted in considerable expenditure on high-class roads and elcctric-power schemes. It was already evident that the country was becoming ovcr-capital-ised in regard to public works. Even apart from the depression of the succeeding two years, some reduction of capital expenditure on public works would have been necessary. If the volume of capital works undertaken by the Government and by local bodies is considered in rolation to existing population, there can be no doubt that much of this work was greatly in advance of its time. This condition may bo remedied gradually as population 'increases, but it adds appreciably to the problem of readjustment on account of the additional burden of debt and maintenance which it has necessitated. Lack of Balance. In effect, this means that even prior to the depression there was a lack of balance between capital expenditure and expenditure on goods for immediate consumption. Even if external causes had not brought about the depression of 1930 and 1931, we should have been faced with a problem' of readjustment. A siowing-down of tho public and private capital expenditure was necessary ,tn bring about economic equilibrium, and was, indeed,, already taking place, as was exemplified in the decline in the values of building permits, mortgages registered or discharged, land transfers, totalisator investments, and railway freights^ The increase in unemployment from 1920 to 2929 is partially explained by the recession in capital expenditure. This recession would have raised a problem of economic adjustment and of labour transfer in New Zealand, whatever had happened outside the Dominion. At a time whet the economic machine was thus out of Adjustment it was subjected to the terrific strain of rapidly falling prices. This raised a new and more serious problem. Price Disparities. The fundamental cause of the depression in New Zealand is the fall in export prices, combined with the failure of other prices, including interest, rents, wages, fees, taxes, and other payments for services, to fall in sympathy. These djfferences in price movements are due, in the main, to the retarding influence on some prices of contract, agreement, or custom. Thus the farmer or business man whose products are falling in price is faced with interest payments or rent whiclf are fixed for a considerable period, while "the wages and salaries paid to his employees tend to lag behind the prices of his goods. Hence profit margins shrink rapidly and may* disappear. This leads to ' a further curtailment of demand, so that a further fall in prices is necessary if output is to find a market. Since profit is the mainspring of enterprise and productive effort, production must fall off and unemployment increase. Hence the only way in which economic recovery can take place is to cause the profits of enterprise to emerge or increase. Practically this means that a readjustment must occur between selling prices and costs. The price disharmony is responsible for our troubles. Since 1928, wholesale prices as a whole have fallen by about 10 per cent., wholesale prices of imports by about 3 per cent., retail prices by about 11 per cent., and money wages by' about 12 per cent. During the same period export prices fcave fallen by about 43 per cent.; but the fall in the index number of farm expenditure, which provides an

approximate measure of; the movement of farm costs, is only about 10 per cent. Meanwhile, despite some economies in public expenditure, it has been found necessary to increaso tho rates of taxation and levy additional taxes.

Changed Purchasing-power of Expotfs. The first effect of the disparity between the-movements of different prices has been a substantial fall in tho vol-; ume of imports that can be purchased by a given quantity of exports. Expressed in sterling, the fall in export prices has been of the order of 47 per cent., while the fall in imports has been of the ordpr of 12£ per cent. Hence CO "per cent, more exports must be sent abroad at the present time to pay for a given quantity of imports. Further, the sum due for services of Government and local body debts payable overseas, which amounts approximately to £9 m. annually, is fixed in terms of money, and this must bo paid out of the proceeds from the sale of exports. Owing to the fall in export prices, about 80 per cent, more exports must be sent abroad to pay this interest than were required in 1928. This means that if the total volume of goods- and services produced remains the same the community as a wholo is able to consume a smaller quantity of goods than formerly. A serious disparity has occurred between farm costs and farm sellingprices. This raises the crucial problem in Now Zealand. Before we can recover from tho present' depression primary industries must be plaeed on a satisfactory basis that will show a profit. No other measures will bo adequate to restoration. Tho serious naturo of the crisis in farming is further revealed by statistics showing the value of farm production. The following estimates are in New Zealand currency, and so allow for tho increased values due to the higher exchange during tho past year:—

Value of Tarm Production. 1 car ended. Exports. Total, £ ni. £m. June, 1929 .. 55.2 ,82.1 June, 1930 .. 46.2 72.2 June, 1931 .. 3G.S 56.0* • December, 193.1 .. 35.1 54,2* *Estimatcd.

On the basis of the above figures, it is clear that the gross income of the farmer ia likely to bo between 30 and 40 per cent, less for the season 1931-32 than for the season 1928-29. Sinco costs from the farm to f.o.b. are very rigid, and since costs on the farm have not fallen, according to the index of farm expenditure, by more than about 10 per cent, during the period, it is clear that the net income of the farmer has fallen by much more. A shrinkage of such magnitude in the farmers' spending-power will not only be reflected in reduced demand for the goods of importers, traders, and local manufacturers, but also weaken the security of mortgagees and embarrass financial institutions. The removal of the disparity between farm costs and selling-prices is the only way in which farm production is likely to be increased or even maintained. The Loss of National Income. Wc have estimated the national income in 1928-29 to be £l5O m. This estimate is arrived at as follows: In 192526 the Census and Statistics Office estimated national income at about £136 m. In the same year production was estimated at £ll2 m. Thus national income was approximately 20 per cent, greater than production. This would give a national income of a little more than £IOO per head of the whole population in a period of prosperity. A comparison with the national incomo per head in othor countries enables us to arrive at the conclusion that tho estimate of a little more than £IOO per head is reasonable in the circumstances.

Prom 1929 to 1931 export prices fell continuously and are now approximately 40 per cent, below their lovel in the period Those are prices in New Zealand currency.'When converted into sterling tho fall in export prices amounts to over 45 per cent. This fall has cut deeply into the income received from exports. For these years the sterling value of New Zealand exports was approximately £55 m. In 1931 it was £32 m., and with present export price.s it cannot rise appreciably abovo this figure. There is consequently a direct loss of £23 m. in tho income from exports. In tho period of prosperity overseas borrowing formed part of the national income, becauso it supported production and employment for a large number of people. » Tho net amount of overseas borrowing for the period of 1926-30 was about £5 m. per annum. If this is discontinued a further loss of £5 m. is involved. This would make a total direct loss of income from abrdad of £2B m. During the period of readjustment overseas borrowing of a diminishing- amount would ease the diffi-' cultics of New Zealand. We must, how(ever, assumo the ultimate cessation of overseas borrowing. When this position has been reached, then the loss estimated on present export prices will bo £2B m. In the , meantime, however, some recovery in export prices might reduce this direct money losb. I/OSS of Beal Income. The passing-on of the loss of income from one . section of the community causes an increase in the money loss until the loss of real income is fairly evenly spread throughout the community. What will be the loss of real income? The adjustment in national income from £l5O m. to £9O m. is in considerable part a price adjustment. Export prices having fallen by 40 per cent, it would ,be necessary, in order to relieve the exporter, for general prices to fall nearly 40 per cent. It is not necessary for them to fall by as much as 40 per cent., because this would relieve the farmer of the whole of the loss of his real income by the process of readjustment. If 35 per cent, is a sufficient average fall, the general decline in the money value of the national income will be 35 per cent, of £l5O m.—namely, £52.5 m.—which reduces the national income to £97.5 m. With exports at £32 m. and a normal overseas obligation of £9 m. for debt services and pther charges, imports will be reduced from approximately £46 m. to £23 m.—that is, by £23 m. Prom one point of view the national income may be considered as the total goods and services consumed —namely, home-produced goods and services locally consumed, and imports of goods and services rendered by other countries. On account of the fall in exports, imports have to be reduced and fewer external sefvices can be paid for. Therefore, even if the internal production of goods remains the same, there will be a loss of national income for the year of one-sixth—that is, £23 m.—on an income of £l5O m. beforo the crisis. But as costs fall and the average standard Of living is reduced, some expansion of local production' may be anticipated. This will- take place partly in export production, partly in home production competing with imports, and partly in sheltered production. As this favourable movement develops and the gap between import, and export prices is narrowejd, the loss of real income will be reduced; but for the immediate future it may safely be assumed that the real income of New Zealand will be from 10 per cent, to 15 per cent, lower than it was before the crisis. Part of the problem before New Zealand is to secure a speedy and equitable distribution of this loss of real income. The loss of national money income is now increasing at a rapid rate. We have been supplied by the Government

Statistician -with figures of production for 1930-31. The total value of production was estimated at £9B m. compared with £125 in. for 1928-29. This is a fall of nearly 22 per cent. This estimate of production for 1930-3 V includes £23 m. for factory products, £ll m. for builders, labourers, and industrial workers, etc. These items have suffered a contraction since March 31st, 1931, on account of the decreased demand from primary producers. _Moreover, there was a further fall in the value of exports throughout 1931, compared with 1930. This fall is not included in the production figures for the year ending March 31st, 1931. The con; traction of output in secondary production, together with the reductions in export- values, will bring down the total value of production much below'£9B m. We estimate that the national income is now of the order of £llO m., but it is declining at a rapid rate. Its decline will not be arrested until the process of economic readjustment is well established. As this process must involve a reduction of costs and prices to close conformity with the level of export prices, the reduction in the money value of the national income must be of the order of the fall in the export prices, as stated above.

From another point of view it is possible to check the extent of the fall in the money value of the national income necessary to restore economic conditions. The price level in New Zealand has not been adjusted to the fall in tho price level in Great Britain. If the average of the Board of Trade and the "Economist'' wholesale prices index numbers be taken, it is found that in November, 1931, it was 98 compared with 100 in 1913. On the same date the Now Zealand index number was 132 on the basis of 1913 as 100. What adjustment in Now Zealand prices must bo made to restore parity of exchange with London as the natural rate of exchange? It would bo wrong to assume that a reduction to 98 would be sufficient. In 1913 New Zealand was borrowing in London, and she has continued on this course since that time. It is a recognised fact that the price lcvol of a borrowing country is sustained at a figure higher than would bo possible in the absence of borrowing. New Zealand will doubtless find it necessary to reduce its external borrowing, except for conversion operations, and possibly even to eliminate it altogether-. In this event the prop to a higher price level will be knocked away, and New Zealand prices should fall below tho English level if both are taken on the common base of 1913 at 100. If we assume parity of exchange, the fall in internal prices required would be from 132 to some figure below 98, say, 90. This is a fall of 40 per cent., involving a revaluation of the national income from £l5O m. to £9O m.; but there is also the loss of borrowing and its repercussions upon internal production, which would bring down the income to about £BO m. It is probable, howover, that as costs were reduced, some expansion of export production and secondary production competing with imports would take place. In this event the fall would not be as low as £BO m., but might reach £so m. These estimates are naturally to some extent speculative, but they present a picture of the loss of income which we bcliove to be a reasonable indication of the magnitude of the problem before the country.

Prom yet another angle, we may attempt an estimate of the present loss of income. Exports have fallen £2O m. in New Zealand currency. There has been a price adjustment of approximately 10 per cent., which may be applied to all tho national income of 1929 other than exports and borrowing—that is, to an amount of £9O m. This gives a further reduction of £ll m. It is well known that tho building industry alone has suffered severe contraction, and we may put its loss at £ 6 m., which amounts to 60 per cent, of its operation in 1929. For all other industries, including factory production, transport, and professional services, a loss of £6 m. would not bo an excessive estimate. The total of these losses is £4l m., thus bringing national income down to approximately £llO m. We conclude, therefore, that national income has fallen from £l5O tn. in 1929 to £llO m. at the present time, that •the fall is still proceeding, cud will reach approximately £9O m,..if adjustment is made on an exchange rate of 10 per cent., unless export prices rise or there is a substantial expansion of internal production. Tho gravity of the situation as portrayed by these figures demands a consideration of tho distribution of tho loss of income..

The , Distribution of the Loss of Income, Money and Real.

We have found, that export producers have incurred a money loss of overseas income of £23 m. in sterling prices and £2O m. in New Zealand currency. This is not their only loss. The total value of farm production in 1929 was £B2 m., while the estimated value at the end of 1931 was £54 m. This is. a loss of £2B m. in New Zealand currency. It is not, however, the loss of real income to export producers. Costs and wholesale prices have fallen by approximately 10 per cent. Therefore export producers could have suffered a reduction in money income from £B2 m. to £74 m.—that is, a loss of 10 per cent, without suffering any real loss. It follows that the loss of real income now borne by expert producers is expressed by a purchasing power of £2O m. The Unemployed. We have estimated the total loss of money income at the present time as £4O m., of which £2B in. has fallen on export producers. Another section of the community severely hit by the loss of income is the unemployed, the total amount of whose loss it is difficult to assess. A rough measure can be devised if we assume that no fewer than thirty thousand additional workers have been thrown out of employment on account of the economic depression. This is approximately 60 • per cent, of the total unemployed at present. These thirty thousand unemployed are being supported to the extent of about £1.5 m. from the rest of the community. Normally their combined income would be not less than £5 m. Hence at least £3.5 m. of the loss of income has fallen upon the unemployed. The reduction in wages, the decline in profits, higher taxation, and the contraction of output account for the balance of the loss. In many of these cases, however, the money loss has been insufficient to impose any appreciable loss of real incom6. As the cost-of-living index has fallen 11' per cent., a reduction of money income of anything less than 10 per cent, may leave the recipient in much the same position as in 1929. This is true of most' wags and salary earners' in full work. For flic most part the reduction in money income in these groups has been less than the fall in the cost of living. These statements must be qualified in so far as wage earners and salaried workers require to meet interest and other fixed charges on house property. Recipients of Fixed Incomes. We have been unable to make a close estimate of the total amount of the national income that is paid in fixed money claims, which include .rents on long-term leases, interest on the public and local body debt held internally, interest on mortgages, interest 6n banks and saving banks deposits, and interest on debentures and preferenoe shares..

Nor have we' been able to estimate the reductions that have taken place in the interest paid on these several classes of investments. Apart from renewal of securities at lower rates, no reduction has taken place in interest on the public and local body debt held internally, and amounting to £9 m. per annum. This is a substantial proportion of the total interest burden, probably not less than one-third. In many cases interest on mortgages is not being fully paid or concessions have been granted by the mortgagee. Some reductions have also taken place in bank deposit rates, and as existing contracts expire the total amount of interest paid on bank deposits will decline by from 10 per cent, to 15 per cent. Reduction of interest by $ per cent, on public borrowing was arranged from the Ist August, 1931. Additional taxation to the extent of £0.5 m. was imposed on recipients of investment income, which includes incomes from dividends on shares as well as fixed interest. But over the whole field of interest the reductions at present have been far from sufficient to relieve industry from the additional burden of fixed charges imposed by the fall in prices and contraction of output. It is part of the problem of the distribution of the loss of income to spread the burden as equitably and rapidly as possible over this element of income as well as other elements. When this process has been completed costs will be reduced, the loss of national income will be distributed over the whole people, and unemployment will be relieved. Necessity of Speedy Adjustment The greater the total money loss of national income the more difficult it will be to secure a speedy and equitable distribution of the loss. Thus, if parity of exchange were rcstorod, the money loss of export producers would be increased and the degree of adjustment required in all prices, wages, incomes, and fixed charges would be greater. The higher the money value of the national income the lower is the loss and the Ipbs the magnitude of the adjustments V 5 be made.

DEPRESSION OF THE PUBLIC FINANCE.

The depression found New Zealand public finance, like that of other debtor countries, in a condition ill fitted to withstand any severe shock. For years past the volume of taxation, expenditure, and debt, both State and local, had been expanding, until by 1929 they had reached levels which imposed severe burdens even in times of abundant prosperity.

Allowing for a duplication of £7 m. lent to local bodies by State Departments, the total debt in 1931 was not less than £340 m. and the debt pdr head at least £220 State and local body taxation combined amounted to over £25 m., or nearly £l6 per head, being probably one-sixth of the total national income. This heavy burden of taxation and rates was a factor in maintaining costs at levels that hampered industry. High costs were a direct cause of unemployment, which, in turn, demanded even higher public expenditure and consequently higher taxation and rates. A further weakness lay in tho fact that a high proportion of the expenditure consisted of fixed charges, while on the revenue aide tho greater part of tho income was very sensitive to changes in the taxpayers' prosperity, and was likely to decline heavily in time of depression.

Analysis of Expenditure and Revenue. . Out of total expenditure from the Consolidated Fund of £24.7 m. in 193031, £ll m. was for debt service, and a further £6 m. was included in permanent appropriations, which left the amount subject to annual vote, and therefore more readily reducible, approximately £7.5 m. Of the revenue, 43 per cent, was from Customs, which" depended on imports. But imports normally expand and decline following upon similar changes in exports and in public borrowing abroad. The depression of prices has meant not only a drastic reduction in exports and imports, but also reduction of public borrowing abroad, which lias further decreased imports. Moreover, the decline tends to be heavy in semi-luxury items on which taxation is highest, so that the yield of Customs while duties are unchanged may decline even more than imports. The remainder of the taxes —income tax (21 per cent.), death duties (9.5 per cent.), land tax, totalisator taxes, etc. —were directly or indirectly dependent largely on the profits of industry and endeavour, and the bulk of them were graduated. Since depression hits profits first, the decline in revenue from such taxes is likely to be much steeper and heavier than the decline in national income. Interestearning assets, too, were represented largely by advances to farmers and others and by capital invested in transport, etc. All these sources have suffered heavily, and a decline in this revenue is inevitable. . Revenue and National Income. As the result of falling export price's, reduced overseas, borrowing, and the consequent depression, the Dominion's national income has been reduced, between 1928-29 and 1931-32 by round about 27 per cent. But the decrease in taxable capacity has- been far greater. For taxable capacity consists not of the total income, but of the surplus of income above the bare necessities of production and of living, and this surplus has suffered a reduction much greater than the total income of the country. This is illustrated by the drastic change in the Budgets for 1931-32. With the total Consolidated Fund expenditure under £25 m. in 1930-31, a prospective deficit of £6.8 m. estimated for 193132 had to be covered. In the supplementary budget issued in September a further £1.6 m. had tcr be provided for. Even with the adjustments made to cover these prospective deficits, the expenditure for the year 1931-32 is likely j to. exceed revenue by a substantial amount. A factor contributing largely i to this'position is the new expenditure] imposed upon the Consolidated Fund for unemployment relief. Burden 6f Fixed Charges.

A further effect of depression is found in the increased burden of fixed charges on the real income of the community in times of falling prices. It is commonly stated, and is roughly true, that in recent years of high prices the returns from New Zealand wool exports, have been sufficient to pay the overseas interest bill twice over. In 1930-31 and 1931-32 the proceeds of a similar volume of wool exports would pay only about half of the interest bill. Expressed more precisely in terms of average exports of all kind, whereas 1000 units of exports paid for certain amounts due as overseas interest in 1928-29, 1600 units were required in 1930-31, and 1630 units were required in 1931-32 to pay the •same amounts. The fall in export prices during the past two years has therefore meant an increase- of 60 per cent, in the burden of the national debt held abroad, and this extra burden of interest can be reduced only by an upward movement of export prices, or by conversion at lower rates. Similar reasoning can be applied to locally held debt, but the increase in burden is less because internal prices have as yet fallen much less heavily than export prices. Over recent years the burden of interest payments on the taxpayer has been increasing in foui; aeparat« ways. l

which are cumulative in their effects. This burden has increased—(l) By the rapid increase of debt. (2) By renewals of debt at. higher ratos of interest not wholly offset by other renewals at lower rates. (3) By the declining interest-earning capacity of public works, due in part to the recent expenditure of heavy sums on new works which fail to meet their interest bill. (4) By tho fall in prices, which moans that more produce must bo sold to meet the interest bill. In local body finance also problems similar in nature, though as yet less in degree, occur when prices fall. Revenue is likely to fall off and „to be increasingly difficult to collect. Earning assets find their income decreasing, while their fixed charges remain rigid. The field of reducible expenditure is found to be limited, while the demand for expenditure - on social relief increases. Thus, while the ratepayers' capacity is reduced by depression, it is often found difficult to reduce rates, especially where debt is heavy; and, as prices rise and incomes are reduced, the real burden of rates is increased. Position of the Taxpayer. In times of depression, when much public attention is directed to public finance, it is apt to be forgotten that the average individual taxpayer faces difficulties similar to those of the taxing authorities.' The State, the local body, and the taxpayer alike find themselves obliged to meet fixed charges out of reduced incomes. . If the price level and ' the national income are reduced more than taxation and rates are reduced, then the average taxpayer finds that he has to bear not only the burden and difficulties imposed on him by the general cut in his own income, but also the additional burden imposed by the taxing authority, which takes perhaps a less amount, but still a greater proportion, of that reduced income. This extra burden is well illustrated in. New Zealand, where in 1928-29 from an estimated national income of £l5O m. the State and local bodies took £24 m. in taxation, or 16 per cent. In 1931-32 the national income is estimated to total £llO ni., and tho average taxpayers' income has been reduced in proportion—that is, by 26 per cent. But State and local taxation budgeted for sums amounting roughly to £26 m., which is nearly 25 per cent, of the national income. The difficulty found in realising such' Budget estimates suggests that the limit of taxable capacity is very near.

THE GENERAL PROBLEM OF READJUSTMENT.

In discussing the readjustment of eeo- ' nomic conditions in New Zealand to the new situation the money and the real losses of income must be distinguished. We have estimated the Teal loss as Jrrom 10 per cent, to I's per cent, of the national income in 1929. It follows that, whatever the internal price level of the immediate future may be, the average, standard of living will fall from 10 per cent, to 15 per cent, so long <as export prices remain low. With increase in the productivity of existing enterprise from higher efficiency and with the expansion of production, whether export, sheltered, or protected, somo of this real loss will be made good, and the standard of living may revert to the 1929 level and may even rise above it! In the short period, however, it is unwise to assume much relief from this cause. We are not unmindful of the, possibilities of increasing productivity, but the loss of real income has been so great that a fall in the general standard of living is inevitable in the immediate future. Should productivity increase, the community will benefit. Whilst every effort to this end is to bo encouraged, we feel that the situation is such as demands a speedy adjustment to existing conditions, and that tho country cannot afford to wait upon the slower processes of ordinary or normal productivity improvement or risk its future on chance movement of prices. Level of "World Prices. We have also taken as a basis the present level of export prices. There can be no doubt that a level of world prices' lower than' that to which we have been accustomed must bo accepted. Wo do not suggest that there may not be some improvement, in world prices. On the contrary, as will be shown later, we hope that export prices will rise to some extent, so as to bring to a rapid conclusion the process of readjustment through which the community must pass. Wo must, however, emphasise the fact that the present depression differs from any that New Zealand has experienced during the past forty years—a period when world prices were tending upwards or romaining relatively stable at a high lovel. On this occasion the collapse of the World price level is bo serious that a return to anything approaching the 1929 international level cannot be expected. The process of recovery'from the depression will therefore be delayed, because an improvement in. world prices of the order of magnitude experienced in previous depressions •is not to be counted upon. Despite a depreciation of nearly 30 per cent, in sterling currency, wholesale prices in Great Britain aro now below their pre-war level and 30 per cent, below their 1929 level. That is, should the international gold price lovel rise, tho recovery in gold prices may bo expressed partly in an improvement of British exchange on the dollar rather than in a rise in sterling prices. In this event New Zealand, in common with other Dominions that maintain their currencies on a sterling basis, will not benefit to the full extent of the rise in international prices. Just as the depreciation of sterling has acted as a buffer between the catastrophic fall m gold ' prices and New Zealand export prices, so will the appreciation of sterling in terms of dollars keep down the New Zealand export price level should the international price level rise. We feel it necessary to draw attention, to this fact in order to discount, the assumption often made that an improvement in world conditions ftlono will the depression in New Zealand.

Overseas Borrowing. •,

It is equally important to consider the change in the national economy of New Zealand on account of the decline and the possible cessation of overseas borrowing. We have shown that overseas borrowing was too heavy hi the post-war period, and it is desirable m the interests of the country that the process should be gradually eliminated. This should not preclude recourse to the London market for the purpose of completing. existing public works and easing the process of adjustment. No relief, however, can be expected from this source unless the community faces the task of internal readjustment with determination. When the process of readjustment is completed, external borrowing will be brought to an end, except where it can clearly be demonstrated that, the projects financed by such loan operations are profitable. We may restate the assumptions upon which we have considered the problem of readjustment. These assumptions are:—(i.) Little increase in productivity per head in the immediate future. (ii.) The maintenance of the existing export price level. (iii.) The ultimate cessation of overseas borrowing with some recourse to the external market during the' process of readjustment. We have confidence in the soundness of the last wnditiop* gta Jtaak, of ;read-

justment is so great that any possible increase in productivity or in the export price level will expedite the process of recovery, but cannot obviate the necessity for fundamental readjustment. The Fundamental Problem. Upon these assumptions we may state the general problem of readjustment as follows: At the present time export production is bearing a heavy burden on account of tho fall in export prices greatly exceeding the fall in other prices and farm costs. The spending-power of the farmers has been greatly reduced, jpid their demand for the goods and services of the sheltered and protected industries has declined; thus these industries suffer a contraction of demand and of output, which will continue until the spending-power of the export producers is restored either by an improvement in prices or by a cut in the costs of production and of internal services generally. When this happens the export producers will be able to purchase with their diminished money income the same quantity of goods and services as before, and industrial output, will therefore be restored to its former level. Without this adjustment, how can the community deal effectively with the problem of unemployment, balance the Budget, and restore and maintain sound financial conditions? There will also be the problem of absorbing in profitable enterprise the, workers and employers formerly dependent upon the expenditure of overseas loan money. For this purpose a further reduction in costs must be achieved in order that export production and internal production competing with imports can be expanded. As this happens, tho volume of employment will be increased and the community will come down to a lower level of real income consistent with the loss of national income caused by the depression. Spreading the' Loss. This real loss must be spread over the community as a whole. If it is borne irainly by two sections of the community —namely, export producers and the unemployed —national income must suffer. The contraction of output in secondary production will be severe, and it is doubtful whether export production ean.be maintained on its present returns. ThuS*the spreading of the loss of income is essential to the process of readjustment. The more rapidly it is spread, the quicker will be the recovery and tbo smaller will be the loss during the process of readjustment. It is, therofore, important to consider lioW the adjustment can be made expeditiously and equitably whilst sustaining enterprise. Eq.uality of Sacrifice. If the adjustment is made on parity of exchange a fall in many cases of the order of 40 per cent, is required. A cut of 10 per cent, in income accompanied by a reduction of 10 per cent, in the cost of living certainly contributes substantially towards the monetary adjustment. It does not, however, involve the spreading of the Teal loss to the recipients of the incomes cut by 10 per cent. Thus to-day average wages have fallen by approximately 11 per cent., compared with a reduction in the cost of living of 11 per cent. Similarly the recipient of interest, unless he be specially taxed, has a higher real income if he continues to receive the same amount as formerly. If the loss of real income is to be spread evenly, no section of the community can be left with a greater real income than before the crisis. An all-round sacrifice is required. •Eesistance to the sacrifice by any section of the community will only delay the process of recovery, dampen down enterprise, and react ultimately upon the interests of the particular section in question, together with the interests of the whole community. It should be recognised that any measures of readjustment involve sacrifices by those sections of the community that have escaped any real loss of income oi have hitherto been asked to accept a minor real loss. The total floss is so great that it must be spread evenly over the whole community if an ill-balanced economic structure is to be Avoided. Inadequacy of Adjustments Already Made. Some progress towards readjustment has already been made. The following are tho measures of adjustment in operation to date: — , (i) A fall in internal prices and in the cost of living of the order v of 10 per cent. (ii) A rise in the exchange rate to 10 per cent., • bringing; relief > to expprt producers. "(iii) A contraction!of imports from £45 m. to £24 m. , . (iv) A reduction in wages of 10 per cent, ordered by the. Arbitration Court. (v) A reduction of 10 per cent, inwages and salaries in the Public Service, and other economies in public expenditure. (vi) The passage of legislation to enable mortgagors, to secure relief from both interest aid principal under certain conditions, and special consideration to mortgagees by all State lending Departments. (vii) Taxation relief and increased subsidies to the farming industry. ' (viii) A reduction of interest on Government and. local-body loans for new "issues, and on bank overdraft and deposit rates. (ix) Special taxation on .gilt-edged income. > (x) Increased land development and settlement, and unemployment relief. (xi) Legislation for a co-ordination of transport to limit unnecessary and wasteful competition, and the placing of the railways under a non-political Board. (xii) The utilisation of reserve funds., (xiii) The conduct of special investi- ' gations—viz., into Government expenditure, by a Eoyal Commission; into banking and cur l rency, with special reference to a central bank for New Zeav land; and into the whole incidence of- local body taxation and the expenditure of all local bodies, including Hospital and > Charitable Aid Boards.

Whilst helpful, these measures are inadequate to deal 'with the situation. "Wo now proceed tp consider in detail what other measures are possible, and what eff.ect they will have if adopted.

EXCHANGE AND ECONOMIC ADJUSTMENT.

The monetary system of New Zealand is best described as a sterling exchange standard. This system has evolved over a long period of years in response to the needs of the Dominion's industry and trade. Under this system exchange has been kept stable in comparison with other exchanges, despite wide fluctuations in the factors that usually determine exchange rates. During the war peripd, for instance, when many exchange rates fluctuated very widely, New Zealand exchange on London was kept stable. In 1921, despite the heavy unfavourable balance of payments, the exchange moved only about 3 cent, above par.. It dropped about 3 per cent, below par in 1924, when the balance swung in the other direction, but returned to parity again. In 1927, when the balance of trade was against New Zealand, the exchnge rate moved by only i per cent. . ' Exchange Funds Overseas. It is not possible to determine the total amount of fnnds held on New Zealand account abroad. 3?hi* depeuds on

the varying amount of bank capital devoted to New Zealand business: but it is possible to estimate the variations in these funds due to changes in the New Zealand balance of payments. Tho banks publish quarterly details and totals of their average assets and liabilities in New Zealand. The excess of liabilities over assets in New Zealand must necessarily be balanced by an excess of assets over liabilities overseas if the total banks' balance-sheets are to balance. A favourable balance of payments to New Zealand will increase these surplus assets overseas and similarly increase the surplus liabilities in New Zealand, while a favourable balance of payments will have the opposite effect. Hence variations in the margin between bank liabilities and as-sets in New Zealand must necessarily reflect changes in the volume of funds held mainly for exchange purposes on New Zealand's account in overseas centres.

It has been shown that it is possible to estimate from the banks' assets and liabilities published in New Zealand the variations in the amount of their funds held on New Zealand's account overseas. Let us consider the figures for the March quarter during recent years. In 1925, a Season of high export prices, funds held overseas. At this point Export prices then fell and the balance of payments became unfavourable. By March, 1927, these funds had been reduced by nearly £ll m. Then export prices turned upwards, export values increased, and imports fell. By 1929 an additional £l4 m. had accrued in funds lield overseas. At thsi point prices fell heavily and the balance of payments became again unfavourable. By the December quarter of 1930 funds overseas had" been reduced by £12.5 m. By the December quarter of 1931 imports had been reduced very heavily, tho balance of payments had become favourable, and the had increased by £1 m. The funds held overseas in the December quarter last were about £2.5 m. greater thaii in tie March quarter of 1927, and £11.5 m. less than in the March quarter of 1929. In these circumstances it might be expected that the exchange rate would not be depreciated more than in 1927, when it moved only per cent, from par. On this occasion, however, the fall in export prices has been heavier and more substantial. Other Influences on Bate. But conditions other than the existing supply of funds influence tho rate. The prospective supply and demand have also to be taken into account. It is probable that the New Zealand rate was raised to 10 per cent, largely because the banks anticipated heavy depletion of their overseas funds if the rate had remained lotfer.' Two in. fluences might have caused such depletion. First, at lower rates import* would undoubtedly have been ..heavier and the drain on their funds greater; secondly) no country can consider its exchange market in complete isolation from other markets which may influence it.

11l addition, the liquidity, and not merely olie supply, of such funds must be considered. Events in the money world in times of depression may freeze bank assets which previously were regarded as perfectly liquid, and it is possible that funds held overseas and normally available for New Zealand exchange purposes may be invested in securities at the moment less liquid than they were expected to be. In this complex of influences, therefore, it is difficult to determine from a mere estimate of funds what should bo the exchange rate. Consideration of the Bestoration of The Gold Standard. We have - given a general descripton of 'the, working of the exchanges. New Zealand is now 10 per cent, off parity with sterling. Whatever the circumstances determining this rate, it-checks-imports and thus helps to safeguard London funds} It also encourages, exports by. raising; the gross income <>f the exporter by 10 per cent, above. , what, it- would be at sterling figures. At parity of exchange" with sterling, national income will tpnd to be adjusted on the" basis of .an overseas income of £32 m. On this basis we found in Section 111. (paragraph 18) that, after, the process of economic adjustment wascompleted, the national income would tend to fall to £BO m. If, however, the rate of exchange moves and remains away from parity, the money valde k of the national income will be different. Alternative Exchange Policies. The rate of exchange thus has an important bearing upon the money value of national We proceed to eon-* sider typical examples of three possible exchange,objectives: IPirst, a restoratioa V of parity with gold; secondly, the main-' tenance of the'existing 10 percent., rate of exchange; and, thirdly, the adoption of a high premium, illustrated by. taking a rate of 40 per cetat." Normally,: the exchange 'mechanism of New Zealand'keeps the .New Zealand exchange very close to parity with sterling. Before the war, and between 1§25 and 1931, Great Britain was on the gold standard;'* hence New Zealand currency was then closely linked to gold through the exchange relationship with sterling/ When v Great Britain moved from thp . ■ gold ' standard, & 1931, British exchange depreciated in terms of the currencies of countries such as the United States and Prance. The New Zealand exchange, which had already cent, in 'terms of sterling, maintained its relationship with sterling, so that , the depreciation of sterling on goldstandard countries resulted in a simi- ■ lar but additional depreciation of New Zealand currency. Return to Parity with Gold. - The present adverse exchange of 10 per cent, on sterling causes). ■ export prices expressed in New Zealand currency to be approximately 10 per cent, higher than *the prices expressed in sterling. The money receipts of the farmer are therefore increased.' If New Zealand currency had remained at parity with gold, the New' Zealand exchange in London would have been below parity with sterling. Hence the effects on export prices would have been the reverse of those at the present rate of 10 per cent. New Zealand export prices expressed in-sterling would have remained the same as at present; bnt export prices in New Zealand' currency would have been lower than sterling prices by approximately the amount of the depreciation of sterling in- terms of i the gold parityj or parity with the dollar. The following table show's the levr.l of export prices and the estimated value of exports in New Zealand at the present 10 per cent. Tate, at parity with sterling, parity with gold, and at a 40 pA- cent, exchange.

Export* Esti- . 'Export mated Prices, Value, December, Current t /931. Tear. . £nu £m. At present rate .. 95.0 35.1 At parity with sterling 86.5 32 At parity with gold .. 61.0 23 At 40 per cent, above sterling .. 121.10 45

In order to demonstrate the probable effects which would follow from maintaining the pre-war parity with gold, let us assume that the exchange between London and New York is established at 3.60 dollars to £1 sterling, instead of the normal gold parity of 4,86 dollars equals £1 sterling. In

»>fher words, let us assume that Great Britain stabilises her currency at a level which is depreciated 23 per cent, in lerms of the gold parity. In fact, sterling at the moment has depreciated by 27 per cent. If New Zealand currency were maintained at parity with gold, this would mean that exports prices in New Zealand would fall 25 per cent, below export prices expressed in sterling. The value of exports is now round about £32 ni. expressed in sterling. Hence the value of exports expressed in New Zealand currency would fall to about £24 m. As a consequence, the national income would fall from the 1928-29 level of about £l5O m. to about £<so m. It will be apparent at once that the problem of readjusting our economic life to a national income of £<so m. would be very difficult indeed - - much more so than the problem of adjusting ,it to a national income of £B9 m.. to which the national income would tend to fall at parity with sterling. Hut it is never assumed that New Zealand should return to the old parity with gold. There is general agreement that parity of exchange with a depreciated sterling has economic advantages over parity of exchange with gold currency at the old rate. The main reason for this view is the higher level of export prices when these prices are measured in a sterling currency depreciated in terms of gold. Effects of Deflation. We now discuss briefly the economic arguments for and against this view. -Maintaining the exchange at parity with sterling does not bring any additional real income into New Zealand, over the amount at parity with gold. ■Hut on the assumption that sterling is depreciated 25 per cent, in terms of the gold parity, it does support the moneyincome in New Zealand at a level 25 per cent, higher. By holding export prices above their level in gold it lessens the magnitude of the necessary adjustment between farm costs and farm prices. It also lessens the extent to which all values will fall. This is important. Debts are created against securities, the value of which is determined largely by the average level of prices and the long-term profits of enterprise. If prices fall rapidly and profits are destroyed, security values also fall; but they fall in greater proportion than the fall in prices, because their value is dependent upon the profit margin. This is quickly destroyed in a period of acute deflation. Hence the value of securities upon which debts have been arranged falls rapidly until profits are restored by rising prices. All individuals and all institutions dealing in these debts must then experience difficulties in maintaining a proper balance between assets and liabilities, unless they have available liquid reserves. Liabilities of financial institutions are expressed in fixed money terms, and they do not respond to a fall in prices. Hence a rapid fall, by destroying part of the current value of assets, is likely to embarrass such institutions. The iower the new price level the greater will be the embarrassment. This is one important reason wliy parity with the depreciated sterling is preferred to parity with gold. Balance of Payments. Though exporters reap the benefit of higher prices in terms of depreciated xterling, the addition to prico is paid to them by the rest of the community. At parity with gold, exports would realise £24 m. Parity"with sterling places this value at £32 m. Who pays the additional £8 m.? Consideration of the value of exports, expressed in gold, and of the effect of exchange upon the New Zealand value of these rxports supplies the asnwer. Out of £24 m. of exports, expressed in gold, New Zealand would have to meet about £9 m. of overseas interest in sterling values. This would require only £ 6.75 m. of exports expressed in gold, leaving a margin of £2.25 m. of relief to the Budgets of State and local bodies compared* with 1929. With exports at £24 my and debt services at £6.75 m. the. value of the amoftnt available for imports would be £17.25 m. in terms of gold. When, however; parity with sterling is the basis of the currency, the debt services are £9 m,, and the sterling value of _ exports £32 m. This leaves £23 m. for imports in terms of sterling. Hence, imports cost £5.75 m. more at parity with the depreciated sterling than at parity with gold. In addition, the interest on the oversea debt is £2.25 m. more, making up tho total of £8 m. This sum of £8 m. comes from the taxpayer and the consumer of imported goods in the first instance. It is well to bear this in mind. Both imports and the overseas debt service cost more in money on a depreciated, sterling basis. This cost comes from" the rest of the community, and is paid over to the exporters, who receive a higher price in sterling for their exports. We have no hesitation in coming to the conclusion that, in- view of the present level of gold prices, parity with sterling is preferable to parity with gold. It means a higher money income, a readjustment of less magnitude, the maintenance of the values of securities, less financial disturbance, and, finally, a less disturbing budgetary situation. Having reached this conclusion, we now consider the economic effects of a rate above sterling. The Present Exchange Bate. At present the exchange is 10 per cent, above parity with sterling. This increases export' values in New Zealand* currency, and sustains the New Zealand price level above what it would otherwise be. If export prices in sterling remain at their present level, the money value of the national income will tend to be adjusted to an export income of £35 m. in terms of New Zealand currency, instead «of £32 m. at parity with sterling. We estimated the national income as settling at approximately £9O m. at the present 10 per cent, and present export prices. Frbm the point of view of farm production, the exchange rate raises export prices approximately 10 per cent, above the sterling figure, and reduces the decline in costs required to make farm production profitable. In other words, the general adjustment in money income and in all fixed charges in the community is lessened. For the same reason, it helps to sustain the values of securities against which/ debts have been created, and thus lessens the financial disturbances associ- j a ted with the problem of readjustment. Further, it sustains revenue at a higher money level than would be possible at parity of exchange. - On the other hand, it increases the money cost of the external debt service when expressed in terms of New Zealand currency. Effects of a High Bate. We now. proceed to consider the eass of a high premium on exchange—say, 40 per cent, exchange. In this case the additional cost of the sterling interest would be approximately £ 3.3 m. in New Zealand currency. The Australian interest would cost £0.09 m., making a total of £3.4 m. But the additional money value «f the national is-

come' would, bo about £32 m. Hence the exchange charges oil external interest would amount to about 10 per "cent, of the additional national income, compared "with a 25 per cent, ratio of revenue to national income before the depression. If this rate is maintained, the additional revenue possible from £ 32 m. of income will amount to £8 m., against which is to l>e set the additional cost of exchange on the external debt charges amounting to £3.4 m. and any increase in the cost of goods and stores as before. Even though these costs increased by the full 40 per cent., the internal debt service would remain the same. Thus there would similarly be a net gain to the budgets. If the Hoover moratorium were continued, tKe external debt charge in terms of sterling would be reduced by £1.3 m. In this event the additional cost of exchange would amount approximately to £2.9 m. An exchange rate of 40 per cent, would raise the values of export prices from their present basis of 40 per cent, below 1928-29 levels to approximately 24 per cent, below the 1929 level. At the present time export prices have fallen from, say, 100 in to 60. This is the position at a 10-per cent, exchange. At a 40-per cent, exchange export prices in New Zealand currency would tend to rise in the ratio of 140 to 110—that is, to 76. The rise would, therefore, be from 60 to 76 —namely, 27 per cent. This would give an addition of this order to the gross income of the exporter and place him in a better position to meet costs which had not fallen in comformity with the fall in export prices. The adjustment in costs required to make export production profitable at the lower level of real income would be less than 24 per cent, from the 1929 level. If the farmer is sharing in the loss of real income proportionately to the rest of the community, a reduction in costs of the order of 20 per cent, might suffice 'at 40-per-cent. exchange rate, compared with 35 per cent, at 10-per-cent. rate and over 40 per cent, at parity of exchange. Hence the revision of fixed charges and other costs that tend to stick would be a less formidable task at a 40-per-cent. exchange than at parity of exchange or at a 10-per-cent. exchange.

Alternative: Primage Duty and Export Bounty.

The general effects of a rise in exchange rates might be illustrated by reference to a possible alternative method of attaining to a similar end. Supposing that New Zealand's payments abroad balanced with exports at £35 m., imports £25 m., and interest payable £lO m. These prices are in sterling, and sterling prices are beyond New Zealand's control. A 20 per cent, rise in exchange would add that proportion to all items in the balance of payments expressed in New Zealand currency. Exporters would receive '£7 m. more; importers would pay £5 m. more, and £2 m. would have to be found by taxpayers to meet additional interest. Thus £7 m. paid by importers and taxpayers would be received by exporters. A similar result might be achieved in another way. Let a primage duty of 20 per cent, be placed on all imports) to yield £5 m v and the extra £2 m. be raised from the taxpayer as under the higher exchange proposal. There would then be £7 m. available with which to pay a bounty on export. In these conditions all the effects would be similar to those caused by a higher exchange. The prices in New Zealand currency of, export and import goods would -tend to be 20 per cent, higher, taxation for interest 20 per cent, higher, the money value of the national income and the taxable capacity of the people would in the long-run be raised in similar degree, and the same transfer to exporters from other sections of the community would be made. The higher exchange has the advantage that it would be automatic, more certain in its working, and, if necessary, easily capable of permanent adoption by devaluation. On this question see Section IX. The primage duty would be less, certain, more difficult tb administer, and open to political interference, but it would enable the bounty to be distributed according to need. If the primage duty were regarded as a temporary measure it might not sustain security values. But the far-reaching effects of allowing matters such as these to become the subject of political pressure points to the danger of deciding them on grounds of political expediency. FUTURE OF NEW ZEALAND CURRENCY.

The question of the future relationship of the New Zealand currency with ster- - ling is a matter for consideration. It has always been recognised as a normal function of government to prescribe by law the basis of the unit of currency, and in fact every currency is bo established. Thus under the gold standard a British pound-note was convertible into a sovereign containing about 123.27 grains, of standard gold. The New Zealand pound-note was convertible into a British pound-note and thus indirectly into a sovereign of the same value. As long as the value of the British currency remained fairly stable, this arrangement had great merits, because it gave stability to New Zealand exchange, and sustained a,n internal pri«e level free jfrom major fluctuations. "At a time when British prices have been subject to a violent fall, it is legitimate for Niew Zealand to consider whether parity with sterling should be restored, and, if so, when, though naturally no final decision on this question would be made without consultation with Great Britain. ; A return to parity would at present in- | volve the Dominion in a general deflation of its internal wholesale-price level to at least the level of British wholesale prices. The heavy fall in export prices is the main reason for concluding that a rate above parity has economic advantages. It may therefore be assumed that the ■ future of export prices in relation to internal costs will determine the advantage or disadvantage to be derived from maintaining a rate above parity with sterling. At the present 10 per cent, rate export prices are 40 per cent, below the 1929 level. Costs, whether measured j by the index number of farm costs, wholesale prices, or the. cost of living, have fallen about 10 per cent. Let us take an increase) in the rate, say, 25 per cent., purely for the purpose of illustration. This rate would raise export prices in the proportion of 125 to 110. That is from 60 to 68. They would still be much below costs. If, however, the adjustments in fixed charges and wages and the fall in import prices brought costs down from 90 to 80, the disparity would be reduced to 18 per cent. It would not be necessary to bridge the whole of this gap because exporters must .expect to suffer a loss of real income proportionate to the loss suffered by the community as a whole. In these circumstances a rise of 15 per cent, in export prices might be sufficient to restore a balanced economic structure. When stabilisation has been achieved, Buch transactions would no longer be necessary. If it were decided that a permanent rate of 20 per cent, above sterling were desirable, it would be sufficient to fix the value of the New Zealand unit of currency at an exchange of 1.2 New Zealand pounds equivalent to one British pound. The-normal control of exchange would then operate, because banks would know that their funds in London would retain a fixed value in terms of New Zealand currency. Such an arrangement is a proper exereiie of the functions of government. Be-

fore it is necessary to tal&e aiiy such step in New Zealand, Great Britain will probably have stabilised her own currency at a new parity with gold. In that event if New Zealand should find it economically beneficial to fix her currency at a rate above sterling, she would then merely be following the example set by Great Britain in changing from her parity with gold.

The whole question of exchange and currency is one that doubtless will be discussed at the Imperial Conference. INTEREST AND RENT. In a period of rapid price changes interest and rents fixed under contracts lag far behind other price movements. Though the lender or the lessor suffers a loss of real income during rising prices, the lower relative burden of fixed charges on the community increases profit margins and promotes • general economic prosperity. Indeed the rigidity of fixed charges is a contributory cause of the rapid upward swing of business conditions during a periixl of rising prices. It would probably promote economic stability if fixed charges could be made subject to periodical adjustment in accordance with price-move-ments. During periods of rising prices profit margins would expand less and there would be a less powerful stimulus to overtrading. On the other hand in a period of falling prices the reduction in fixed charges would diminish losses in enterprise and thus mitigate the severity of depression.

Adjustments are being made. Interest and rents are not being paid in full over the whole field of industry because present prices industry as a whole cannot afford to pay the fixed amounts. With regard to the national debt, the internal interest and debt-reduction charges amount to approximately £9 m. This was 6 per cent, of the national income in 1929. It is now over 8 per cent., and will rise towards 10 per cent, as national income falls towards £9O m. In these circumstances some adjustment <in interest on the internal debt, and on interest generally, is inevitable. What could be paid without strain at the higher level of prices now becomes such a burden on industry as to reduce enterprise and retard recovery. Real Income from Fixed Charges. Another aspect of the situation should be mentioned. Since 1929 the cost of living has fallen by 11 per cent. It was comparatively stable over the whole post-war period from 1920 to 1930. The fall in world prices 'and the economic adjustments to be made in New Zealand point to a. further substantial fall in the cost of living in New Zealand. In these circumstances an adjustment of interest, whether by a special duty, a special income tax, or a reduction in interest rates, would not impose undue hardship upon the lender. As tho cost of Kving falls a given sum from interest payments represents more and more purchasing power. In other words, the real income of the recipient is increasing. Thus at present a reduction of interest of the order of 11 per cent., apart from the effects of the special taxation of interest, would be merely an adjustment to the fall in the cost oi living. It would not reduce the real income of the recipient of interest. But ■some interest is not being paid and the total income from interest is lower now than it was in 1929. Hence the bondholder and the mortgagee are adversely affected by a fall in national income, though the net effect upon them, may be less serious than upon other sections of the community. Their welfare will be best safeguarded by the restoration of sound trading conditions. This necessitates a.reduction in all costs. It is both socially equitable and economically sound that the recipient of interest should make a,contribution towards the reduction in costs and bear a due proportion of the loss of national income.

Extension of Mortgagors Belief Act. For these reasons a reduction in fixed money claims would have beneficial effects. Provision is now made under the Mortgagors Belief Act for a downward revision in certain conditions of mortgage interest and principal. An extension of this principle to all fixed payments .nnder private contract would assist in the reduction of costs and the more equitable spreading of the loss of national income.

If the borrower who is unable to secure relief from the lender after recourse to an Adjustment Commission then has the right to approach a tribunal, the adjustment could proceed on a sound constitutional basis. It would then be open to the lender to show why a reduction in interest or other fixed charges was inequitable to him, and to convince the Court that no reduction should be made. Any revision of fixed charges should be confined to internal interest pending an all-round adjustment of economic conditions to the new situation. It is the responsibility of the people of the Dominion to meet the posi* tion by a common sacrifice among themselves. We draw attention to the fact that fhe fall of 40 per cent, in export prices; has increased the burden of external payments by two-thirds. Some relief has already been granted through the Hoover moratorium. If this be made permanent, the money burden of the present external debt charge will be reduced by nearly 15 per cent. Rents. The same arguments apply to rents as to interest. Indeed, a reduction of interest on mortgages offers a suitable basis for rent reduction. According to the Government Statistician 'a index number for rent, in twenty-five towns in the Dominion the fall in rent from 1929 to November, 1931, has been approximately 6 per cent. Thus, the recipient of rent, wherever it is paid in full, is receiving a greater real income now than he was in 1929. Unless a rapid downward revision of rents occurs, the reductions in wages will fall with special severity upon wage and salary earners, and costs in commercial and retail businesses will remain high. It is important that these costs be .reduced, and it is equally important that the wage-earner should be placed in a position where he can take a lower money wage without making a greater sacrifice than the rest of the community. Hence the case for revising rents is not less strong than the case for revising interest. In any legislation it would be advisable to treat rents on a uniform basis with interest. A final question arises regarding the revision of contracts in fixed money terms. What rate should be applied in making a revision? If parity of exchange is restored, the export price level will, under present conditions, be 45 per cent, below the 1929 level. Farm costs as a whole have fallen by approximately 10 per cent. There would thus be a wide gap between export prices and farm costs. This gap would be narrowed by a higher exchange rate, or some other process that transfers real income to the farmers. Beasons have been given in Section VIII. for stating that ia higher rate of exchange will bring but a slight increase' in farn costs in the immediate future. With a corresponding fall in import prices these additional costs will be reduced. Thus the gap between farm costs and export prices would be narrowed by substantially the whole amount of the rise in exchange. This should be considered in relation to Sections XI. and XII. A reduction of 20 per cent, in fixed money claims Virould make a substantial contribution towards bridging the gap between costs and prices.

THE REVISION OF WAGES.

According to the official index number, money wages were" high during the period of prosperity, with a slight tendency to rise from 1923 to 1930, though when at their peak in .1930 real wages were only 6.6 per cent, higher than in 1914. From 1929 to September, 1931, money wages have fallen by 11.5 per cent, compared with a fall in the cost-of-living index of 11 per cent. Thus, apart from the effect of the special unemployment levy on wages, real wages foi workers in full employment are approximately the same as in 1929 despite the adjustment in money wages made by the Arbitration Court in 1931. To bring wages down in conformity with the fall in real income 3 reduction of a further 10 per cent, would be necessary. The necessity for any subsequent adjustment could best be judged by the general progress, of ecor nomic recovery and the reduction in unemployment. An objection frequently made to a reduction, in wages is that it decreases the spending-power of the people and thus intensifies the depression. This argument may have some force during the- period of readjustment, but it cannot be true in the long run. Indeed, it may be shown that it is a fallacy. The spending-power of the people as a whole depends upon the money value of the national income. If a reduction in wages helps to restore national income, it must ultimately increase real spend-ing-power. In the present circumstances of New Zealand, national income, both money and real, has fallen, and the former level of wages cannot be sustained for the whole people. Some will remain permanently out of employment unless" costs of production can be brought down sufficiently to expand the margin of production and re-employ workers at present displaced by the depression. The fall in wages must be considered along with the reduction in other incomes and in the cost of living. Moreover, the wage level bears a close relationship to unemployment. The maintenance of wages at uneconomiclevels increases unemployment. Any increase in unemployment throws addl tional weight upon the Budget for unemployment relief. In the existing financial position it is important to avoid any increases in public expenditure if a sound Budget position is to be reached. It is therefore inevitable that a fall in wages will take place. At the same time it is desirable to consider whether undue restrictions 011 industry cannot be removed in order that costs of production may be lowered. In > some cases working conditions exert a more powerful influence in keeping up costs than does the level of money .wages. At a time when all sections of the community are revising standards that were economically possible only in the period of high export prices and heavy overseas borrowing, a revision of regulations governing working conditions in industry is appropriate. It is not suggested that free competition without any intermediary regulating authority should be restored. What is required is a relaxation of the rigid conditions that the community could afford in the days of prosperity, but cannot afford now.

It may bo appropriate here to restate briefly the reasons why a reduction in rnal wages in New Zealand is inevitable Export prices havo fallen much morn than import prices, and the same quantity of exports will purchase a substantially lower quantity of imports. Overseas borrowing is declining and will continue to do so. The real income of ft community from the point of view of the consumer is the goods and services a\ailable for consumption. These poods and services are made up of home production less exports plus imports. The Ha'lTand fTT* h&S fallcn ridlly, and for the present home-produc-tion in factories and other non farm products has declined. The latter may je restored, byfc the former cannot until import prices f a n relatively to export prices. Hence the community has less SS»rS Wi . th the fall in inteS prices the reduction of money income is TLiTZ- Jt ' has been iV still J?™ present, and the decline it is clear fhn?' ? J? Cse circumstances R clear that a decline in waiyps Wh atiime an<l " incvitab,e at least for local body finance. Up-to-date information upon the financial position of local bodies is not available. It cannot be doubted, however that the revenue of local bodies will be adversely affected by the depression. There is a considerable lag in the adjustment of capital values upon which rates are levied, and other forms of local body revenue are also less seriously affected in the early stages of enl ""Z'h I"." °°™>™nTrev. enue. But the basis of local body r<svrtVt£oTh n - the national inco™directly through income and indirectly through land values. It i 8 therefore * COnsider tho future? of position iD thG Ught of tMs For the year ended March 31st, 1930 the revenue and'expenditure of local bodies, excluding loans, were as follows (figures in £ m'.): — Jtevenue— Rates .. qi Licenses .. . 10 31 Government subsidies 0.44 Total ■■ .. 16.76 Expenditure— Interest .. ~ 3 g(l Amortisation .. j Other ~ _ ..1171 Tota l •• .. 16.76 It is difficult to separate the expenditure financed by revenue items included above from those financed by loans. It is assumed, however, that .expenditure on items other than loan works balanced the revenue. Assuming a general reduction of 20 per cent, in revenue for the year 1932-33, total revenue will reach £13.41 m. We think this is a reasonable "assumption. In any ,case the task of readjustment is such that local body rates and charges should conform to a general standard of economy. A 20 per cent, reduction is much less severo than the reduction that has taken place in Government revenue. In the event of a fall of this order in revenue it would be necessary to make adjustments in expenditure. From the above table it is seen that expenditure other than debt charges amounted to £11.71 m. in 1929-30. If we adopt the same standard of economy as was assumed for Government expenditure—namely, 25 per cent.—the savings on this account would be £2.93 m., against a loss in revenue of £3.34 m. To bridge the gap of £0.42 m. it may be necessary to consider an adjustment in respect of interest from two viewpoints—(a) loan conversion, and (b) special stamp duty levied on local body interest to be applied to assist local bodies. Interest Adjustment. The internal debt of local authorities is held to the extent, of £26.4 m.' by the public and £19.9 m. by public Departments. The average rate of interest on the public holdings is 5.48 per cent., and on the Departmental 5.1 per cent. If we assume that the interest on the local body debt can be adjusted by 20 per cent, to a minimum of 4 per cent., the total economies would be £0.41 m. Thus, total economies would

amount to £3.34 m. But in 'any plan of interest adjustment it would be necessary for Government Departments holding local body securities to bring down the interest to their own borrowers. Thus the net relief to the Budget of local bodies' should not be the total savings on interest. Some £25,000 would have to be set off against the adjustment of interest on the securities held by the Departments if the Government Budget ,is not to suffer to this extent. It would be appropriate for the Government to reduce its granta to local authorities by this sum. In these circumstances the Budget of local authorities as a whole would balance with slight additional economies above the 25 per cent, standard already suggested. ' ~ „ We have not had time to consider the varying incidence of such a set of proposals upon different local authorities. Some would benefit, while others would lose on account of the varying ratio of internal to external interest burden. This however, is a problem which would hav,e to be considered in any general review of local body finance. Local body finance as a whole will no doubt come under detailed review by the special Commission which it is proHosed to set up to investigate the urgent problem of local government in New Zealand.

TREASURY BILL FINANCE

1,1 a period of acute depression it is important that credit should be available to sustain and encourage enterprise. This can readily be done, provided the community is making the adjustments in public and private finance necessary to re-establish the basis of profitable enterprise. The main responsibility for supplying credit rests with the banks.-That credit has been made available by the banks is clear from the following table:— December Quarter. posits. vances. £ m. £ m. ,1928 .. ' 55.73 48.10 ]92(i .. ~ 55.01 ;i3.80 1930 .. • ■ r >3-23 56.38 1931 •• -• 51.98 51.02 Banks and Government Savings bank's deposits rates were reduced by J per cent, to A per cent, in August, 1931, and some reductions' were also made in private savings bank deposit rates. But these were not uniform. In addition the Public Trustee and over-the-counter security rates were reduced. In a general plan of interest adjustment these rates should be further reduced, and with them advances rates. It may be necessary to deal with some institutions by legislation, but bank rates could for the most part be arranged by agreement.

Financing Deficits. hi addition to the normal requirements of private business, banks may be asked to supply credit to the Government until Budget equilibrium is restored, to finance redemption operations, and to sustain some loan expenditure. We have to consider the effects on the banking and the general economic situation of the financial operations associated with the supply of such credit. In normal conditions a deficit in the Budget would be regarded as unsound public finance. In a time like the present, however, when national income has been so severely reduced, a Budget deficit may be unavoidable. The costs of Government are in some respects rigid, and, though drastic economics may bo mafle and higher taxation levied, it may be difficult to bridge the gap in the Budget at oncc. The general economic effects of economies and high taxation have to be considered. If pressed too far, they may exert a detrimental influence upon economic recovery. Yet it is vital in any Budget proposals to aim at stability and reduce the deficit to a manageable amount—that is to say, to such an amount as may be liquidated by a moderate recovery in business conditions or by further,economies should this recovnot eventuate. In the meantime such a deficit could be financed by the issue of .Treasury bills. Where a central bank is in operation, it is possible to arrange this Treasury bill finance through the bank in, co-operation with trading banks. In New Zealand, however, as there is still no central bank, arrangements would have to be made di • rect with the banks as a whole. Provided the Budget deficit is reduced to a manageable amount, it is possible for banks to take Treasury bills for the deficit without impairing their resources. But they must have confidence in the ultimate liquidity of the Treasury bills, and this confidence depends essentially upon the balancing of the Budget within a .reasonable period. ' In taking up Treasury bills banks. are supplying further credit to the community, and to this extent they are easing the process of readjustment. The additional credit sustains spendingpower, and therefore the volume of internal production at a level higher than would otherwise be possible. . It also helps to prevent the internal price level and the value of securities in general from falling too rapidly. In this way it tends to maintain the liquidity of all bank assets. Further, the use of. Treasury bills to finance a Budget deficit for internal transactions does not necessarily involve a drain on bank resources for external purposes. Therefore the credit made available to the Government will, in large part, find its way into the accounts of other customers of the banks and be used to reduce advances or increase deposits. Hence it should not have a detrimental effect upon the bank position generally, provided Budget equilibrium is in prospect, and the Treasury bills taken up by the banks are therefore good securities. The transaction is indeed a means of using the banking system to ease' the process of economic readjustment. Loan Expenditure through Treasury Bills. The same considerations apply to the issue of Treasury bills for necessary loan works until such time as the Government is able to float an internal loan for essential public works. In 1930-31 the total expenditure for public works, land settlement, and State advances was approximately £lO m. It will not be possible for the Government to spend the same amount during the depression, but it would only deepen the depression if the supply of funds for these purposes were completely cut off. Moreover, such a cessation of loan expenditure would be economically unsound, because it would leave uncompleted some loaD" works, and thus involve the community in a dead loss on account of indebtedness created by th«j expenditure on the uncompleted works. It might, however, pay the community to abandon non-productive works not vet completed and cut the present loss thereon. But it is desirable that some loan expenditure should be sustained.* Apart from completing-existing works, the suspension of which would involve a net loss, new works should be able to meet normal debt charges on' the capital expended upon them. If this standard be applied to loan works in the future, there will necessarily be a permanent reduction in loan expenditure. In the transition period funds should be available for such completion of existing public works or settlement schemes and for such new enterprises as are economically sound. It is not possible at present to estimate the amount likely to be required for these purposes, but the reduction is likely to be at least

I 50 per cent, compared with 1930-31. This is a very heavy reduction over,a period of two years, and will in any case involve considerable disturbances to the volume of employment both directly and indirectly dependent upon loan works. External Requirements. With regard to the issue of Treasury bills to 'meet external requirements the position is different. The nature of the transaction depends mainly upon the extent to which funds are available in London from the balance of payments. During 1931 imports were approximately £25 m. and exports £32 m'. in sterling values. On present indications it is estimated that, exports will amount to about the same figure for the current year. In the event of no loan operations being possible on the London market, the requirements of the Government and local bodies in London will have to be met from exports. These requirements are estimated at £l4 m., leaving £lB m. available for imports, unless existing, reserves abroad be drawn upon. It may thus be necessary to bring imports down to this figure. If this is done there will be sufficient credits in London from current income to meet .obligations for interest and loans falling due. With respect to interest, the Budget plan should provide for tho raising of sufficient funds in New Zealand to buy from the banks the credits required in London. With regard to Treasury bills falling due in London, however, this policy is not practicable, and it may be necessary for the banks in New Zealand to take over these bills as they mature. If it is practicable to fund these bills on maturity, such should be done so as to ease the position in New Zealand. In conclusion, it may be desirable to draw attention to the fact that the issue of Treasury bills involves an increase in the public debt. Where this debt is increased on account of the Budget- deficit, there can be no immediate provision from earning assets for payment of interest and sinking fund. But the transaction is not unsaund on this account, because it may form part of a plan of general readjustment. If it is associated with an exchange policy that sustains the internal price level, the real burden of the debt might still be less than it would be with a policy that combined parity of exchange the immediate balancing of the Budget, and the consequent fall in internal prices. With this policy the real burden of the whole internal debt would be raised because of the lower price level. Against the lower burden of the existing debt under the alternative policy must be set the added interest upon the new debt created by the issue of Treasury bills. The point may be illustrated as follows: The internal debt service of Government and local bodies is about £9 m. If the price level is sustained at, say, 25 per cent, above what it would be at parity of exchange, the real burden of tnis debt is lower than it would be at parity of exchange. Thus if we take 100 to represent the prices of goods at parity of exchange,. 125 would represent the ultimate general price level at the higher exchange rate. This means that a lower volume of goods would be required to pay the interest on the debt at the higher price level. For instance, at the lower price level 5 units of goods would be required to pay a debt of 500 compared with only 4 units at the higher price level. The real burden is. reduced by 20 per cent. The burden of the additional debt service on Treasury bills would be slight compared with this reduction. Necessity of Co-operation.

The question as to the best policy involved in financing deficits and sustaining loan expenditure through Treasury bills is one of vital importance to the Government and the banks and to the community as a whole. There would, be , a great advantage in having a clearly I defined' policy from the outset in which the Government, on its part, undertook a general budgetary plan, and the j banks and other financiers concerned, on their part, undertook the underwrit- j ing of Treasury bills up to an agreed maximum. I

ADDENDUM BY *MR A. D.

PARK. As I concur generally in those sections of the report which are descriptive of the existing economic position of the Dominion and which demonstrate the necessity for an'all-round adjustment of costs to restore economic balance, I have signed the report. I have done so, however, subject to reservations on the following points: — I wish particularly to record my dissent from statements ■ made and other references in the report to the effect that there would be a net gain to the Budget from an increase in the rate of exchange. In fact, lam convinced that the immediate effect would be to increase considerably the Budget difficulties. For instance, an immediate substantial rise in the exchange rate to, say, 25 per cent, would increase the expenditure item for exchange by approximately £1,500,000 for next financial year. In addition, it would assuredly lead to a further immediate fall in Customs revenue of, say, £1,500,000, and, through the reactions on the importing and mercantile sections of the community, income tax and other items of -revenue would be adversely affected, perhaps to the extent of £500,000, making a total adverse effect of £3,500,000. The ultimate effects on the Budget of such a rise in exchange rates are very difficult to foresee, but it would appear that when stabilisation at the new level is eventually reached the aggregate margin of real income available for taxation can be no greater than would accrue from stabilisation at the present rate of exchange, or at parity with sterling. On the other side of the ac'count, the relative position of the expenditure to the revenue, apart from internal debt charges, would be the same at the new level once internal prices, wages, property values, etc., had completely adjusted themselves to that level. On present internal debt charges, as these are definitely fixed in terms of money, there would be a saving at a higher price level. , In between the immediate loss and tho ultimate effects on the Budget of a rise in the exchange rate—that is, during the period of adjustment—the Budget would benefit or lose according to the relative stages of adjustment of the various economic factors at any particular time. • These remarks on tho effects on the Budget largely apply generally. During the period of adjustment some sections of the community will gain at the expense of others from a rise in the exchange rate, but such benefit, apart from the saving on existing fixed charges, would be lost a3 soon as stability at the new level is reached.

The Future of New Zealand Currency.

In regard to the observations on this matter contained in the report, I agree that it is a normal function of Government to prescribe by . law the basis of the unit of currency. At the same time I wish to point out that changing an established basis of currency is a serious step, as any impression that the existing basis at any time is not permanent would be fatal to the essential element of confidence in the currency. Other countries have devalued their currencies, but, so far as I am aware, only in recognition of an existing depreciation. It is quite another matter to fix intentionally in advance a point to which the currency is to be depreciated, eveii assuming the depreciation could be controlled and stopped at the point decided

noon I may add that the history of other* countries is against such an a»9U ArtSally to raise the above the level required to mamv" equilibrium in external receipts and paj £ts amounts * designed depreciation of the currency, suggested London funds resulting from sary restriction of imports could be used ' for redeeming debt .held abroad. P from the fact that doing this would be very costly at a high rate of exchange, the operation would inmy P nresent" sa^s^^rs^ New Zealand the additional funds required for such redemptions. Thus the banks would be unable to sell at the higher rate all the exchange bought at that rate, and accordingly the artihcmt rnte' could not be maintained. To nx an artificial rate without being; able to maintain it would further complicate an already difficult situation, with repercus sions that cannot be foreseen. In any case, the prop osa l means f°rc ing the community to provide funds lor sueh redemptions out of ' th<?! ™ tg duced purchasing power of their exports. In other words, the community badly needs the reduced' volume of imports that; can be obtained m exchange for our exports at present, but this proposal would still further reduce the volume of imports that_could be purchased The restriction would operate through the higher New Zealand prices for imports resulting from the raising of the exchange rate. - To raise the exchange rate for the express purpose of giving a bonus to one section of the community at the expense of'the remainder of the community would establish a precedent which might later lead to similar demands from other sections, with disastrous results to the all-important element of confidence [in the currency. Further, such a bonus ! would be distributed pro rata without I regard to the relative need of individuals. - . . , „ If, as is quite likely, it is found that the comparative rigidity of some of the elements of cost is such to render it impossible to make sufficient internal adjustments fairly rapidly, without imposing too much strain on the economic structure, some further measure af currency depreciation may be. forced upon us. It is not advisable in a time of financial stress to attempt to restrict credit unduly, and maintaining the volume of credit in the face .of falling prices must, as soon as there is some recovery in turnover, lead to pressure on the exchanges. Essential* advances to the Government during the period of economic adjustment would add force to this tendency. Even if further intentional depreciation of the currency as suggested in the report were found to be desirable, the desired end could be attained oh more orthodox liijes by action through the banks to maintain the internal purchasing power, leaving the rate of exchange to reflect the relative position of internal jfnd external purchasing power in the normal manner. . In this way unavoidable depreciation would take effect in the usual manner, and there would be no suggestion of tinkering with the currency. Experience clearly demonstrates that even an orthodox rise in exchange rates results in a fall in the price of our securities on the London market. An j I artificial rise denoting intentional depreciation of the currency would undoubtedly have a much greater advefse effect on our credit, and this wouldi not only preclude, obtaining any relief through fresh borrowing- abroad, but would greatly increase the difficulties and cost of dealing- with debt maturities abroad.

Whatever the exchange rate may be for the time being, any change in the currency laws should be considered only when sterling is again on a permanent basis and general economic stabilisation at some level has actually been reached in the Dominion. New Zealand is linked with Great Britain by .strong ties of sentiment, trade, and debt, and it would be inadvisable to make any permanent change in the basis of New Zealand currency without full discussion of the matter with the British authorities.