KEYS TO INFLATION

Chronicle (Levin), 2 March 1949, Page 7

KEYS TO INFLATION

Press Associatiion)

fflr. Nash Discourses On I Money And Work

(Per

AUCKLAND, March. 1. Twelve main points in respect of iniiation were r'eviewed by t.hc Minisler of Finance, Mr. Nash, in an address to the Auckland Creditmen's Club. Ihe t'ollowing were the main headjngs: (1) The war of 1939-45, iike'all othei wars but particulariy those of • the last eentury, entaiied the wholesale diveision of manpower and other resourees to war purposes. Th^t meant there was more money in circulation but fewei^ consumer goods available. ",t i (2) During the six y'ears ended December 1945, the volume of money m circulation in New Zeia%n,d.1 in'creased by £102,000,000 of whicli £80'. 000,000 came from excess of exports over imports. Private incomes rose from £200,000,000 for 1938-39 to £366, 000, 090 in 1945-46. Civilian goods- available for purchase by that added income m 194445 were only 75 per cent of what were available in 1939. At that point we had £166,000,000 more money in circulation and 25 per cent less goods for people to buy. (3) An unchecked situation of that type would have led to higher prices, as it did but not to any major extent, and then to higher wages to buy goods at higher prices and then to higher pricos again and so, ad infinitum, until one got, as soxne countries did, into an inflationary spiral. (4) The remedy was then and stili was, price control, rationing and absor bing the increased purchasing power, as far as practicable, by taxation and savings. This was for the double purpose of checking inflation and providing fiaance for the war. (5) In addition to war loans of £218,000,000 raised between 1939 aml 1945, deposits in savings banks were £105,000,000 more at March 31 last year than in 1939 and there were also £43,000,000 in national savings. (6) The people naturally wanted to buy things not available during the war now they had extra purchasing power :n their vvartime savings. The ditfieully at the moinent was that people saw their money there and naturally wanted to spend it but if spending outstripped supply, we got on to an inflalionary basis that was terriblv dangeious. (7) New Zealand exported about halt what shp produced and imported correspondingly. Higher prices xor import&d commodities'w meant higher prices locally, leading .to - higher. wages; and more money in circulation^ without any -greater quantity^|?gpodj5> Sinco pre- " vvar overseas priries1 liad' more ■ than do.i|b0d{' The latest ligu;res showed that thtr dxpdrt-pfides of the' iiiajor countries from. which New Zealand bought, principally Britain, were 122.7 per cent higher than in .1939. As y,. result it was difficult to avoid the eile'et of inflatioh oversehs spreading to* New Zealand. ,(8) Some' imp.ort pfiCes were held dovvn by subsidies during tii c,_ war. Those on tea and sugar cost i'airlv large sums. This year there -would be- sfient . .about £14,000,000 in^ 'Subsidies bjit not ; for sugar and tea. .J^expprt prices rose c Qri*ies p p n d i n g I y p.6 iSfegafl jg;s t m e n t ; c o u ld be thade by hl$4riiij^tlf^;Mchangb rate •V^l'was dorie wriAbgust last year. "V.'/Tt is, not possible to. ineasure the extent, at the present time, of t.lie ell'ect of the appreciation of our inonev but it is incoutrovertiblc tliat prices are lower than they would have becn had the exchange rate not been altered, " he said. "Everyone in nianufacturing and importing businesses must know that prices, in globo, sliould decliue 9 to 10 per cent. but this is qualified by the increase in prices overseas after the alteration. " (9) In times of stress, becauso of pressures in various direclions, wagc rates in normal industry t ended to get. out of relationship. Margins existed betvveeii the labourer, skilled labouror,

tradesman, super * tradesman, clerk. I clerk with some executive responsibrl ity and so on. All argued about main" taining their margin. This was most, diliieult espccially when the Covernment in power wanted to lift the bot tom dog. These groups had got out oj relationship with oue another and a roalignment meant a general increase in wage rates. There was no way oi bringing wages down. He was eertain it couid not be done as loug as there were more jous than men and women and he wanted to hiake sure there wert always more jobs than men and women. Even a 10 per cent. increase in wages would mean x20, 000.000 more money in circulation and in the long niu £20,000,000 added to the cost of commodities and to the sum the Govern mcnt had to pav for services. "I don't know how to get over that," Mr. Nasa saicl. "There is noth ing more dangerous to reaching inflatxonary conditions than an increase in wage rates witnout a corresponding in • crease in production." (10) One metliod of the past thai had led to inflation more than auy other, had been budgeting for delicits as was done in many countries. The New Zealand Government had not budgeted for a single deflcit and from luU^-4o surpiuses amounted to £19,000, 000. He did not know where similai conditions existed elsewliere. (11) All private oxpenditure, whether by government, local bodies or private concerns, added purchasing power with out immediateiy increasing, consuni.n goods and services and, uniess balanced, savings automaticaily brought infla •tion, Capital work? did increase production in the long run. The lmportaui thing was that in present conditions there shouid be a rate of capital expen diturc that did not exceed the rate oi savings in general. This had been done but care must be exercised in selecting works to be done at any time, especittlJy wlicn developnient was in arrears. if nioipey was spent on war in the long run it had to be paid for in goods and services. (12) ilesearch indicated that in New Zealand 10 per cent. of the national iip euine was tne limit for capital expenditure witliout tending to inflation. Mr. Nash dolined inflation as that, state of national economy where the demand for goods and services was greater than production. That applied in most other countries today excep: Ihe United Btates. II e did not think there had been a shadow oi inflationary pressure in New Zealand because of social security, i !s spite of the fact that the suiu collected last year exceeded the total Goverunicnt rovenue in 1935-36. , He thought no one would object to takiiigf money from' those who had it and giving it to those who needed it, but if it was imagmed that this money could just he made, then the country would be headed fpr disaster. ;• ' ' The inflationaiy positiou, in spite 51 •.cantro-Isj is ,still wi^li us, " Mr, Nash" added, ' *' hs with'" .jfleafly every other country but bur jyirlces arie not so high and our danger ndt so great. Overseas prices a're s.tiU high and " that is the chief factor- in our diliieult position. ' ' ( ■;New Zealand had to do all she could |h* heip the Uni.ted Kingdom, he said'. referrcd to tTie effieieney in local iiianufacturing hc had seen in Auckland but said Now Zeatund could not alford to pay £1 for goods that could be bought elsewhcre for 10s. Efficient local maiiufacturing wrould help avoid inflation.