STABILISATION

Evening Post, Issue 51, 2 March 1931, Page 9

STABILISATION

MR. SCULLIN'S POLICY

WHERE HE ERRED

An interesting article on the financial policy of the Commonwealth Government was recently published in the "Sydney Morning Herald" from the ,pen of.Mr. A. T. Traversi, F.1.A., F.C.A.S., formerly Government Actuary in New Zealand. Mr. Traversi wrote as follows: — In his recent speech at Ashfield Mr. Scullin was reported as having said: ' ? Many suggestions have been made in ihe present situation. My answer is that neither deflation nor inflation is the remedy. The remedy in my judgment as il see it is to aim at restoration and stabilisation. .", . Let us examine this gospel of reduction. . . . Fixed income would benefit but property would decline. ■So property owners ■ would suffer, whilo bond-holders would benefit. Wage-earners on full-timo would benefit by lower prices." ' Mr. Scullin proceeded to criticise inflation. ■It seems from other evidence that Mr. Scullin means by '.'restoration and stabilisation" the raising of internal prices to, and maintaining them, at some past level, and it is to be inferred that he is actually under the impression that a process of internal deflation is now going on in Australia. This inference is borne out by the speeches of others, notably Mr. Theodore. ' -* , "As the matter is of such great importance to Australia, and as Mr. Scullin himself has invited suggestions, it may be worth while to indicate,- purely from the economic point of view, some facts not mentioned by him, namely: (1) Australia is inflating, not deflating, as Mr. Scullin seems to infer. Her gold reserves are falling relatively and absolutely, and her exchanges rising. These are the two most wniVersally recognised symptoms, or rather proofs, of inflation. (2) The growing inflation 'in <Australia is the result of an external deflation which is absolutely beyond our power to remedy. The position can be illustrated by the mechanical case of a balloon .comfortably filled with, gas, >whicli tends to burst if tho air outside is sufficiently reduced in pressure, i.e., external deflation produces internal inflation. Further inflation is no remedy. (3) It seems to be quite as common as it is superficial, to assume that a fall in internal prices necessarily means internal deflation. This is quite erroneous. A fall in internal prices may coexist with a rapid internal inflation; and this is actually tho case now in Australia. (4) The position may be illustrated by some banking figures. Without desiring to' limit tho term "credit," it has been taken for the purpose of this article that the amount of bank deposits, plus the note issue, gives a sufficient indication of the movement in the credit superstructure. Accordingly it is found that at December, 1928, the Australian position was: Credit £405,000,000, gold £48,643,000, or £5.33 credit for every sovereign held; whereas at' September, 1930, tho position was: Credit £347,800,000, gold £20,176,900, or £17.23 credit per sovereign held. In other words, bank deposits and notes, forming the principal, credit superstructure or principal liability of the banks, have practically- doubled relatively to gold, and this despite the 'fact that the gold is only retained here by the penalty of -a high exchange rate against Australia. At the present moment the position seems to be even worse. CREDIT ALREADY INFLATED. Co) The facts in (4) show that the Australian internal credit superstructure as progressed from what might be termed a normal position to a high decree of inflation', and yet Mr. Scullin is proposing to cure "deflation." (6) For the special benefit of those who object to the gold standard, the matter might bo put in another form by regarding all internal prices as being based upon our income from exports, relegating gold to the position of a mere insurance against a shortage in such income. In this it is also clear that' if our export income has fallen faster than our internal .prices,, wo ivre in a "state of increased inflation; and that is actually the case. (7) The nocming paradox of internal inflation accompanied by a fall in internal prices, is due to tho fact that inflation enn occur through contraction

in the basis quite as well as through an expansion in the credit superstructure. In. the former case it can easily be accompanied by falling prices. How erroneous then to regard falling intornal prices as necessarily evidence of internal deflation. (8) Harking back to the figures in illustration (4) above, it -will be noted that when the position fell from (a) Credit £405,000,000, gold £48,643,000, to (b) credit £347,800,000, gold £20,176,----900, accompanied by a fall in prices, the proposal of Mr. Scullin "restoration and stabilisation" would involve increasing the credit in (b) by, say, £50,000,000, without strengthening the basis. This might be restoration of internal prices, but it would be a disastrous acceleration of the already" increasing , inflation. As all economists know, the additional bad money, by Gresham's law, would drive out the good, so that the basis of gold would completely vanish; or else the exchanges would go disastrously against, us. WHAT CHECK? (9) In short, "restoration" of prices would mean an increase in' the credit superstructure at a time when the basis was reduced; a. procedure against all reason and all experience. (10) "Stabilisation" would' apparently mean the issue of further paper if prices fell, and the recall of paper if prices rose. The two things, "restoration" ana "stabilisation," would together mean an initial voluntary inflation, which, added to the progressing inflation of the moment, would create a movement1 as of .a stone rolling down' hill, so that recall would be impossible. If, for example, prices rose sufficiently to call for reduction of currency, how would such reduction be effected?' Inflation is easy; but in France it took all the courage, ability, and wonderful reputation and trustworthiness of a Poincave, aided by war indemnities and the faith .and industry o£\ the French, to stop the inflationary movement, and achieve exchange stabilisation. It would be much more difficult here to achieve price stabilisation". In Germany it was found impossible to check the inflation. (11) Stabilisation of prices is at best a dream for a sunny day. Everything has its proper time. When a country's very financial pivot has settled down to a lower level through uncontrollable .external forces it is idle to experiment with a super-refinement which would start off blinking the one essential fact, that the fall in the basis is beyond our control. It is no time to instal a bump stabiliser when the aeroplane is developing a tail spin. (12) Even if we could restore and stabilise, prices »it would mean constructing for Australia a little financial lake' at a higher level of price, but a lower level of honesty and manhood than the rest of the world. And if the. world deflation proved permanent,this position could only be maintained by repeated waves of inflation in tralia.STABILISING EXCHANGE. (13) If Mr. Scullin means restoration and stabilisation of^th'o exchanges, all economic criticism I would fall to the ground. That, however, is what-' he apparently calls deflation; but it is in reality merely a preserving of the same relative neutral position as before the slump. If he is really against both inflation and deflation, this is the end for which he should strive., , > (14) The great and signal omission of his remarks is this: Ho failed to point out that restoration of the, exchanges, or, as he erroneously terms it,.deflation would (a) maintain the real wage level; (b) keep. Australia •in an honourable position in the world; (c) avoid repudiation; (d) constitute :i real assertion of manhood; (c) create a new margin of credit, whereupon capital would flow towards Australia at low rates of interest; and (f) represent the only sound way of attaining economic recovery. ' The so-called price ' stabilisation" w.ould present Australia to the world as a moral coward, afraid to face facts, .and, like .an incipient lunatic, seeking for a childish means of- overcoming difficulties, apparently insuperable, but needing only to be attacked. Moreover, it would actually defraud 'the working man, because it is clear that if the present increasing Australian inflation is beyond the courage of the people to stem,' the acceleration produced by. further doses would send us hurtling along. And.'as every one knows, the workers' wages never catch up, once real inflation gets going. As pointed out above," our increased inflation is due to reduction in the pressure outside, and everyone can surely see that further inflation, whether, described as "restoration." or "stabilisation," or otherwise, is no cure, but that the only real remedy is to attack thn facts frontally and thus acquire the nfcrit that comes from valour in the faco of difficulty. (Jo) Finally, in,the two simple fractional expressions above, wo have a fair touchstone; .and all tho brilliant schemes, and royal roads that have,so far como under our notice, amount to the proposition that the way to correct a shrinkage in the denominator (or basis), is to increase the numerator (or superstructure). Truely.we have yet to learn that two and two make four.