CENTRAL BANKING

Evening Post, Volume CXXII, Issue 31, 5 August 1936, Page 14

CENTRAL BANKING

POLITICAL CONTROL

A FUNDAMENTAL ISSUE

"Evening1- Post," Apgust 5. Evidence given by Dr. &unald Walcer, Lecturer in Economics at Sydney University, before the Australian Banking and Monetary Commission was to the effect that the central bank should be independent of political control.

Dr. Walker said there had been such progress in State-controlled coinage that State control of other sections of the'monetary system might some day be feasible.

1 The present Government of New 1 Zealand considered it to be the functions of the Central Bank "to give effect, as far as may be, to the monetary policy of the Government;" but the Australian Prime Minister had repeatedly stated that the Central Bank should not be subject to political control. This raised a fundamental issue. • Replying to a question by Mr. Justice Napier, Dr. Walker. said that on the whole he considered it desirable that the Central Bank Board should be independent of political control, as frequently the board might have to take action in the interests of Australia as a whole, which might not' be accept- . able to a section who might desire to -. influence the Government through political pressure.

EFFECTS OF DEPRECIATION.

Mr. L. G: Melville, economist.to the Commonwealth Bank Board, gave evidence on monetary policy, but he stated that his views were his own, not those of ■ the Commonwealth Bank Board. It was not certain, said Mr. Melville, that the depreciation of the Australian pound would temporarily cause London funds to accumulate. This would1 depend on action taken by other countries towards goods exported from a country with an undervalued currency, and the way in which sections of the community, benefiting from the depreciation, spent their windfall gains. The depreciation of the currency would' at first increase the incomes of pastoralists, farmers, and manufacturers competing with imports. \The wealthier pastoralists and farmers were heavy purchasers of imported motor-cars and petrol, and spent much money travelling abroad.

"PERNICIOUS INFLATION."

The increased profits of manufacturers might result in the importation of- expensive machinery to equip new factories. Thus it was doubtful whether a depreciation of the Australia!* pound would expand exports. Retaliatory measures by other countries > might actually decrease them. Depreciation would reduce some imports on account of-their higher price in Australian currency, but cause others''to expand in response to the higher incomes of favoured sections of the community. The ■ net result would be uncertain. Successive depreciations of the Australian pound would cause internal economic disorder and instability.

The losses would fall principally upon the receivers of fixed incomes, including pensioners and widows. Real wages would be reduced by rising ■prices and incomes destroyed by unemployment. . The decline in the national income, the low level of real wages, aggravated by panic and flight of capital, might well lead to pernicious inflation. ' '

ELUSIVE MEASURE OF VALUE: Earlier in the course of his examina.tioa Mr. Melville remarked that ttie ideal way of settling. the monetary problem would be by supermen.' with" absolute, power, but that would be inconsistent with democratic institutions. Monetary policy, in Australia was the resultant of .a variety of actions. The psychological reactions of individuals had an effect on financial policy, added Mr. Melville, and the.Press played an important part in moulding opinion. The complexity of monetary policy/was due to the fact that all , economic measures were relative. Wages were relative to the cost, of living, which was dependent on retail prices relative to other prices. These were all relative to the unit of currency in a particular country in rcla.tionto that,of other countries, including the varying values of gold and silver. It was thus impossible to find in any country an absolute measure of