BEYOND INCOME

Evening Post, Volume CXXVI, Issue 137, 7 December 1938, Page 15

BEYOND INCOME

RAJE OF SPENDING

3IEBD FOR ADJUSTMENT

TO AVOID DISASTER

An ejx«planation of the shrinkage in (tie London funds and a suggested remedy for meeting the situation —an adjustment of the income of the country to the market value of the goods and services produced—were contained in the November bulletin of the Canterbury Chamber' of Commerce, prepared in' collaboration with the Faculty of Economics of the Canterbury University College.

After referring to the shrinkage of funds held both by the Reserve Bank and the trading banks, the bulletin States that if -the rate of decline shown in the last few months were to continue*, the Reserve Bank's sterling exchange would be completely exhausted early in 1939. "These funds," it is stated, "may fairly be said to represent the bank balance of the Dominion as a whole. TJhey constitute what is held by the Dominion in centres where internationjal payments are made and in money which is recognised internationally. «Sust as an individual's bank balance reflects changes in his receipts and pajenents, so in the case of the Uominion movements in these overseas funds represent the balance of New Zealand's transactions with other counties. Payments to New Zealand from overseas countries are made into these funds, while payments from New Zealand to other countries; are xaade from them. When, therefore, New Zealand's payments are greater than Jaer receipts, these funds decrease; When her receipts are greater than her payments, these funds increase. The decline in overseas funds therelore means that the Dominion has been paying more than it has been receiving, or spending more than it is getting, and has been drawing on its reserves for the excess expenditure. ! THE FUNDS REQUIRED. j "It is generally considered that about '£10,000,000 per year is required to pay interest on public debt held abroad and similar items, and that export receipts should exceed import payments by ftiis amount in order to make total payments balance. For the years 1933----85, the excess of exports was greater than this, and overseas funds increased. They were further augmented by money required to meet overseas payments for imports, etc., the transfer of ■which was postponed, partly because jn the depressed conditions its owners icould find little use for it at home, and partly because of the hope that a profit might be realised on it should the exchange rate fall. Since 1935, the trend ©f these funds and of the balance of (payments has been reversed. Most of •the money left in New Zealand has been repatriated as. it was required to finance the expanding business of its owners elsewhere; and as the hope of a reduction in New Zealand exchange rates and of a consequent profit on exchange became more remote. In addition, New Zealand's exports, which increased rapidly as recovery progressed, and reached a record high level of £66.7 millions for the year 1937, have since fallen by £7.2 millions to £59.5 millions. The expansion of export re-, ceipts up to the end of 1937 increased New Zealand's income, and this was further expanded by heavy Government expenditure on public works, which converted borrowed capital into income and diverted it into the hands of those most likely to spend it freely. Following the expansion of income, expenditure and payments for both locally-produced goods and for imports increased heavily. The increase in imports was rapid and was carried on, as is usually the case, some months after export receipts began to fall. Hence, sincere end of 1937, the excess of export receipts over import pay- J ments has declined rapidly and hasi been less than is required to meet nor- > mal payments abroad for interest, etc. THE EXPORT OF CAPITAL. "There has been a further cause of the ,decline in overseas funds. Since 1935, a fairly steady export of capital from.New Zealand has taken place and money has been invested overseas, mainly in Australia, where conditions have been • more ' attractive to investors. It is often said that capital is the most timid and the most liquid of all the agents of production. It is readily frightened away when conditions appear insecure and its movement in any particular direction is difficult to detect and to stop. An investor necessarily looks first for security, and second for return on his capital. In New. Zealand during recent years the conditions for investment have appeared insecure and unattractive for several reasons. The compulsory adjustment of contracts between debtors and creditors during and since the depression has not been forgotten, and there has been some fear of further unknown and unpredictable changes in the security of investments in New Zealand. In addition high and increasing taxation and rapidly rising costs have made the margin from which capital gest its return less than it would otherwise be, and have impaired the net earning capacity of business on which the security of capital ultimately rests, j These conditions have been more in | evidence in New Zealand than elsewhere. It follows that since capital' is ] liquid and moves readily, seeking the ! best combination of security and return, some overseas inyestors have realised their investments in New Zealand and transferred their capital elsewhere while some New Zealand investors have found overseas investments more attractive and have sent capital outside the country where relatively greater security or higher returns appear to offer. All these movements have affected the balance of payments, have assisted to turn it against New Zealand/and consequently have combined in the depletion of overseas funds." THE REMEDY. After discussing other aspects of the position, the bulletin proceeds to discuss the remedy. "The remedy," the bulletin states, "lies in adjusting the income of the country to the market value of the goods and services produced. As far as the trading banks and the business community are concerned, both have experienced many times the moderate credit contraction now needed in view of the fall in export receipts, and the methods of adjustment are familiar and would be readily accepted. The new factor in the situation, which is causing most concern, is the part the Government might play. The tried and proved method of meeting a depletion of overseas funds is to impose a check on the outward flow of funds from New Zealand by means such as a slight and temporary rise in the exchange rate

and an increase in the overdraft andj discount rates of the banks. Such methods should check the outflow of funds and might attract money to New Zealand, which would build vi the overseas balance again; and they would also Check the expansion of credit which is the underlying cause of the depletion of overseas funds. But the control of credit must apply to the Reserve Bank and the / Government as well as to the trading banks and their customers. It should be clearly recognised that, owing to over-spending in the recent past and to the reduction of export receipts, money has become scarcer. It should therefore be more expensive to borrow and its use should be limited to the purposes that are more essential. MONEY AND CAPITAL. "In addition, it is the essence of sound finance to distinguish clearly between money and capital, and the Government should observe this distinction. The function, of the banks is to supply money to finance trade. They are not equipped or organised to supply capital to finance public works, and they cannot do so without impairing the liquidity of their assets. Capital should come only from the savings of the people, and for public works should be borrowed only on long term. If the Government wishes to continue an extensive public works policy, it should borrow for this purpose in the proper quarters, that is, from real savings, and should not finance such works by the creation of additional credit. Credit creation beyond the needs of current business increases money income without increasing real income, and is inflation. Borrowing transfers income and expenditure from one channel to another, but does not increase either. . "The surest and shortest way to remedy the present drift would therefore be for the Government to raise a loan to finance its public works policy, i to repay at once its advances from the Reserve Bank for .other than dairy marketing purposes, and to acquiesce in the general adjustment policy that has been tried and proved in, the past. GOVERNMENT POLICY. "Much of the present concern in New Zealand about both the decline in overseas funds and the outward drift of capital arises from the fear that the Government will not limit its expenditure to its income and to what it can borrow in the loan market, but will pursue an inflationary policy and strive to conceal the results. Already there have been many rumours of exchange control. It would be quite possible to peg the exchange and the bank rates at present levels and at the same time»to continue to expand credit and to inflate and depreciate money in the Dominion. If restriction of exchange transactions were resorted to, such a policy would only defer and multiply the difficulties of ultimate adjustment. This policy would.be difficult to enforce effectively in the case of the export of capital, and it would certainly obstruct any tendency for capital already exported to return or for foreign capital to be invested in New Zealand. It should be remembered that capital is essential in production and is also both liquid and timid. Capital will flow back to New Zealand readily when conditions are such -as to attract it, and a return flow would' speedily reverse the present decline in overseas funds. The recent fall in these funds points clearly to the need for reconsideration of general policy and for a frank admission that in the case of a country or a Government, as with an individual, expenditure cannot continue to exceed income without disastrous results."