Investment Market To-day

Evening Star, Issue 23374, 18 September 1939, Page 14

Investment Market To-day

Economic Factors In Wartime

Quiet Opening Of Share Markets

A quiet opening marked the resumption of investment activity in Dunedin to-day. Business was restricted, while buying support again reflected a cautious policy. Australian metals were dominated by vendors, but most other section s were accorded fair support.

Sterling on New York was fixed at 4.04 for this week. An illuminating analysis of war-time economic factors is published on this page. Most pertinent part of the article deals with the finding of the necessary money, and New Zealand will have to face one of the three alternatives available; inflation, taxes, or loans.

WAR FINANCE ECONOMIC FACTORS TREND OF CONSUMPTION I CHANGES IN PRODUTION When a country goes to war a lot of people are taken from productive employment in the various groups and transferred to the fighting, administrative, and supply services. “ In their new spheres,” remarks the ‘Wild Cat Monthly,’ “ they still consume much the same quantity of food and clothing as they did in their old or peace-time occupations. The remainder of the population is, therefore, called upon to produce more food and clothing per capita than it used to. There is also a big increase in demand for strictly war goods—arras, munitions, equipment. In this jvay new industries are developed and the capacity of old ones ‘increased. Production is maintained mainly by the replacement of men-by women and youths. If in any particular direction war consumption e,xceeds home production, the shortage is made up by imports, either' direct from the country of origin or through neutrals. During the Great War, Britain was able to import direct, because it had command of the seas. Because Genpany had not, it had to import through neutrals. This had the effect of increasing the most of its imports. The recent Russo-German pact and trade agreement have put Germany in a much stronger position economically and strategically than she was in 1914: Britain, of course, still has command of the seas. BRITAIN'S GREAT RESOURCES. “ If the imports cannot be paid for with exports and income from foreign investments, then gold can be exported, the foreign investments can be sold, or foreign borrowing can be resorted to. In all these respects Britain and the Empire are well equipped for a prolonged struggle. Also, the British currency system is more elastic than it was •in 1914. It all boils down to this—no country can spend more than it can produce and borrow. _ The point at which national exhaustion is reached is not when the debt rises to any given amount, as is often supposed, but when essential war requirements outrun the

resources of production and borrowing. As this point approaches, the standard of living becomes very low. The decline in consumption results in under-nour-ishment that cuts into the vitality ol the nation, especially of the rising generation; this happened in Germany during the Great War. This point of view also goes a long wav toward explaining the rather feverish development of economic nationalism, of which so much has been heard lately. finding the money. Now, where do the funds come from to pay’for the money costs of war? the three principal methods of raising them are (1) taxes, (2) loans, and <3) inflation of the currency. When war is declared a lot of money has to be found in a hurry. It is a national emergency in which' the Government’s credit is. alwavs good, for any amount, at the central bank. So the Government goes ahead, spending whatever is necessary, and the bank honours the cheques, this money finds its way mainly into the accounts of traders who provide the various war supplies. Prices shoot up, and so do trade profits. Wages rise, too, hut they lag behind the rise in the prices and profits. So the question arises whether taxes or loans are the best way for the Government to recoup what it has already spent, and to make provision for its planned commitments. Loans spur the rise in prices and profits. They also lead to inflation, and give the bondholder a claim on the Future money income of the community. A politically democratic and economically self-reliant tax policy would help to retard, the rise in prices and profits. It would also help to diminish the volume of claims on the future that could be established by purchase of bonds. _ But there is a point beyond winch taxation retards production. Actually, the aim is to stimulate the production of essential war materials, and to retard the output of luxury goods. Anyhow, taxation alone would not yield enough to cover the entire cost of a war these days, especially if the campaign was a protracted one. So loans inevitably become part of the programme. Indeed, we have not yet discovered a way of financing war without employing all three methods—taxes, loans, and inflation. The war .finance policy that has least sting in its tail is the one that rests mostly on (1) taxes and (2) loans from savings. INFLATION PROBLEMS. “ The point to keep in mind is that goods and services are primary, am! money and credit are secondary. The

importance ol money and credit lies in the fact that they are the means by which goods and services are paid for. When it conics to a question of borrowing in the world’s money markets, a country’s ability to raise funds is governed very largely by its productive power, now and in the future. Yet the value of money or currency is of great importance, both to the individual am! the nation. If the value depreciates it will buy fewer goods and services: if its value appreciates it will buy more. This is one reason why there is always a tendency to hold money or fixed in-terest-hearing securities during a period of falling prices, or slump, and to get, into goods, or some equity to goods, when things arc improving and prices are rising. Bank notes alone do not increase a nation’s real wealth, any more than paper debts will end a war. By paper debt is meant the internal debt of a country, not the foreign debt, which has to be paid for with exports. “ Inflation results in a rise in prices and a decline in real wages. The lag o F wages and other costs of production behind prices makes profiteering possible. Now, when profits arc made at the expense of wages, it means that the labourer hoars more than his fair share of the burden. Unless an adequate tax policy is adopted, the profiteer is able to fix his gains by investing them in war loans. The labourer’s invisible contribution to the, war consists of the amount by which wages lag behind prices. Inflation is an unrecognised and pernicious form of taxation. It falls heaviest upon those with fixed incomes from labour and investments ; its effect upon the bondholder is in the nature of a capital levy.” MARKETS IN WAR REOPENING OF EXCHANGES IN THE PUBLIC INTEREST When the Melbourne Stock Exchange reopened the chairman, Mr W. Forster Woods, said that the stock exchanges were acting in the best interests of the nation and the Investing public. Mr Woods expressed the opinion that it was improbable that investors would desire to sell first-class securities unless they required money for a special reason. He considered it improbable that the public would turn assets into cash which might not be required, particularly as good securities were likely to pay regular interest or dividends, whereas notes, although having the purchasing power, would pay no interest. The committee of the Stock Exchange of Melbourne has prohibited members from short selling; that is. selling of securities not actually owned by themselves or by a client. Operation of this rule had the effect of causing a fairly wide discrepancy between prices of stocks in Melbourne and Sydney last week, because ordinary arbitrage transactions were considerably curtailed.