The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES." GISBORNE, MONDAY, AUGUST 7, 1939. RESERVE BANK FINANCE

Gisborne Herald, Volume LXVI, Issue 20009, 7 August 1939, Page 4

The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES." GISBORNE, MONDAY, AUGUST 7, 1939. RESERVE BANK FINANCE

The returns issued by the Reserve Bank last week arc of interest not only in themselves, but also because they appear to provide a remarkable disregard of the warning contained in the bank’s annual report and a contradiction of the policy announced in the Budget. The sterling exchange which for some time past has been the most important aspect of the returns shows little variation and the figures in this connection call for no comment beyond drawing attention to the fact that London funds are still very low and £9,750,000 lower than a year ago. More important at the moment, and much more disturbing, is ;the continued rise in advances to the State. Advances to the Marketing Department showed an increase of £113,000 for the week and of £1,750,000 for the year, while advances for other purposes rose by £600,000 in the week and £10,650,000 in the year. These figures show that at a time when the London reserves have been reduced to danger level the State has borrowed an additional £11,400,000 from the Reserve Bank alone, and, most significant of all. there has been no increase in the production of wealth to warrant this expansion of credit. On the contrary, production has declined, so that the Dominion is in the paradoxical position of having more money with which to purchase a diminished Quantity of goods.

It is difficult to reconcile the Reserve Bank trend with 'the comments made by the bank in its report. The report stated that any additional credit expansion would inevitably tend to cause a general rise in prices, with a consequent diminution in the value of all savings, wages, and pensions. The board not only stressed the desirability of stopping borrowing from the bank, but also urged a limitation of governmental expenditure and a reduction of outstanding advances. Since the function of the bank, as defined in the act, is to give effect to the financial policy of the Government as communicated to it by the Minister of Finance, it must be assumed that the import expresses the opinion of the Government itself, yet the policy now being followed is the exact reverse of that recommended by the bank. The report advocates three things—no further borrowing from the bank, a limitation of governmental expenditure, and a repayment of advances. Since the report was issued, only three weeks ago, the State has borrowed an additional £2,700,000, the Budget has been presented providing for an increase of £12,000,000 in governmental expenditure compared with last year, and instead of advances being repaid they are being rapidly increased. The public might be excused for being puzzled by these obvious contradictions.

Then there is *the point made by the Budget itself which stated that Reserve Eank credit was a type of finance which had obvious limitations during the current year and added: “We are not suffering from a shortage of money in New Zealand, but from a shortage of what money will buy.” That in itself is a clear admission of inflation, yet there is direct evidence that instead of the inflationary process being checked it is to be accelerated. Credit is being expanded through Reserve Bank advances at the rate of more than £700,000 a week, and currency is being increased through weekly additions to the note issue of £IOO,OOO a week. These amounts might seem to be comparatively small, but the injection of even these amounts into the stream of commerce has far-reaching effects. When, according to the Budget, there is no shortage of money, the printing press is being worked overtime to provide further issues of Currency and credit, and since, to again quote the Budget, there is a shortage of what money will buy, it is apparent that there must be a further increase in prices “with a consequent diminution in the value of all savings, wages, and pensions.” It is clear that the very dangers against which the Reserve Bank and the Budget issue such plain warnings are being intensified by the

misuse of a central bank under politi cal control.

There is another point in regard to Reserve Bank advances that commands attention. In the previous annual report the bank showed that the only advances to the State were in respect of the Marketing Department, the total being £5,109,000, but this year the total was no less than £19.460,000. Last year, presumably, the resources of State departments were sufficient to meet tire needs of the Government other than for the guaranteed price, but this year the bank comments that departmental funds have been reduced/lo a low level. Consequently, it has been necessary to issue an additional £14,350,000 worth of credit through the Reserve Bank, of which £5,600,000 was in respect of the Government housing programme. There have been suggestions at different times that "new money” at a nominal rate of interest has been created for the purpose of housing, but the accounts issued by the Treasury show that money now being advanced by the Reserve Bank is carrying interest at the rate of 4 per cent. How in view of this fact and the cost of houses it is possible to let them at the present rentals is a question that is not answered in any of the official documents. All the information that is available tends to show the dangers inherent in the present inflationary policy and it is to be feared that unless the advice contained in the Budget and the Reserve Bank report is followed the present financial crisis will be rapidly intensified.