The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES." GISBORNE, THURSDAY, AUG. 10, 1939. EXPANSION OF CREDIT

Gisborne Herald, Volume LXVI, Issue 20012, 10 August 1939, Page 4

The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES." GISBORNE, THURSDAY, AUG. 10, 1939. EXPANSION OF CREDIT

In view of the Reserve Bank's recent warning to the Government against continuing a policy of credit expansion, it is interesting to find that an almost identical warning is contained in a memorandum issued by the Australian Commonwealth Bank. The Reserve Bank commented 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, and it stressed the desirability of the avoidance of further recourse to the bank for accommodation for the Government. The Commonwealth Bank makes the same point, but it explains its conclusion in considerably greater detail. It is stated, at the outset, that expansion of credit by means of central bank loans can be justified only when there is general unemployment, and that* even under such conditions the policy has to be exercised with extreme care. "A loan by the central bank," says the memorandum, "can be advantageous only for bringing into use unemployed resources in men and equipment. Having done that its effects would be adverse through causing prices to rise." Unless there is general unemployment, it is added, lending by the central bank will cause prices to rise and will have adverse effects upon the general economy. The memorandum places much emphasis upon the distinction between general unemployment and employment. In normal circumstances, it is stated, central bank loans can be of no help and cannot cause any new production. What they do, in effect, is to compete with existing money for resources which are already being used. "We shall not have any more goods produced," it is stated, "and in the long run we may have even less because of the dislocation in the productive organisation caused by the use of central bank loans. We shall have more public works but so much less consumption goods or ordinary capital goods." This seems to be a fairly reasonable definition of what has already occurred in New Zealand as a result of the issue of credit through the Reserve Bank and explains why that bank has called a halt to the policy that was pursued so vigorously last year. It explains, also, why it has now become necessary for the Government to appeal'for an increase in production, to attempt to divert labour from public works financed through the central bank, and to restrict the importation of goods in excess of what the country is able to pay for through its exports. Indeed, the Commonwealth Bank issued a warning against these very results. Paraphrasing the Commonwealth Bank comment, it is stated that a central bank loan of £5,000,000 would not go a long way for public works, bir: with its indirect effects it might go beyond what was needed to absorb unemployed resources, and beyond that point it would only raise prices. "For this reason it is necessary to be able to withdraw the central bank

loan progressively as it docs its work." Here there is support for the Reserve Bank suggestion that the Government should reduce its existing indebtedness to the bank. The effect of currency expansion in a primary producing country is to put up the cost of producing everything, including exports and locally manufactured goods, but the price received for exports docs not go up to correspond, nor does the price of imports increase. The effect of this policy is summarised by the Commonwealth Bank in the following terms: "So, the export producer is in trouble and so is the factory competing with imports. The volume of exports goes down, imports go up, and exports would not provide sufficient surplus to pay for necessary imports. London funds would be quickly depleted, and if the issue of central bank credit exceeded proper limits, we should soon be face to face with a serious crisis." That quotation deserves careful study, because it seems to provide an almost exact diagnosis of what has actually occurred in New Zealand. It will be observed that the Commonwealth Bank, which deals with a much larger country and population, took the figure of £5,000,000 to illustrate how far-reaching could be the effects of an expansion of credit. In New Zealand, the Reserve Bank has issued more than £20,000.000 to the Government, the bulk of which was expansionary. In the circumstances, it is not surprising that the results forecast in Australia have actually been experienced in New Zealand. Another point to which reference is made, and which also has a bearing on the position in New Zealand is the effect of credit expansion on the community. This process, it is stated — and again it has been experienced in New Zealand—creates a rising spiral of costs which impacts itself most severely on the wage-earner and family man, whose standard of living is consequently lowered. It is admitted that the standard of living will be lowered, also, by the imposition of increased taxation or by borrowing in the ordinary way, but under this procedure, it is pointed out, rthe burden would bo borne by those best able to bear it instead of those who have no facilities for passing on the added costs. The whole tenor of this independent report is to support the view that New Zealand's difficulties are due to the policy of credit expansion and that the problems will not be overcome until that policy is reversed.