The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES.” WEDNESDAY, NOVEMBER 1, 1939. RESERVE RANK FINANCE

Gisborne Herald, Volume LXVI, Issue 20083, 1 November 1939, Page 6

The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES.” WEDNESDAY, NOVEMBER 1, 1939. RESERVE RANK FINANCE

| The ordinary individual requires no ; economist or financial wizard to tell ! him that if he produces less his in-

j come. and. therefore, his purchasing { power, diminishes. The thing is so ! obvious that it needs no mention, but

; what is puzzling is that a large secI tion of the community is prepared to I assume that New Zealand, as a nation,

can continue to produce less, yet, at the same time, apparently have more to spend. That is the position that exists to-day. Production in the Dominion has been steadily declining since 1936-37, but, paradoxically enough, the note issue has increased in the past two years by nearly £4,-

500,000 or almost exactly one-third. There is actually less real wealth in the country but millions of pounds more paper money. In these circumstances it is clear that the purchasing power of the money must decline in proportion, and this explains the rapid increase in the cost of living. If a cow gives less milk there is neces-

sarily less to distribute and to make good the deficiency by the addition of water is merely deluding the consumer. It might be possible to create an illusion of even more milk by further additions of water, but the consumer will soon learn that the watering down process robbed the milk of its nutritive value. In the same way an illusion of wealth can be created by printing large quantities of banknotes, but in time the public realises that the notes are rapidly losing their value.

It is clear from the statistical records that the increased note issue is not the result of an increase in the production of wealth. The source of

this additional money is the credit created by the Reserve Bank. At the beginning of last financial year nothing had been advanced to the Government by the Reserve Bank for purposes other than the dairy produce account. This month the total of “other advances” has reached nearly £17,500.000. In other words, currency and credit has been expanded to this extent beyond the real value of production. The £17,500,000 represents the water that has been added to the milk and this explains why New Zealand currency, in the same way as adulterated milk, has lost some of its value. Until the passing of the recent amendment of the Reserve Bank Act there was a limit beyond which this watering process could not go, but now the last safeguard has been removed and there is a very real danger that the inflationary process will be continued until New Zealand currency has no real value at all. Already the Dominion’s productive wealth of about £135,000,000 has been inflated to the extent of nearly £20,000,000, but since inflation does not produce goods, but rather tends to restrict production, it follows that there is more purchasing power than there are goods to be purchased and this can only mean a rise in prices and in the cost of living.

Both the Reserve Bank Board and the Minister of Finance have expressed grave concern at this trend, but both seem equally powerless to check it. It is significant that Mr. Nash, in defending the maintenance of the dairy produce price at last year's level, remarked that “increasing purchasing power at such a time of any large section of the community would tend to bring about an inflationary situation which no one wanted.” The present advance to the dairy industry account is between £5,000,000 and £6,000,000 and nearly all of this amount is backed by real production. Mr. Nash balks at increasing this deficit by a few hundred thousand pounds, because “it would bring about an inflationary situation.” At the same time, however, he does not hesitate to increase “other advances,” which are not backed by production, to the extent of millions of pounds. Only last week, in a broadcast address, Mr. Nash said that “a bigger price to the farmer would create a demand for consumer goods, resulting in a further drainage on sterling funds.” The farmer, therefore, is refused a bigger advance from the Reserve Bank, but from the same bank the Government itself exacts advances at the rate of more than £1,000,000 a month. These advances have already brought about the inflationary situation in regard to which Mr. Nash expresses concern and have been largely responsible for the disappearance of overseas funds.

It has been claimed that politicians should control the currency and credit of the Dominion, but experience already shows that the misuse of the Reserve Bank is the one thing above all else that is likely to gravely endanger the real credit and currency of the country. The overseas credit of New Zealand lias disappeared already and a continuation of the present policy can only result in a further devaluation of the currency. The attitude that has been adopted in recent months is well summed up in a work on “Public Finance" by Dr. Dalton, one of the leaders of the British Labour Party. “From the revenue point of view,” he writes, “resort to the printing press is often the line of least resistance for an embarrassed Government, which dare not cut down expenditure or take the steps necessary to pay its way by taxing straightforwardly or offering sufficiently high rates of interest to attract an adequate Supply of new savings.” No comment

could be more apposite to the policy that has been adopted in New Zea-

land in recent months. The Reserve Bank, in its annual report, issued a strong warning against additional credit expansion, and the Government was persuaded to float a comparatively small public loan. Now, however, the caucus lias over-ruled the Government and the printing press is working overtime. The milk is being adulaterated by repeated additions of water and New Zealand currency, instead of being a token for real wealth, is merely an issue of paper which is rapidly losing its value.