The Guardian AND EVENING STAR, With which is incorporated “ The West Coast Times.” TUESDAY, APRIL 12th, 1921. A BANKER’S OUTLOOK.

Hokitika Guardian, 12 April 1921, Page 2

The Guardian AND EVENING STAR, With which is incorporated “ The West Coast Times.” TUESDAY, APRIL 12th, 1921. A BANKER’S OUTLOOK.

Till-: adjustment of ihe financial equilibrium is the urgent necessity ot the times all round the world. The Chairman of some of the great English banks have been discussing the situation very closely lor in Britain the financial issues are ol the deepest concern, lieu Reginald McKenna, an ex-Chanccllor, who is now Chairman of the London City and Midland bank recently devoted much of his address to a consideration of the important questions of inflation and deflation. He made clear the essential difference between inflation caused by active trade, which was usually of short duration, and could be remedied by the imposition of a high Bank Rate and other restrictions upon credit, and inflation of the kind produced by heavy Government borrowing, not for the purpose of producing commodities for sale, hut for purposes of consumption. 'lbis Mr McKenna distinguished as monetary inflation, in the process of which prices are forced up over a protracted period of time, wages and contracts of all kinds are adjusted to new price levels, and fresh capital is embarked in business on this basis. The Government, in the early part of last year, set about a policy of producing monetary deflation; the Bank Rate was raised to 7 per cent, and the interest on Treasury Bills to 6| per cent. But such a policy, Mr McKenna contends, is impossible of execution. Trade is never good when prices are declining, but the consequence of a continuous fall in prices entailed by dear money and restriction of credit and accentuated by heavy taxation must mean complete stagnation of business. A fall in wholesale prices will follow through goods being forced upon the market by traders unable to carry their stocks; there will be a diminution in production, profits will be greatly lessened, and unemployment will grow. It is easy to he wise after an event, but few will question the accuracy of this diagnosis of the position. An obvious method of removng the inflation caused by the heavy Government borrowing during the war is to cancel the National Debt, thus reducing the immense volume of purchasing power which its creation brought into existence. That, of course is impracticable, for the only way in which at the present time funds could lip provided for such a purpose is by the imposition of additional taxation, and that could not he enforced without bringing immediate ruin upon our commerce and manufactures. In this connection Mr McKenna said that our experience during the past year has taught us that there is a limit beyond which trade and industry cannot be burdened without great danger to their strength and permanence. That limit is passed when traders arc forced to borrow from their banks in order to meet the liabilities to the tax-collector, and it is a fact that no inconsiderable part of the expansion of credit during the last year was due to this cause. The only way in which funds can be obtained for repayment of the National Debt is by economy in expenditure, and by this means alone, in present circumstances, can monetary deflation be effected, or even attempted, without permanent injury to our Trade. Economise our national expenditure as we would, we could not escape from the annual charge for interest on the National Debt, the Sinking Fund, the charge for war pensions, which together would total £470,000,(XX). Tf we left the whole of the remaining cost of Government to he defrayed out of our other revenue this would call for an income tax of over 13s in the pound, a rate absolutely impossible for any country to bear. Deflation, however, can be effected without producing the evils referred to if we increase the commodities available for purchase without increasing the purchasing power. The fall in prices then would be very gradual, and though a loss rate of profit would be made than

if prices were stable, it would he a larger quantity, and there would still be room for a fair return on capital and a fair reward for labour. This, Mr McKenna said, is the kind of deflation at which we ought to aim—a deflation brought about by a larger supply of the commodities wo all need, a greater surplus for foreign export, and a larger total of real wealth. At the same time Mr McKenna agreed that we cannot look for real commercial prosperity until the European market is restored, and what Europe needs is peace, not merely the peace of pacts and treaties, but that which, is born of the spirit of peace. When the Government of Europe have accepted the conditions of peace they will be able to bring their expenditure down to the limits of their revenue; the issue of paper currency will cease; the exchanges will be stable; confidence will revive, and full employment will follow.