MANY PROBLEMS

Rotorua Morning Post, Volume 2, Issue 410, 20 December 1932, Page 5

MANY PROBLEMS

("Post" Special Commissioner).

CABINET'S TASK NOT UNANIMOUS ON INTEREST AND EXCHANGE RATES. EFFECT S OF INFLATION.

Wellington, Monday. It is apparent that the Government has not yet made any decisions as to the policy it will pursue when Parliament meets again on January 26. Since the adjournment the majority ' of the ministers have been occupied on departmental matters. which have accumulated during- the "session, and it is not likely that Cabinet as a whole will commence deliberations on the economic situation until after the holidays. The minister who has been devoting the most time to the central problems of the day is the Minister of Finance (the Hon. W. Downie Stewart), and be will no doubt have sf big say in the policy that will be finally adopted. During the weelc Mr. Stewart called in three members of the Economic Committe'e, Professors J. Hight, H. j Belshaw and A. H. Tocker, and for two days these experts were in close ; consultation with the minister and members of the Treasury Department. It will be remembered that in February last the Economic Committee, which also included Professor D. B. Copland, of Melbourne, and Mr. A. D. Park, Secretary of Treasury recommended an ' artificially high exchange rate as a means of arresting the downward trend of internal prices, but this suggestion was rejected by the Government on the ground that the exchange rate was a matter for the banks. However, the Government has not adopted this policy consistently, as about twelve months ago it ereated an exchange pool, with the right to restrict imports, in order to 'ensure that there would be sufficient funds available in London to meet Government and local body overseas commitments. The exchange was fre'sd a few months ago and the Government again affirmed the principle of allowing the banks to control it. Apart from the economists, the Government has also been in close toueh with the banks, and in some quarters this is regarded as significant. It will be remembered that the Directors of the Bank of New Zealand, in deciding against a pegged exchange, offered as an alternative a loan of £2,000,000 to finance remissions to farmers of land tax and rates. No decision on this proposal has been announced by the Government, which has also under review a system of bonuses on exports. Among some of the rural members of the House it is considered that £2,000,000 will not be sufficient to meet the plight of the primary producer, but it is also evident that if any large measure of assistance is given ta( the farmer, there will be a protest from the city members who consider that bonuses and remissions of rates and taxes are helping to keep the price of land at an uneconomic value. A further alternative that is being discussed has an inflationary tinge. Many new or apparently new ideas for creating money credit and prosperity are being brought forward to-day, and some of the schemes have not fallen on deaf ears. The Banks and Prices One of the most popular ideas at the present time is that the banks could, by manufacturing money, force up prices. This idea is widely held by those who have the firm conviction that the banks will not do this because they are guarding vested interests, and that the power of the banks must be broken by giving the State the control of money. This theory owss its origin to experience of the wartime inflation of money. Governments at war are great spenders, and in the last war they wei-e compelled to print tremendous sums of money to buy things they needed, with the result that prices, wages and profits rose enormously. In other words, inflationrreduced the value of money. Effect of Inflation The present troubles of the world are mainly the outcome of the inflation which was necessary to finance the war, and fresh inflation, though it might temporarily mitigate them, would, according to past experience. ultimately intensify them. By the depreciation of its currency a country might raise its price level in terms of that currency, but it could not, with such a device, raise the world level of prices that are proving so oppressive to New Zealand. We cannot bring about a change in world parity with little inflation schemes of our own. Thol idea that cheap money means good trade and the reverse bad trade, though entertained by some politicians is contrary to all experience and logic. When trade is depressed the demand for money like that for commoditi'es and labour, falls, and its price declines. When the demand increases, prices rise, and that applies to money as well as other things. There would he no more wisdom in incraasing the supply of money, when it is already in excess of demand, than increasing the supply of labour in the midst of great unemployment, or the supply of a particular commodity in a market already overstocked. >

Fearful of Consequences It is unlikely that the Minister of Finance would countenance any inflationary scheme, although it must he said that one or two of his colleagues, who were advocates of the high exchange, are toying with 'the idea. It is contended that the psychological effect of an inflationary policy would he beneficial, as it would have a tendency to create confidence and thus unloosen some of the purse strings which at present have knots in them, but those who see two or three moves aheau are fearful of the consequences. Inflationary schemes, like tariffs, are artificial in their essence, and like tariffs also are open to abuse. There are few students of politics who would place the power in the hands of any Government to set the note-printing press in motion. There are indications that there are two schools of thought in Cabinet on the question of a compulsory reduetion of interest. Th'e Prime Minister has stated on several occasions that he considers that the burden of interest is more than the country can bear -and that steps will have to he "taken to reduce the price of money, but some of his colleagues are of the

orinion that such a policy, if pursued further will shake the confidence of investors to such an extent that loan money will disappear from the country. It can thus he seen that Cabinet has a long way to travel beforo it can arrive at any unanimous decision.