MONEY DEPRESSION

Sun (Auckland), Volume IV, Issue 966, 8 May 1930, Page 11

MONEY DEPRESSION

FINANCIAL CONDITIONS WILL IMPROVE ARTICLE IN "GAZETTE” Many people are inclined to think that the severe setback in values in New Zealand is the result of the financial crisis in Aus- ! tralia brought about by the Commonwealth’s borrowing. This may j be a contributory factor, but the ! main reasons lie outside. In an article entitled “Future Prospects,” ! the “New Zealand Stock Exchange Gazette,” in its May number, reviews the position, suggests reasons for the depression, and strikes an optimistic note for the future. In financial matters, as in most others, the exercise of a sense of proportion is the saving quality, the article states. Its absence makes possible the wildest extravagances of a boom and deepens the gloom period of depression. such as that through which we are now passing. .That the present condition of agricultural products, industry and finance in this country leaves little ground for optimism, goes without saying. But it is probably true that the extreme pessimism now’ prevalent is eqLially unjustified. It seems to be overlooked that the recession in values of primary products now being experienced here owes its origin more to basic factors of wideworld incidence than to Australian or domestic influences. COMPARISON OF PRICES The fall in world wholesale prices that has been proceeding steadily with only one slight check since 1920 has been accelerated in recent months by the deflationary effects of the fall in stock markets. The dependence of our farming product values is so bound to conditions in Great Britain that a comparison of wholesale prices there will not be out of place. The average index number of wholesale prices for 1920 stood at 295, and following the collapse of the post-war boom fell to 152 in 1923. Cheap money then caused a rise in 1924 to IG4, but tlie downward movement was renewed in the following year, and has continued ever since. By 1929 the index had reached 135.3, a decline of less than 3 5 per cent, in five years, or approximately 3 per cent, per annum. But between January, 1929, and January, 3 930, the decline was one of 9 per cent., a movement from a decline to a fall. This sudden drop is at once so large and so rapid as to be almost disastrous. The depressing effects on trade of a falling price-level create a general lack of confidence and a reduced purchasing power. What has caused these conditions in Great Britain? The reasons are mainly two, world over-pro-duction and the return to the gold standard. Of the first it may be said that the effect of the war w*as to destroy the relatively stable equilibrium of supplv and demand that had existed before 1914, by encouraging the growth of manufactures in countries either unable to secure supplies from belligerent

nations or freed from their competition. This tendency has been accelerated by the imposition of progressively high tariff barriers. This factor alone would probably have resulted ir. a general fall in commodity values, at least for a period. RETURN TO GOLD STANDARD

The movement without doubt has been prolonged by the general return to the gold standard, following the example set by Great Britain in 1925. The problem of the future commodity value of gold is one of the main issues facing the world today. It may be quite reasonably argued that the deflation of values in 1920 was necessary. The important point, however, is the movement since 1925. Its effects on trade were minimised by the advent of a period of cheap money beginning in 1922, which, with the ensuing rise in Stock Exchange securities, provided a form of inflation in spending power and promoted a widcworld feeling of confidence. Unfortunately the security boom has also had other and more unpleasant results. It has, for instance, encouraged a further extension of productive power in many industries which the basic conditions of the world trade do not justify.

The other side of the picture is the rapid fall in the bank rate in London. From the 6A per cent, reached in September of last year the rate has receded tt 3 per cent., at which figure it stands today.

In short, the wheel has swung a full circle, and at a time when the outlook seems hopeless the forces making for recovery are already apparent.

The effect of a bank rate of 3 per cent, for any period will be reflected in rising prices for gilt-edged securities. concludes the article. Then, as the income from securities of this class declines, there should be apparent once more an exchange of money into equities that already offer attractive yields, and the beginning of another rise in the general level of stock exchange securities. If the period of cheap money in London continues for any time, it must go a long way toward relieving conditions there, and the relief of the pressure must be reflected in this country.