The Daily News. SATURDAY, APRIL 10, 1920. PRICES AND CURRENCY.

Taranaki Daily News, 10 April 1920, Page 4

The Daily News. SATURDAY, APRIL 10, 1920. PRICES AND CURRENCY.

Recent English files contain reI ports of the general meetings of several of the leading London ! banks, whereat the respective chairmen dwelt more or less thoroughly with the economic problems of the day. The most conspicuous of these addresses is that by the Right Hon. Reginald McKenna, who was Chancellor of the Exchequer in 1915, and is now chairman of the London Joint City and Midland Bank. Most people look upon economic problems as too technical for all except experts. This is an erroneous idea, for it is a subject of absorbing and vital interest, and it affects every member of the community, though it requires a master mind to make causes and effects interesting, and it requires a financial genius such as Mr. MeKenna to lucidly explain details step by step so as to show why prices have been forced up and how normality can be again reached. At the outset, the fact is stressed that the actual spending power of the public is gauged by the total currency in circulation, added to the total amount of bank deposits. In 1914 the public spending power in Britain was 1198 millions; to-day it is 2693 millions, an increase of 125 per cent., and a comparison of prices of commodities showed the same percentage of increase. The next point to be noted is that bank deposits—which consist of payments of currency into the bank, and bank loans and advances—increased from 75 millions in June, 1914, to 191 millions in January, 1920, the additional 116 million in currency being represented by payments into the banks, while 1114 millions out of the increase of 1230 millions in bank deposits must be attributed to bank loans. Thus it is seen that bank loans are the main source of the growth of the bank deposits, and as an increase of deposits means an addition to purchasing power, it would be expected that such an increase would be followed by a rise in prices. An important point to note is that if money is borrowed by manufacturers and traders for production purposes or movement of commodities, the increase of purchasing power consequent upon the loans is automatically followed by an increase in the amount of commodities available, so that the ris<.in prices is corrected by the larger supply meeting the extra demand. What takes place in regard to bank trade loans is: An advance is made to the manufacturer who uses it on raw material, wages, etc., it being expected that the proceeds of sale to the merchant will be used to pay off the advance. The merchant borrows from the bank to pay the manufacturer, and there may he a whole series of loans, each paid off in turn, until the goods reach the consumer, so that the totnl loans by the banks would only increase as the total commodities increased. When, however, the State borrows, the loans lead to an immense increase in deposits, or purchasing power, and to an increase in prices. It is asserted that loans by the Bank of England to the Government have a much greater effect in raising prices than any other form of Government loan, as thev not onlv hn-

mediately raise the total of bank deposits, and consequently the spending power of the public. but they also increase the power of the banks to make further advance,;, which in due course lend to still more deposits and still greater purchasing power. Throughout the war the British Government were large buyers of commodities, greatly in excess of normal demands. The first effect of this was to stimulate production and employment, but the demand, even with the aids, speedily ex-ceeded-the supply, causing a rise in prices. At once more currency was needed, partly to pay the additional workpeople, and partly because with higher prices shopkeepers kept more money in their tills. The Government, to meet its constantly rising expenditure had to borrow freely, so that bank deposits increased enormously—but there was no proportionate increase in the supply of goods. Prices consequently rose rapidly, followed by demands for increased wages, and the vicious circle, from the effects of which the world is now suffering, was set in motion, the screw being turned again and again. Higher wages and prices mean a greater demand for currency—wages having to be paid in legal tender money. In the ordinary way the bulk of the money paid out weekly in wages comes back to the banks through the shops and is paid out again the following week, but as prices and wages rise, each week a larger amount is retained in the pockets of the people, in the tills of shopkeepers and in the banks' reserves. At the outbreak of the war there was not enough legal tender money to satisfy the additional requirements so the currency became inflated, every advance to the Government by the Bank of England being followed by a fresh issue of currency notes, but one? the nation ceases borrowing, the rise in prices will cease, and as the advances are paid off prices will decline. Mr. McKenna does not think the increase in currency was j the cause of high prices, yet it is ! a matter for anxiety and even alarm, nor does he consider prices will ever return to those of the pre-war period. The rise is worldwide, and only increased production and bringing expenditure within revenue will have a lowering effect. In other words the only remedy is rigid economy and sanity on the part of Governments, and hard work and thrift on that of the peoples. No heroic remedy is possible. Europe must have time to recover her equilibrium. "Europe," said the Hon. R. H. Brand (a banker), "is rather like a drunkard. She has got used to obtaining her imports on credit, and if you cut off her drink all at once the effect may be fatal. On the other hand, to let her continue (drinking, would in the end be equally fatal." The remedy for improving the rates of exchange is the same as that which has been advocated in relation to rising prices. So long as currency can be increased at will, without any relation to real value, the economic condition of any country may rapidly change for the worse, and that is why the need has arisen for rehabilitating the distressed countries of Europe. The outstanding work that must be undertaken is the improvement of the Empire's industrial and financial position. The present condition of the world will not admit either that we should stand still or go backwards. There must be progress and expansion on sane, sound lines.