Wairarapa Times-Age MONDAY, OCTOBER 16, 1939. CURRENCY AND CREDIT CONTROL.

Wairarapa Times-Age, 16 October 1939, Page 4

Wairarapa Times-Age MONDAY, OCTOBER 16, 1939. CURRENCY AND CREDIT CONTROL.

AN entirely reasonable request is advanced by the Associated Chambers of Commerce in a letter addressed to the Munster of Finance on the subject of the Reserve Bank Amendment Ac . "The association asks that an explanation should be given ot the policy it is proposed to pursue under the powers conferred by the Act. It should be recognised that the explanation thus souglit is desirable irrespective of the opinions held on questions like that of the relative merits of Government and commercial control of banking.

In its letter to the Minister of Finance, the Associated Chambers of Commerce asks for explicit explanations on a number of questions. The most important of these relate to the method by which funds for war purposes other than those forthcoming from revenue are to be provided, and the extent to which it is considered by the Government that Reserve bank credit can be used without inflating the currency. In effect the Government is thus asked to define the.standards by which it proposes to be guided in its control of currency and credit.

This evidently is not an unreasonable request. It might have been put forward even by those who agree unreservedly with the Minister of Finance that the Government should have control of the credit system of the Dominion “in its fulness, not merely on broad lines.’’ In advancing that claim Mi Nas i said the Government recognised the tremendous responsibility which was involved. That being so, the Government should be willing to define its policy clearly and in particular to say whether its control of credit, and currency is to be regulated by ascertained and declared standards or is to be tested only by results.

Broadly speaking, the Reserve Bank Amendment Act empowers the Minister to abolish the standards hitherto in force with regard to borrowing by the Government from the Reserve Bank. The Minister is authorised, amongst other things, to set aside the provision that the Bank must maintain a reserve of twenty-five per cent in approved assets against advances to the State. In this and other details virtually unlimited powers of borrowing from the Bank are conferred upon the Government. It hardly needs to be pointed out that the [powers thus conferred are in themselves dangerously wide and that they could be used with inflationary results exceedingly detrimental to the Dominion. It does not follow of necessity that these poweis will be used unwisely or with damaging effect, but it is definitely a question whether the extension to any government of virtually unlimited powers of credit expansion can possibly be justified.

Once again it may be emphasised that the vital question at stake is not that of Government versus commercial control of banking, but whether Government control of the monetaiy and credit system of the Dominion is to be exercised in such a way as to protect and advance the interests of the community. On this all-important aspect of the position, Ministers have professed excellent intentions. The Acting-Prime Minister (Mr Fraser) said, for instance, when the Reserve Bank amending legislation was under discussion in the House oi Representatives, that there would be no reckless inflation.

Without doubting that assurances of this kind are offered quite sincerely, it is still highly pertinent to ask why, if there is to be no reckless, inflation, it is considered necessary to pass legislation under which virtually unlimited Inflation would be possible. The best-intent ioned politicians should be very willing to fortify good intentions with positive safeguards where monetary policy and the control of credit are concerned. In the experience of nations, inflation has less often been brought, about by deliberate policy than by pressure of circumstances. In the case of a. Government committed already to a highspending policy and now with a. war on its hands, pressure of the kind that would make for inflation on an exceedingly harmful if not disastrous scale is likely to become very powerful and difficult to resist.

It might have been expected in these circumstances that the Government would as a matter of course embody in its policy positive safeguards against inflation. The Government might have done this without making the slightest, concession to those who hold that an element of commercial control over banking should have been retained. A purely governmental control over monetary and credit policy'is quite capable of being reconciled with adequate safeguards against inflation, but no such safeguards are embodied in the law as it now stands in New Zealand.

The essential safeguard needed is the institution of standards with reference to which credit expansion would be checked short of the point at which it would cause harmful inflation. As a standard and safeguard against inflation, the reserve provision which the Minister of Finance is now empowered to set aside admittedly was not ideal. Better methods probably are available of maintaining the just relationship between currency and production which is or should be the aim of monetary policy. A report by a special committee of the London Chamber of Commerce in 1932, put forward by the Council of the Chamber as a contribution to the reform of the monetary system, recommended that currency should bo “issued by the Central Institution against all commodities, as represented by Hie eligible commercial bill, and not merely against one commodity, gold, supported by paper representing Government debt.’’

. The commercial bill is little used in this country at present, but there are other methods by which the volume of credit and currency might be proportioned to the flow of production. Continuing adjustment on these lines admittedly could not bo perfect, but even a standard based upon a rough and ready adjustment of credit and currency to production would be vastly preferable to the abandonment, to which the Dominion meantime is committed, of all positive and express. safeguards against inflation.