8.—3.

prosperity encouraged people to speculate, and there was a mass movement towards speculation amongst the people. What were the inflationary conditions to which you refer ? —A large amount of the inflation was the attraction of gold to America owing to the very profitable part she played in the war and the expansion of money oil the basis of that gold. But the bank officials told us that it is not inflation so long as you have the gold. You do not agree with that ? —No. I think you can have gold inflation as well as note inflation. So far as the speculation is concerned if there are losses on one hand somebody gains on the other do they not ? —I do not think so necessarily. There is no total loss is there ? No net loss ? —I think there might be. Money was flowing into the American markets largely out of commodity markets. With the increased money flowing into the American markets the body of securities was growing, but the money offered against those securities was growing at a much more rapid rate, so a security which in 1922 was worth £100 in 1928 was worth £400 and people were paying £400 for it. Then the estimate of those securities in the market fell and they came to be worth less than £100 again. Pretty well all the world authorities I have been able to get in touch with ascribe the commencement to a policy of deflation. Has there not been a general policy of deflation ? —The policy of deflation I think, followed that fall in the value of securities, because most bank loans were lent against securities and they would be valued for purposes of loan at their market value. But you told us just now that the policy of inflation caused the speculation ? —lt was one of the causes. A policy of deflation would smash that would it not ? —Yes. So that the speculation was not the cause of the deflation, but the deflation was the cause of the smash of the speculation ? —I think they are linked together, that that speculation was the cause of the deflation in the value of securities, and the deflation in securities was the cause of the monetary deflation which occurred in America. Have you seen that formula which was issued from Columbia University by Dr. Walter Rauchenstrausch, showing that population is increasing as the square on the increment of time, production is increasing as the cube on the increment of time, and debt is increasing as the power of four on the increment of time ? —I have not seen the formula. It suggests a train of thought, because this question of war debts particularly has engaged a good deal of attention, and there is a tendency in some quarters to ascribe most of the troubles to those debts and the attempts to pay them. In reality, with the Young Plan and the Dawes Plan, and the moratorium that was established, those debts have not in fact been paid, have they ?— I could not quote the figures exactly, but I think most of the payment that has been made has been balanced by fresh loans to Germany. In other words, they have not been paid ?—No. They borrowed the money to pay them. So that it is not really sufficient for us to ascribe the trouble to the payments of the war debts, reparations, or whatever it might be ? —A good deal of the trouble occurred when the flow of money from America to Germany for loans to finance construction stopped, because that flow of money was attracted into American speculation. Then Germany could not pay. Then difficulties came to Germany. Is not there a better field for investigation there, the fact that it is not only since the war but before the war that national debts were increasing in progressively larger sums ? —You mean State debts ? National debts, of course ?—Public debts, not private debts ? I am not in a position to speak about that, but we have the information about the national debts. Statistical information shows that ?—1 do not know whether the national debts were increasing proportionately to our total value of production. That seems to be the important point. Production has been increasing progressively for over two centuries ? —Very rapidly. And debt has been increasing apparently at least as fast ? —I could not say. The figures you give us here show that, so far as New Zealand is concerned, over a certain period there was an increase in production of 4'4 per cent., and an increase in advances of 4'4 per cent. Advances is only another name for debt ?—Yes. So that you have production and debt increasing proportionately ?—Yes, but that production is financed in part by long term debt—that- is, in part by the savings of the community (if it is a man's own savings there is no debt), and in part by debt to the banks, and our monetary system consists of financing trade in part by debts to the bank which are balanced by debts of the bank to other people. It seems as every asset we create is treated as a liability ? —Not every one. If we are pledging an increasing proportion of our total wealth, we will probably get into trouble. If we did not pledge our assets in that way, the whole thing would come to a stop ?—I said thatin every community there is a proportion of its total wealth, that it is convenient to hold in the form of money. That proportion is the chief factor governing the general level of prices. Inflation can be brought about by a rapid increase in the issue of loan-moneys ? —lf those moneys are issued on creation of bank credit, yes ; if they are brought about by simply borrowing money or the savings of the people, it is only a transfer, and there is no increase, in money. Most of the money is in bank loan-money, is it not ?—At the present time we have £60,000,000-odd of deposits and round about the same amount of loans by the banks. But the money in circulation is almost entirely loan-money ? —lt is money lent by the public to the banks on the one side, and by the banks to the public on the other side. It is bank liabilities. I was talking of it when it was entirely metallic ; it was then in permanent circulation? — Not necessarily; because a very important factor in money is the fact that individuals hold varying proportions of their total money out of circulation.

148