This monetary reform business : a guide for busy men ; The fallacy of guaranteed prices

Sinclair, A. J. (Alexander Johnston), Waipa Post Print, Te Awamutu, N.Z., 1935

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Title: This monetary reform business : a guide for busy men ; The fallacy of guaranteed prices.

Author: Sinclair, A. J. (Alexander Johnston)

Published: Waipa Post Print, Te Awamutu, N.Z., 1935

This Monetary Reform Business

A GUIDE FOR BUSY MEN

There in no laboratory in which experiments in monetary reform can first be tried. They can only be tpied on the lives and fortunes of human beings, and if they fail, they may be productive of untold misery. The mechanism of finance is a delicate one. The confidence upon which it is based is a stow growth, but it may be destroyed overnight, and those to whom is entrusted responsibility for the welfare of the people must proceed with caution in the adoption of changes.

ROYAL COMMISSION OX BANKING AXD CURREXCY IX C AX ADA, 1!)33.

FOREWORD.

In July, 1934, the New Zealand Government issued a •document of 745 pages. It contained over 800,000 words, and was entitled:

MONETARY COMMITTEE, 1934:

MINUTES OF EVIDENCE.

I have asked scores of business men if they have studied it. Not one of them had ever seen it, although a few had perused the Monetary Committee’s Report.

As a pastime for long winter evenings, I recommend the study of the Minutes of Evidence, with the object of separating the wheat from the chaff. There is a great deal of chaff.

The wheat I garnered for my own use, and it has occurred to me that the result might be helpful to busy men who would shrink from the appalling task of studying some of the weirdest and most impracticable schemes ever conceived in the brain of man.

I have grouped the information around a series of questions which most business-men ask themselves at one time or another, as they read the extravagant claims made by monetary theorists. In an appendix, I have expressed my views on the inherent fallacies involved in the proposals relating to guaranteed prices.

I have never taken any interest in party politics except when they propose vitally and detrimentally to affect the primary industry with which I have been associated for the past twenty years. I hold with the soundness of the view expressed by the Macmillan Report that the depression was caused largely by non-monetary factors. lam of the opinion that the New Zealand monetary system must always and inevitably reflect overseas conditions; that the anomalies which previously existed in our banking system have been removed by the establishment of the Centra! Reserve Bank; and that our present monetary system will effectively respond to the steady improvement of trade conditions in Great Britain.

A. J. SINCLAIR.

Te Awamutu,

Ist September, 1935.

The following questions are answered by extracts from “ The Report of the Monetary Committee, 1934,” or from “ The Minutes of Evidence Submitted to the Monetary Committee, 1934 ”:

Answer

No.

Was the Monetary System Responsible for the Depression ? 1

What was the Real Cause of the Depression ? 2

What have been the Trade Cycles in New Zealand ? 3

Why is there so Much Unemployment ? 4

What is Money ? 5

What is the Difference between Money and Currency ? 6

Can Banks Extend Unlimited Credit ? 7

Do Banks Create Money ? 8

Can Banks Make Unlimited Advances ? 9

Can Credit be Created by “ Writing Figures in a Book ” ? 10

Do Banks Create and Destroy Credit at No Cost ? 11

Can We Have “Costless Credit”? 12

Must Credits be Cancelled ? 13

What is the Real Danger of Currency Inflation ? 14

How are Wage-earners Affected by Currency Inflation ? 15

Can Commodity Prices be Controlled ? 16

Can the Internal Price-Level be Stabilised ? 17

Does an Internal Price-Level Really Exist ? 18

Are Guaranteed Prices Feasible ? 19

Do Bank Reserves Affect the Community’s PurchasingPower ? 30

Why are Bank Reserves so Necessary ? 21

Who are Shareholders in the Trading Banks ? 22

What has been the Decrease in Overdraft Interest Rates ? 2:

Should Overdraft Interest Rates be Further Reduced ? 24

Is New Zealand’s Banking System Self-contained ? 25

What is the Value of the Reserve Bank ? 26

Is there a Monopoly of Credit in New Zealand ? 27

Do Banks Control the Government ? 28

What are the Main Fallacies of Douglas Social Credit ? 29

Is the Exchange Premium of 25% Unsound ? 30

Why was the Exchange Rate Raised ? 31

Does Our Present Exchange Rate Give a Preference to Australia ? 32

What are the Dangers of Lowering the Present Exchange Rate ? 33

How is Economic Nationalism Affecting New Zealand ? 34

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This Monetary Reform Business.

I.—Was the Monetary System Responsible for the Depression ?

A sound monetary policy suited to the needs of the country, and wise administration of that policy, can do a great deal to promote trade and industry. On the other hand, the best monetary policies or systems cannot prevent serious disorganisation and trouble arising from unsound economic policies, or lack of balance in production. At the present time the welfare of the Dominion is being adversely affected by the over-production of dairy produce relative to the effective world demand.

It was the heavy fall, within a short period, in the British prices for our exports that disorganised our economic structure and brought the depression to New Zealand. If that disastrous fall in world prices was due in part to monetary causes, it was obviously not due to failure on the part of the New Zealand monetary system. This is a fact overlooked by many who ascribe our difficulties to failure on the part of the monetary system.

(Report, pp. 6 & 7.

—What was the Real Cause of the Depression ?

In 1928, 51 per cent., or approximately half of the Dominion’s toal production (apart from buildings, etc.) was exported. Between 1928 and 1932, the index figures indicate that the value of exports increased by 18 per cent. In exchange for the greater quantity of exports (after making provision for the payment of interest and other fixed claims) we received in return for 1932, 34 per cent less quantity of imports compared with the position in 1928. The net effect of this was that for 1932 the quantity of goods available for consumption in the Dominion was 25 per cent lower than in 1928. On the same basis, the loss for 1933 was 26 per cent. This was a real loss, due principally to:

(a) Having to set aside a larger quantity of produce to meet fixed obligations overseas; and

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(b) The fact that the terms of barter in Great Britain had gone against us, with the result that, in exchange for a given quantity of primary products, we now receive less manufactured goods than formerly—that is to say, the price of primary products has fallen more than the price of manufactured goods.

(Treasury: Minutes —p. 10.

3.—What have been the Trade Cycles in New Zealand .’

A study of the figures shows a fairly serious slump in 1907-9, which reached its lowest point in March, 1909. There was a boom to the middle of 1920. The subsequent slump reached its lowest point in the first quarter of 1922. A high point was reached again in 1925-26; there was a falling-off in 1927-28; a high point occurred at the end of 1928, and a low point in the latter half of 1932. There has been a continuous increase since.

(A. H. Tocker: Minutes —p. 132.

4.—Why is there so Much Unemployment ?

The cause of the trouble lies in the fact that the masses of the people lack the necessary purchasing-power to obtain the goods they so badly need. . . . These people are not in a position to exchange their services, or goods produced by them, for other goods and services required by them for consumption. This tragic state of affairs, which is reflected in the huge army of unemployed, implies that the productive capacity of the world is not being used to anything like its full extent, although we do know, to our cost, that there is a relative over-supply of certain commodities. Our primary industries, for instance, are turning out a greater volume of produce than ever before, but the aggregate return to the producers has shrunk to such an extent that they have not the purchasing-power to buy goods and services required to carry on their farms and maintain a reasonable standard of life. . . . The prime cause clearly lies beyond the scope of our monetary policy, however much it may be a result of monetary policy overseas.

(Report—p. 8.

s.—What is Money ?

Money in all its forms is only a device to facilitate the exchange of goods and services, and in the aggregate derives its value solely from the goods and services that are

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exchanged. This being so, if an appreciable amount of additional credit is brought into use apart from trade and industry, it means increased purchasing-power against a relatively constant supply of goods and services, and ultimately this can lead only to increased prices, or, in other words, a fall in the value of money.

(Report—p. 7.

Walker’s definition of Money (frequently referred to in the Minutes of Evidence) is as follows;

“ Money is that which passes freely from hand to hand throughout the community, in final discharge of debts, and full payment of goods, being accepted equally without reference to the character or credit of the person, and without the intention of the person who uses it to consume or enjoy it, or apply it to any other use than, in turn, to tender it to others in discharge of debts or payment for commodities.”

The conception of money consistent with these definitions includes:

1. Gold, silver and copper coins;

2. Convertible or inconvertible bank notes:

3. Government Treasury notes.

(Minutes —p. 31.

6.—What is the Difference Between Money and Currency 7

Prof. Sykes states: “ The term ‘ Currency ’ is generally used to denote the whole of the circulation medium by means of which debts are paid and prices are measured. It is synonymous with money in its broader sense, and contains the two subdivisions of coinage and paper circulation —that is, bills, notes, cheques, postal orders, and similar forms of money.”

Bank notes in circulation are almost invariably backed to the full extent of their issue by gold and/or securities.

(Minutes—p. 32.

7.—Can Banks Extend Unlimited Credit ?

A bank’s ability to extend credit is limited by its ability to provide sterling, and its deposits must be kept within such limits in relation to exchange reserves held overseas as experience has shown to be safe. It is this relationship that fixes the limits to which banks can safely extend credit Figures show clearly that, over a period of years, bank credit has expanded in rough corre-

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spondence with the needs of production, and I know of no evidence, statistical or otherwise, to support the view that arbitrary restriction of bank credit has ever been the cause of depression in New Zealand, and the view that it has been does not correspond either with bank practice or with the published returns of our monetary system.

(A. H. Tocker: Minutes—p. 134.

Professor F. A. Hayek (Professor of Economic Science and Statistics at London University) says:

“To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means that brought it about. Because we are now suffering from a misdirection of production, we want to create a further misdirection—a procedure Which can only lead to a much more severe crisis as soon as the credit expansion comes to an end.”

(Quoted in Minutes—p. 251.

B.—Do Banks Create Money ?

Q: I am interested in a speech made by the Right Hon. Reg. McKenna to the shareholders of the Midland Bank on 24th September, 1933, when he said: “ The average citizen will not like to be told that the banks do create and destroy money, and by these means direct the policy of the Government, and thereby hold in the hollow of their hands the destiny of the nation.” Do you accept that ?

A: No, because he was using the word “ create ” in a sense in which Ido not understand it. If he meant that the banks create money out of nothing, he was simply wrong; but Ido not think he meant that. . . .In his book, McKenna said that traders often assume that the banks can issue loans to as great an extent as they like, but that this is not so. The banks can only lend to the extent of their cash resources. That is the statement made by the Right Hon. Mr McKenna.

(E. C. Fussell, Examined: Minutes—pp. 52 and 56.

9.—Can Banks Make Unlimited Advances ?

Deposits are debts due by the banks to individuals, and advances are debts due by individuals to the banks. . . . . Banks do not, and in fact cannot, lend their deposits. This, however, does not mean that the banks could go on making advances without limit, because to

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increase the volume of advances involves expanding the credit structure, and if the production and sale of consumable goods internally is not increased in proportion, the additional demand for goods arising from the additional credit put into circulation will generally lead to increased imports and pressure on the London balances of the banks. Restrictive action would then be necessary to restore equilibrium.

(Report—p. 12.

10.—Can Credit be Created by “Writing Figures in a Book ” ?

In at least a score of the schemes submitted to the Committee, a tremendous inflation of prices would follow if any of the ideas were put into practice. Very few of them involve inflation by purely printing-press methods. The emphasis has shifted to “writing figures in a book,” since this is the process by which a bank records its recognition of the fact that a person or firm is credit-worthy. It must be remembered, however, that inflations characteristic of Europe in the war and post-war period began by being “ figures in a book ”; the printing of notes was an inevitable concomitant, but it was not necessarily the initial stimulus. When people distrust the quality of the currency, it will be turned over much more rapidly in the effort to have goods instead of untrustworthy money. . . . For instance, if the people of New Zealand anticipated that the Government were endeavouring to find a way out of the depression by means of the printing-press, or by writing more “ figures in a book,” than the state of trade would warrant, there would be two reactions: one, a flight of free capital, which would mean a demand for foreign currencies with a suddenly depreciated exchange to meet the demand; and a rush to turn money into real property, causing a sharp and cumulative boom in the prices of land, city properties, and tangible goods.

(Report—p. 46.

11.—Do Banks Create and Destroy Credit at no Cost ?

Banks do not create credit in the sense that they make something out of nothing. Credit is on a tangible basis For instance, if a man goes to a bank and gets an overdraft, that credit is the basis of the value that he has.

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Q: Is there any method by which purchasing-power could be made available to people who have no security V

A: 1 know of no way at all—there is no method of getting something for nothing. The printing of credit notes would not meet the position, unless the people had assets which would be expressed in the form of goods--unless there were goods and services to be offered in exchange for these notes, it would not be possible to meet the position.

Q: I presume you will agree that there is to-day a lad of purchasing-power ?

A: I would not say that. The real difficulty is a lack of confidence. In New Zealand at the present time, thenare free deposits of £70,000,000, but the people who have this money cannot be induced to purchase things with it.

Q; Are there not equally a number of factors which have been responsible for the falling-off in purchasingpower, not only r in New Zealand, but in other parts of thcworld ? Do you consider this falling-off in purchasingpower is due in part to any failure of the banking system

A: No, I do not consider it so. The troubles at the present time are not monetary, and cannot be restored by monetary measures. Various economic forces are responsible. Personally, Ido not think the monetary system has anything to do with it; and if these things which cause the trouble were righted, the monetary system would reflect the improvement.

(E. C. Fussell, Examined: Minutes—p. 48.

12.—Can We have Costless Credit ?

Q: Can you give the Committee any enlightenment or the subject of costless credit ?

A: I do not believe in costless credit; in fact, there is no such thing—someone has to pay for it. There is nothing of value that someone does not pay for somewhere.

(A. H. Tocker, Examined: Minutes—p. 113.

13.—Must Credits be Cancelled ?

If credits as a whole were never cancelled, we should see prices as a whole rising in a steep, never-ending spiral. .... The value of our land may be high, our national resources “ well nigh limitless,” our potential wealth may run into millions of pounds, the “ real credit of the coni-

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munity ” may be elastic in a one-way direction, our land may flow with milk, and even with honey; but, as one witness has so aptly put it, "endless millions of costless credit” based on these things can only annihilate capitalism. . . . . . Can the country stand the tremendous rise which would ensue in prices from an issue of credit based on the whole physical wealth of the country—on credit which mayone day produce consumption goods, but for this generation can only produce prices of astronomical dimensions ?

(Report—p. 69.

Q: What has been the average number of bank notes in circulation during the past three years ?

A: Around about the six million mark.

Q: Under the conditions existing at the present time, if the banks wanted to increase the number of notes, they would do so ?

A: Aes, if the notes were required.

Q: Are they not required ?

A: They are not effectively required.

Q: But everyone at present is complaining of a shortage of money. To what reason do you attribute that V

A: It is due to a lack of confidence, or the lack of sufficient avenues for trading. The man who can obtain money from the banks, either by overdraft or otherwise, will not use that money unless he can use it effectively or profitably.

(E. C. Fussell, Examined; Minutes—p. 89.

Q: If notes were printed and issued from time to time, as has been suggested, they would have to be cancelled at some time or other ?

A: Yes.

Q: Suppose the process went on until £50,000,000 of notes were issued ?

A: There would be tremendous difficulties in the way of redeeming them. It is hard to say how they would bo cancelled.

Q: Might such a policy lead to promises of credit at election times, with one party offering to issue so much if returned, and another party offering to go one better by issuing so much more ?

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A: That is rather a political question, but I should say that a candidate for election would be rather foolish if he did not take a chance like that to promise something in return for support.

(E. C. Fussell, Examined: Minutes —p. 89.

14.—Why is Currency Inflation so Dangerous 7

The question arises: How far is it possible to go on issuing extra currency ? How long will the people consent to be taxed in this manner, and can the same real value be raised in taxes by this method ? Currency inflation in order to raise taxes defeats its own ends in a few years. At the same time, it so disorganises the social and economic life of the country that business cannot be carried on unless some other monetary unit is used. The printing of notes, or “ writing figures in a book,” is only another way of making the public pay for what the Government spends. To act as a receipt for income tax should not be a function of money.

Keynes’ “ Monetary Reform,” Chap. 11., referring to currency inflation in Russia in the post-war period, says:

“In Moscow \the unwillingness to hold money, except for the shortest possible time, reached at one period a fantastic intensity. If a grocer sold a pound of cheese, he ran off with the roubles as fast as his legs could carry him to the Central Market to replenish his stocks by changing them into cheese again, lest the roubles lost their value before he got there; thus justifying the pre-vision of economists in naming the phenomenon ‘ the velocity of circulation.’ ”

(Report—p. 49.

15.—How are Wage-Earners Affected by Currency Inflation 7

To the wage or salary worker, inflation is definitely detrimental. As the cost of living keeps ahead of wages, the worker has his standard of living reduced Inflation is a blind force with an almost inevitable tendency to rob the working-groups of the community.

(Report—p. 51.

10, —Can Commodity [’rices be Controlled 7

The Douglas Social Credit representative (Col. Closey) said that he would control prices If demand, supply, qrality, competition, monopoly, human nature, and

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acts of God can be controlled, then prices can be controlled. Even assuming that the scheme could be put into operation without panic, the economic and financial disorder which would ensue would soon halt its further operation, but great damage would already have been done.

(Report—pp. 82 and 83.

It can be said quite definitely that commodity prices cannot be controlled by simply regulating the quantity of notes and credit issued. Prices cannot be moved up and down like a gasometer merely by operating certain financial calves. Many advocates of currency reform, especial!} those not handicapped by a knowledge of economics or monetary history, assume that this is so To slow down a train running at a dangerous speed, there exists an ingenious mechanism called the Westinghousc brake, which, by the action of compressed air, will in an easy transition bring the train to a safe running speed. There is nothing like this in our economic and financial system Those who advocate a “ little ” inflation by Government issue of currency do not realise how easy it is for this “ little ” dose (because of its apparent ineffectiveness) to be repeated, aiming now at a “ moderate ” inflation. The tendency is always to “ revise the estimates upwards.” To halt the resultant price inflation and prevent final ruin of the currency, drastic methods will be necessary, bringing industry, production, and employment to lower levels than existed before the “ controlled ” inflation experiment.

(Report—p. 47.

17.—Can the Internal Price-Level be Stabilised V

We cannot for long have internal stability of pricelevels and external stability of exchange-rates. We in New Zealand cannot have both: we must choose. . . If the money incomes of the primary producers are to be kept stable while export proceeds fluctuate, it means that the exchange rate will have wide fluctuations. . . . Wide and frequent fluctuations would not promote the economic welfare of the country, especially as this Dominion has probably the greatest amount of external trade in the world (per head). ... A majority of the schemes considered by the Committee involved controlling the price-level. In order to keep the “ general level of prices ” stable, the

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controlling authority would need to control, from the monetary side, the volume of credit, the velocity of circulation, the destination of the credit, and the volume of saving and investment; on the side of goods, it would have to control all forces on the side of money and all on the side of goods and services, including supply and the human element, demand. . . . It is the business of the monetary system to facilitate the production of goods and services. It is not its function to impose quotas, subsidise industry, or license imports.

(Report—p. 40.

It would theoretically be possible, by variations in New Zealand exchange rate, to maintain average interna! prices at stable levels in New Zealand. The causes of dislocation, however, lie in the disparity in the movements of particular groups of prices, which would not be overcome by this means. In New Zealand during the past five years, export prices fell more than 40 per cent., while interest prices and costs declined much less. This dislocation cannot be overcome by varying the exchange-rates, and I think that particular cure, if generally adopted, would be worse than the disease.

(A. H. Tocker, Examined: Minutes—p. 139.

18.—Does An Internal Price-Level Really Exist ?

Q: Do you think there is such a thing as an internal price-level ?

A: The concept of a general price-level is a useful one to simplify our ideas, but it does not really exist, of course.

Q: Does a price-level exist at all ?

A: No.

Q: Can you state what mechanism would be necessary on the monetary side to aim at a general stable level of prices ?

A: No, I am afraid I cannot. I seriously doubt the possibility of achieving such a thing. I think some measure of control would be got through a wise manipulation of the exchange-rate, plus such other devices as the Reserve Bank may be able to discover in the course of its experimentation, but I cannot think of any way in which absolute stabilit3' could be got.

(D. 0. Williams, Examined: Minutes—p. 121.

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19.—Are Guaranteed Prices Feasible ?

Q: Do you not think that we could fix an internal pricelevel that would be free from fluctuations and oscillations with the overseas prices ?

A: Ido not think that would work well in practice. If you have stability of incomes on price-levels, you cannot have stability of exchanges.

Q: How would that affect exchanges ? If you had a New Zealand price-level of Is 6d per lb for butter, and you exported, you would be paid overseas ?

A: Yes.

Q; Tou could only use that credit overseas to pay debts ?

A; Yes.

Q; If the goods coming into New Zealand approximated our internal price-level, would not that adjust the position ?

A: 1 do not think so. If the price-level falls 50 per cent, overseas, and you continue paying the farmer the same price here on purchasing-power already determined, it would mean that the exchange rate would go up, and that ■would mean that, .instead of paying a debt with 20 lbs of butter, you might have to go up to 40 lbs. We would have to produce more.

Q: Oui trouble is that the farmer is lacking in income ?

A: But the income comes from overseas.

Q: It comes from New Zealand ?

A: I know what you mean there, but if we send to London all our produce and buy on the London market, it means a great deal what the exchange value of our money is on the London market.

(E. C. Fussell, Examined by Mr F. Langstone:

Minutes: p. 99

20.—1s the Community’s Purchasing-Power Keduced When Banks Create Reserves ?

The proposal (of the Douglas Social Credit Scheme) to “ monetize ” reserves is apparently based on the assumption that when banks provide for reserves, they reduce purchasing power by the amount set aside; nothing could be further from the truth. The money represented by reserves, hid-

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den or otherwise, is not taken out of circulation; it is invested in the bank’s business, and, in New Zealand, is to be found for the most part in Government securities. To acquire buildings, securities, or other assets, money was paid out to the community so that the net amount of money—deposits and notes—available for expenditure was not decreased. If profits are not distributed as dividends, they are spent in purchasing assets for reserves.

(Report—p. 71.

21.—Why are Bank Reserves So Necessary ?

Banks keep reserves for the same reason that any prudent man or business keeps a reserve. There are always difficult times to contend with, and the reserve gives confidence and stability, and is at the same time a reservoir which can be drawn upon when losses are sustained. Already in the present depression, the banks and stock and station agents have written off millions of bad debts. Their ability to do this depends on the reserves built up in good years. The fact that the banks in New Zealand have successfully weathered the economic blizzard of recent years is an indication of the foresight of the banks, and a demonstration which abundantly justifies the policy of maintaining adequate reserves.

(Report—p. 73.

22.—Who are Shareholders in the Trading Banks ?

A commonly entertained but utterly erroneous belief is held by some people that the banks are owned by a limited number of wealthy people. There are nine trading banks in Australia, and their shares are owned by some 71,000 people. The average capital holding is £528. The shareholders are drawn from every class of the community, except only the improvident. Similar general principles apply to New Zealand conditions, where the trading banks employ some 3300 men and women in their services. The shareholders in New Zealand number approximately 11,130, representing an average capital holding of £487.

(Minutes —p. 33.

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23.—Whai Has Been the Decrease in Overdraft Interest Rates ?

A statement submitted as evidence by the Associated Banks showed that the minimum rates for overdrafts and discounts have been decreased as under:

Ist November, 1931 . . . Reduced from 7 % to 6

Ist September, 1932 . . Reduced from 6i% to 6 %

Ist May, 1933 Reduced from 6 % to 5 %

(Note: Since the above statement was submitted, a further reduction from 5% to was made on Ist November, 1934.)

(Minutes —p. 28.

24—Should Bank Rates Be Further Reduced 7

A reduction in overdraft rates would not only induce fresh borrowing for productive purposes, but would appreciably lighten the present load on industry. . . . With idle funds accumulating in the Dominion, long-term lending rates (as evidenced by the market return on Government and local-body securities) have declined sharply in recent months. The return on Government securities is now less than 3|%. Owing probably to the fact that there is no organised short-term loan market in New Zealand, shortterm rates have not fallen in anything like the same ratio. . . . . We consider a further substantial reduction in bank overdraft rates is essential. The Committee considers that, in the present circumstances, the overdraft rate for first-class accounts should be reduced to 34%, with a maximum of 5% for other accounts.

(Report—p. 20.

25.—1s New Zealand’s Banking System Self-contained ?

The banking system in New Zealand is not self-con-tained, in that the banks normally hold a large amount of funds in London. In fact, these London funds are the real regulative factor and the key to our whole banking system The all-important work of our banks is financing our external trade, which is per head one of the largest in the world.

(Treasury; Minutes—p. 1

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26.—What is the Value of the Reserve Bank ?

Q: Can the banks force people to borrow ?

A: No, but they can tempt people to borrow.

Q: Do you mean that the present banks do not tempt people to borrow ?

A: No, not to the extent that they might. The whole thing comes back to banking pohey. It might be pointed out that our commercial banks are primarily profit-earning institutions, and they are alter profits in business. When times are good, they may fall over one another in their competition for business, _...f thus tend to carry things too far. When times are bad, and they are all trying to avoid losses, they will probably tend to go too far in the other direction, from the point of view of being too sudden and too drastic in restricting credit. Our Reserve Bank, being freed from pressure in chasing profits, should avoid these pitfalls.

Q: Is the Reserve Bank free from that ?

A: Yes. It has no interest in profits at all. That is the whole object underlying the provision whereby th. State takes all the profits, apart from the fixed dividend on share capital.

Q: Why was it considered necessary in these circum stances to have private shareholders at all ?

A: That is one of the means devised as an additional measure of stability, with the idea of keeping the controlling factor of monetary policy to some extent outside the burning political questions of the day. It is only a means of giving an extra broad basis to the Reserve Bank.

(B. C. Ashwin, Examined; Minutes—p. 22.

27.—1s There a Monopoly of Credit in New Zealand ?

There is no monopoly of credit in New Zealand. The total mortgages in the country amount to £200,000,000, and the total of all bank advances (including mortgages) is only one-fifth of that amount.

(E. C. Fussell: Minutes—p. 43.

28.—D0 Banks Control the Government ?

Q: With regard to the statement that the power of sovereignty has passed from the Government to the banks, do you consider it consistent with that belief if the Government is able repeatedly to pass legislation controlling and affecting the banks ?

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A: I should consider it quite inconsistent. Banks are circumscribed in their operations by banking statutes and banking laws.

Q: Would it not be contrary to that belief when we know that the Government recently took over the gold from the banks at parity against the wishes of the banks V

A: That is an indication that the sovereignty does not rest with the banks—and that the sovereigns do not rest with the banks !

Q: the fact that the Government put up the exchangerate against the protest and express wishes of the banks would be still further evidence that the sovereignty still rests with Parliament and the Government ?

A: That is a further indication.

Q: If further evidence were wanted, the fact that the Govei-nment, without consulting the banks, increased taxation by a note-tax and otherwise would be clear evidence that the sovereignty still rests with Parliament ?

iiui oi/xxi iv,oi.o ** iuii i A: That is so.

Ji. C. Fusscil, examined by Hon. W. Downie

Stewart: Minutes—p. 76.

29,—What are the Main Fallacies of the Douglas Social Credit Theory ?

Although the Douglas Social Credit Plan put forward belongs to the group of schemes which the Committee consider to be inherently unworkable, we have treated it separately, both because it is part of the widely advertised genus of “social credit” proposals, and also because the Douglas Social Credit movement was given a special invitation to submit an alternative monetary scheme for New Zealand.

“ Social credit,” if it has any meaning at all, is not a new concept. The Government’s issue of Treasury Bills is an example of the issue of “ social credit ” —the credit of the community is the backing for the money advanced; similarly, it is “ social credit ” which constitutes the security behind Government borrowing

A perusal of the evidence shows that Colonel Closey (the Douglas Social Credit representative) and Major Douglas were not in agreement, and that Colonel Closey several times gave the opposite answer to that given byMajor Douglas to an identical question. (See p. 79 of the Report for a typical instance.)

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The assumptions stated in the proposals are all of dubious validity. For instance, production in New Zealand is not “ capable of indefinite increase ” in the sense that monetary manipulation can achieve this increase. . . . Again, to state that our troubles exist because “ the nations have no workable means of exchange ” is not to accept the obvious fact that New Zealand’s trade with England has been carried on by a very effective medium of exchange. . . . . To infer that the monetary factor is the cause of the world’s troubles is merely not facing the facts.

Another assumption was that “ raising wages merely adds to prices charged, and therefore does not expand purchasing power.” This proves too much, and provides an argument for further reducing wages. It may be said that there is at any time an appropriate wage-level which, in general, industry will support. Raising or lowering this level will bring disequilibrium and lower national welfare.

The Douglas Social Credit remedy would give an additional stimulus to a boom, but in a depression, when shortages of purchasing-power are usually said to exist, the amount of monetary stimulus would be at its lowest. This seems irrational; the added height given to a boom under the operation of these proposals could only intensify the following depression due to the distortion of the production system.

There are many intelligent and well-intentioned people who, instead of seeking for a solution of the problem presented by haphazard production, have been misled by the superficial attractiveness of schemes for quickly curing the world s ills. When one of the leading advocates of a purely' monetary remedy (C. H. Douglas in “Warning Democracy," p. 42) states that “ almost the only thing that is not open to destructive criticism about the banks is their dividends." he illustrates how the minds of a considerable section of the public are being diverted from the more basic problems of the day by placing all the emphasis on monetary reform; they are focussing attention on symptoms rather than on monetary causes.

(Report—pp. 77 to 84.

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30.—1s the Exchange Premium of 25% Per Cent Unsound 7 There has been fostered an idea that the New Zealand exchange depreciation was unorthodox and “ unsound.” . . . . The following table shows how unorthodox New Zealand has been when compared with other countries. (Note: The Report gives the following table, showing how the currency of each country had depreciated as at 17th May, 1934, compared with the pre-war standard. In the case of Australia and New Zealand, two comparisons are made: (a) The depreciation on a gold standard basis, and (b) the depreciation on a sterling exchange basis. New Zealand has never operated on a gold standard basis; the basis is and always has been a sterling exchange standard. See p. 10 of the Report.)

Percentage by which Currency has been Depreciated Compared with Pre-War Standard.

%

%

Portugal 98.7

Denmark 49.4

Norway 43.1

Roumania 97.3

Finland 94.1

Sweden 41.G

United States 40.9

Greece 90.0

Belgium 80.0

Canada 40.5

Brazil 80.0

South Africa 37.8

France 79.7

India 37.5

Japan 74.3

Australia *50.2

Italy 73.5

Australia f2O.C

Spain 57.8

New Zealand *50.0

Uruguay 53.2

New Zealand f!9.7

Argentine 52.2

*Gold Standard. fSterling Exchange.

This table omits such countries as Germany, Austria, and Russia, in which the depreciation was not comparable with that in the countries listed. It would be incorrect to measure the Australian and New Zealand depreciation in terms of gold, as those countries were on a sterling exchange basis.

(Report—p. 90.

31.—Why was the Exchange Rate Raised 7

It has been freely stated that Denmark depreciated her exchange rate because of the New Zealand action, in order to keep on a competitive level with New Zealand

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The fact of the matter is that it was the one cause which was responsible for similar action on the part of several countries at the same time, with a similar internal situation. It must be emphasised that, although the catastrophic fall in prices was the originating external cause, the resulting internal disparity between rigid costs and falling prices produced such a situation that raising the exchange rate was inevitable. The exporters’ returns fell, the national income fell, business stagnated, revenues fell, wage cuts were forced on the country because of the one main factor —a fall in export prices This Dominion was faced with progressively falling national income and revenue, with further wages cuts and retrenchment. The alternative was raising the exchange rate.

(Report—p. 91

32.—Does the 25% Exchange Premium Give a Preference to Australia ?

A point of common misunderstanding in connection with the exchange premium relates to its effect on the competitive position of Australian exporters and United Kingdom exporters to New Zealand The truth is that the alteration of our exchange rate operates equally against Australia, the United Kingdom, and all countries. To the extent that the Australian exporter has an advantage over the United Kingdom exporter, this is attributable solely to the alteration which Australia has made in her exchange rate. The relative positions of Australia and the United Kingdom would not be altered one iota by any variation in New T Zealand’s exchange rate.

(Report—p. 98

33.—What are the Dangers of Lowering the Present Exchange Kate ?

To attempt to lower the rate at the present time would be financial and economic folly If one thing is certain, it is that there is nothing in our economic conditions which would warrant a reduction in the exchange rate.

(Report—p. 98.

In present conditions, and in view of the uncertainty of future prices for our export trade, any substantial lowering of the exchange would involve a gamble with the sol-

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vency of primary industries, unless it were possible to provide assistance of another sort to replace the protection now afforded by the exchange. In practice, this would mean borrowing internally in order to pay a subsistence dole to farming Even though it may be pointed out (fairly or unfairly) that the exchange device has operated inequitably in that it has conferred benefits on the deserving and undeserving alike, that it has stimulated production, and that it has irritated people overseas, yet it is a much simpler weapon than any subsidy could be; it is fairly elastic in both directions; operates most directly on the major source of the national income; and does not pile up unproductive debt for a later operation.

The cost-price structure of farming would immediately suffer by a lowering of the exchange-rate, and unless export prices rose to an amount of at least equivalent to the loss of income sustained through exchange reduction, the economic distress to farmers would rapidly spread to the rest of the community, and prejudice their power to meet direct taxation, as well as their power to purchase imported goods. . If no rise in export prices occurred, revenue from other than imports would be more difficult to collect, and imports would also decline once the loss in farming income began to express itself in diminished buying. . . In our circumstances, where national increase (and therefore taxable capacity) is so sensitively responsive to the course of external prices, a rise in prices should precede any lowering of the exchange The serious consideration of a proposal to lower the rate of exchange should be postponed until either high external prices or lower internal costs (or both) have definitely restored the profit equilibrium between costs and receipts.

(D. 0. Williams: Minutes —pp. 114 and 115.

To lower the exchange rate would place New Zealand exports in an unfavourable position compared with those competitors in overseas markets whose exchange rates are also depreciated with sterling. These competitors include Australia, Argentina, and Denmark. It would also increase the real burden of all internal debts and other industrial costs, most of which are rigid. It would contract the national income and the monetary demand for goods; it

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would lessen profits and turn some profits to losses. It would check recovery, and might promote further depression.

(A. H. Tocker: Minutes —p. 138.

31.—How is Economic Nationalism Affecting New Zealand ?

It is a perfectly easy thing to say, as our farmers may say, that it is against nature, or that it is pure folly for England to increase her farming when we are a vastly more efficient country. In the sense of the nineteenth century philosophy that is perfectly true; but this is the twentieth century, and the thing that concerns us is that England, Germany, and other countries are all endeavouring to live more fully on their own resources, and become less dependent on the outside world. That is a fair interpretation of the various experiments in Europe, America, and Russia—very different experiments in motives, spirit, and ideals; but all of them, for the moment anyway, concentrating to a unique degree upon home production and home consumption I think it is a mistake for us to assume that the policy which England has embarked upon, and w T hich other countries have embarked upon, is a policy which they will reverse in a few years. Once any system is established, however bad or illogical it may be, it tends to survive far beyond the time when it should have collapsed. Institutions do not collapse merely because they lack logic; they even survive for that reason. I feel that the farming policy of England is likely to survive the generation of farmers that has called it into being.

(D. 0. Williams: Minutes—p. 122.

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The Fallacy of Guaranteed Prices

by A. J. SINCLAIR

TE AWAMUTU

1ST SEPTEMBER, 1935.

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THE BEGINNINGS OF RECOVERY

The average business man has not, probably, studied the technical mysteries of what is called the business cycle; but he knows from experience that there are ups and down in business, and that after the downs come the ups, and that when the downs have been in the descendant for a long time, it is safe, according to the traditions of the market place, to expect that the ups arc going to get an innings. In this frame of mind he is ready to welcome and perhaps exaggerate any signs of improvement that he sees, and to act on them; and every move towards activity that he and his fellows take tends to widen the circle of improvement. Just as the vicious circle of depression spins faster and faster as the depression of one industry and of one country acts on and increases that of all others, so it is also when the tide turns. Once the upward movement is started, it will go ahead of its own momentum, if it is left free to do so and is not side-tracked by some new disaster.

HARTLEY WITHERS in “THE WAT TO WEALTH(I93S).

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THE FALLACY OF GUARANTEED PRICES.

By A. J. SINCLAIR.

I take exception to the statement that “ in hard times, farmers are radicals; in prosperous times, they are conservatives.” As a general assertion it may be true, but it is not sufficiently general, because the inference applies almost to every section of the community.

When farmers are producing at a loss because their income has been drastically curtailed; when arrears of rates, interest, and loan-repayments are accumulating; when the banker is adamant, and even the storekeeper looks askance and makes uncomfortable suggestions about “an order on the dairy cheque ”; and when other sections of the community eke out a steady income, blissfully unaffected by the fact that butter is selling in London at 65s or 95s per cwt., it is impossible to keep the farmer happy by quoting economic laws, or assuring him that this is one of the integral risks of his calling. In hard times, he wants one of two things—either his costs must be lowered to meet the fall in prices, or prices must be raised to cover his costs.

The Farmer’s New-found Friends.

If he is wise he will concentrate on the first objective, even though it may be a more difficult path to traverse, and may take him longer; but if he is hard-pressed, he is in the psychological mood to accept the plausible argument that higher prices can be obtained by “ adjusting ” the currency, or by some other “ get-rich-quick ” method.

This idea at least has the merit of being new. He has been through depressions before, but until lately he was old-fashioned enough to believe that he was compelled to accept the price realised in the world’s markets for the product he exported. Now, he is not so sure, because he seen what can be done in the direction of raising the price of butter-fat by means of an exchange premium; and suddenly he finds many friends who assure him that there will be no difficulty in guaranteeing a payment, say, of 1s 3d for butter which may realise only lid when sold in London.

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Because of its speciousness, I do not blame the farmer for being misled by so tempting a proposal. After all, there does appear to be vast “ wealth ” in this country, if wealth is measured in terms of commodities. All that is necessary, say these new-found friends, is that this wealth should be “ monetized,” converted into credit, money, or purchasing power of some sort and in sufficient quantities to enable him to meet his commitments and provide him with a reasonable standard of living. He is assured that banks create money every day merely by “ writing figures in a book,” the inference being that this money has no tangible backing, but is merely drawn out of the void, to be created or cancelled at the caprice of bankers.

“ Monetizing ” Assets.

Before dealing in detail with the fallacies of guaranteed prices, a few words of explanation will dispel much of the fog which envelopes this proposal. When a farmer obtains an overdraft from his banker, he is to be excused if he thinks that he secures this solely because he possesses certain assets. When the transaction is closely examined it will be found that he does nothing of the kind. He really obtains this credit for the same reason which often actuates a dairy company when making an advance to a supplier without any security at all—the transaction is based actually on the goods or produce which will be turned out by the use of that credit, and from the proceeds of which the credit will be extinguished. If the goods are sold to cover the cost, the credit has been properly made; if a loss results, the farmer has made a mistake. Strictly speaking, the mistake has actually been made by the banker, and that is why the banker takes security—just to provide for a contingency of this kind, and so that the farmer can be called upon to make good the loss. If we lived in a world where bankers made no mistakes—(they seldom, but sometimes, do !) —no security would be necessary at all.

This point is of the greatest importance, because monetary reformers are running around the country to-day saying to the farmers: “When a banker grants you an overdraft, he merely ‘ monetizes ’ your assets, and writes a few figures in a book.” The assets are not “ monetized ” at all—they are only the security, not the real basis, of the credit. The real basis is the goods that are to be moved,

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manufactured, or produced, and if these goods, when realised, do not produce the amount of the credit granted, 't is as clear as noonday that a loss has been made, no matter what security the banker may hold.

When anyone states, therefore, that it is possible to pay the farmer Is 3d for butter which will realise, say, lid when sold in London, and that this can be done by “ monetizing ” the asset represented by the butter, he is talkingutter nonsense. For example, let us assume thac all the assets possessed by the farmers of New Zealand, in the shape of farms, insurance policies, etc., amount to £300,000.000. Assume further that the farmers of New Zealand borrow £50,000,000 a year by way of bank overdraft. r ihe produce against which this credit has been granted must realise £50,000,000 if no loss is to be incurred. If the assets were “ monetized,” as is contended, the sum of £300,000,000 could be lent, and this would be the beginn'ng of an enormous inflation. This aspect is admirably dealt with in paragraphs 107 to 123 of the Keport of the Monetary Committee, 1934, particularly paragraphs 122 and 123.

Questions Unanswered.

Let us now consider in detail the scheme for guaranteed prices. So far, the sponsors of this new idea have been remarkably vague. In June of this year, I heard Mr Walter Nash, M.P. (President of the New Zealand Labour Party), address the national conference of the dairy industry at Palmerston North on “ The Meaning of Guaranteed Prices.” He gave an informative address on conditions in the United States and Europe, lasting about an hour, but his proposal was rejected by an overwhelming majority, largely because he left unanswered three questions upon which delegates expected information;

1. What would be a fair guaranteed price to pay dairy farmers under present conditions ?

2. As the guaranteed price would be considerably iu excess of the price realised by the sale of the export produce, how would the additional money be found '!

3. How would this money be paid back ? The third question I regard as the most important, for reasons which are now set out.

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The moment additional currency of any appreciable o.uantity is injected into the monetary system—whether the injection is made by a trading bank, a Reserve Bank, a State Bank, or a “ National Credit Authority ” —two results are inevitable, and no scheme devised by the wit 01 man can circumvent them: (1) The prices of goods and services rise, unless the increased credit is accompanied by a correspondingly increased production of commodities; and (2) a liability is created which must be met sooner or later. Let us consider these two problems briefly.

Every Credit Must Have a Debit

No greater fallacy has ever been used to hoodwmk fhe people than to state that money can be created out of nothing, merely by the printing of paper, or by “writing figures in a book.” When additional money is issued with the oojcct of creating increased purchasing-power, a liability is created. W’hen this additional credit is granted in respect of a commodity which, when produced and marketed, will cover the amount of credit issued against it. all is wed; but if it is issied on any other basis, the day of reckoning must be faced.

What would happen if the credit were not cancelled V On a smali scale we would experience in this country what Germany and other countries experienced during the postwar period. The people’s confidence in this paper currency would be destroyed, and that would be the beginning of the end. In his book, “ What Everybody Wants to Know Aboi l Money ” (p. 51), Mr G. H. D. Cole, the well-known Oxford economist (who. incidentally, is a Socialist), says:

“ In Europe in the years immediately after the war. loaves of bread, pairs of boots, anything and everything that possessed an intrinsic value were somewhere used as a means of payment at times when faith in the available paper currencies had been utterlydestroyed.”

Nevertheless, because the actual cost of printing and issuing credit, say, in the form of bank-notes appears to be infinitesimal, ihe impression is being deliberately created that, as this credit really costs nothing, it can be withdrawn or cancelled without cost to anyone. Let us reduce a trans-

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action of this nature to its simplest terms, without any o1 the complications which occur in everyday experience, anc ascertain whether this is so.

Rigid Quotas.

The scheme proposes to pay a guaranteed price for butter, among many other commodities. To arrive at some tangible basis, we shall take the figures quoted by some responsible exponents of this idea—ls 3d per lb. In the first place, it should be clearly noted that the Government would not take over at this price all the butter which could be made, but only the quantity which it had decided to purchase. That quantity would be entirely contingent upon what arrangements the Government could make for the disposal of the exportable surplus overseas. If Mr Walter Nash has done nothing more, he has made that point abundantly clear. The farmer who thinks that he would bo allowed to produce unlimited quantities of butter at the guaranteed price is due for a rude awakening, because the scheme clearly envisages quotas and restrictions of a most rigid nature. Its most sanguine advocates realise that the enormous impetus to production which has been the invariable result of every price-fixing scheme, in the States and elsewhere, would make the Government’s task of finding markets for an unlimited exportable surplus an impossible one.

The quantity having been determined, the Government would pay the dairy companies the guaranteed price, and would take over absolute control and ownership of the butter. Now, of our total production, approximately 10 per cent is sold locally, and 84 per cent is exported There would be no loss incurred by the Government on local sales because the consumer would be charged a sum equivalent to the guaranteed price plus the costs of marketing As this principle would also apply to many other commodities, the wage-level would of course have to be raised substantially to enable the consumer t'o pay these higher prices. ™V’? Uld en . tail . a substantial rise in production costs—out that is a side-issue for the moment.

£7.000,000 a Year.

What has actually happened so far ? The part of this transaction which may be said to be on a sound basis is that relating to local sales. With regard to the exportable

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surplus of 84 per cent., the only part which is sound is that covered by the price which the butter will realise in the overseas markets. We shall take an optimistic view of this, and assess the exchange value of our butter in London at lid per lb for the season. (What are a few millions among friends, anyway ?) The Government must therefore find the difference of 4d per lb by the circulation of additional credits in some form of paper money. An equivalent amount would have to be found, of course, for cheese factories, otherwise they would close down. The Dairy Commission’s report states that a sum of Id per lb butter-fat represents £1,750.000. and although there is difference between butter and butter-fat, we are estimating conservatively in calculating that, for dairy producers alone, the new scheme must conjure from the void additional currency to the extent of £7,000,000 annually.

Now, the actual cost of putting this £7,000.000 into circulation may be small, but the amount by which the reai wealth of this country would be increased is even smaller, because this transaction would not add one penny to the real income of this Dominion. Farmers can avoid practically every pitfall in this new scheme if they constantly bear in mind that the only real value which our export butter possesses is not any fancy figure which we may choose to put on it at this end, but the exchange value in the market where it is sold—in other words, the amount of goods which it will purchase to be imported to New Zealand. At the present time, admittedly, farmers are getting a higher return than world’s parity owing to the operation of the exchange premium of 25 per cent., but this is merely a form of taxation which helped to spread the effects of the depression over the general community for the special benefit of the primary producers—in my opinion, very necessary at the time, but a method which could not be further exploited with safety or equity.

The issue of this additional £7,000,000, therefore, is just so much fictitious wealth with no real backing whatever. We have merely put into circulation a much greater quantity of money than previously. We do not bring into this country one pound’s worth more goods than before, and no monetary theory will ever circumvent the economic law that, if there is a greater quantity of money with which to purchase a given quantity of goods or services.

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the prices of goods and services will rise. When the price of imported goods rises, the price of locally-manufactured goods rises. It has been, and always will be, so; and the monetary theorist who believes that the internal price of a great number of different commodities can be kept fixed and stable has a faith which would have made King Canute less sceptical, and Mrs Partington more hopeful. Inevitably the farmer would find his production costs soaring, and he would speedily find that he was travelling in a vicious circle in which ever-increasing prices would be necessary to counteract ever-increasing costs.

Lord Kelvin’s Dictum.

Let us now consider the second factor involved —namely, that the issue of this additional currency would create a liability which must be met sooner or later. A brief explanation will make this clear. If the explanation is elementary, at least it conforms to the dictum of Lord Kelvin, who was approached on one occasion by an engineer for permission to explain an electrical invention. Somewhat overawed by the famous scientist’s reputation, the engineer considered it would be presumptuous to refer to the elementary principles upon which his machine was based, and he commenced his explanation at a fairly advanced stage. Lord Kelvin at once interrupted him by saying, “Assume that I know nothing; then I may learn something.” Let us then follow the wanderings of a £5 note which forms part of this fictitious issue of wealth amounting to £7,000,000, so that we may ascertain by what process it can be withdrawn from circulation.

On receiving the guaranteed price from the Government in exchange for the butter, the dairy company places the amount to the credit of its respective suppliers at the bank. From this sudden and easy increment of “ wealth ” a farmer, by drawing a cheque, withdraws a £5 note which he invests towards the purchase of a wireless set—no section of the community is more entitled to one. The agent who receives the money earmarks the £5 for a pair of boots, and he would need it all, because a good pair of boots would probably cost that sum under a scheme which would involve a great increase in the selling price of practically every commodity. The bootmaker pays the £5 back to the bank,

33

but the bank cannot hold on to it, because the original liability created has merely been transferred from the farmer to the bootmaker, who draws a cheque and remits to his wholesale merchant as a payment for leather. The merchant withdraws the £5 again, and pays it to an employee for wages; the latter pays a doctor’s bill, and so on indefinitely. It is clear that at no stage can the bank withdraw that note from circulation without substituting another in its place. But, sooner or later, it must be withdrawn without substitution or there would be such an accumulation of paper money in a few years that we would be faced with ruinous inflation. There is really only one way by which the Government can get back that money and cancel it—by taxation, direct or indirect. It is therefore obvious that the circulation of additional currency that is not backed by commodities which, when realised, will cover the amount of credit issued, is merely a form of taxation on the community.

I have, of course, stated an extremely simple and uncomplicated case. A note can be withdrawn from circulation for the purpose of paying off a bank overdraft, or to pav for an import draft. The fact remains that, if there is no advance to pay off. the note remains as a claim on overseas funds, and that is where the danger lies. Every £1 note issued in New Zealand is a claim to sterling at the rate of 16s at the present time. A huge expansion in credit or note issue, such as is contemplated in this scheme of guaranteed prices, would drive up the exchange rate, or the bank world have to ration the sterling among importers.

What is Oar Taxable Capacity ?

It is now worth while to consider to what extent the community can bear further taxation, because there must be a limit. For the last financial year, ending 31st March. 1935, the total revenue from taxation amounted to £24,737.939, the amount per head of mean population being £l3 18s 7d. The aggregate amount of taxation is the highest ever recorded, but the comment of the Government Statistician in this connection may be accepted—namely, that the increase reflects the steady improvement in business.

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Surely the best indication as to how much further taxation we can bear is found by a comparison with countries such as Australia, with whom we must compete on the world’s markets. In the following table of taxation per head of population, foreign currencies have been converted to sterling, and the figures are for the latest year available, 1934:

£ s d

Great Britain 14 17 3

New Zealand 11 IS H

Australia (Commonwealth and State) 10 2 4

France 8 19 4

United States (Federal only) 6 3 5

Germany 5 11 0

Italy 4 3 9

Admittedly, these figures cannot be strictly compared. For instance, Great Britain has gone in for a considerable amount of derating, and possibly our figure would be about level with Great Britain if an adjustment were made in New Zealand’s rating of £3 15s per head. Furthermore, Australia has borrowed extensively by Treasury Bills to finance unemployment, thus materially adding to the public debt, whereas New Zealand has financed unemployment from taxation. England pays for mental asylums, police, and education from local rates, so that the above figures are merely a rough guide.

Amount Involved in Guaranteed Prices.

We now turn our attention to the amount required to pay a guaranteed price in all industries. So far, we have considered only dairying, but the proposal covers “ the whole field of production.” We shall, however, exclude secondary industries. A conservative estimate shows that, to give all primary industries similar treatment to that proposed for dairying, in addition to the amount now being raised from taxation, a further sum of about £24,000,000 would have to be found every year.

It may be objected that there is no suggestion to find this money by direct taxation. Certainly, Mr F. Langstone, M.P., makes it clear in his pamphlet, “ Labour’s Plan ” that he proposes to find it by increasing the exchange premium which would have to be raised from 25

35

Mr Walter Nash’s Dilemma.

per cent, to about 200 per cent.; but this is merely another method of saying that the people of New Zealand must find the money.

Mr Walter Nash is not quite so clear or so definite upon this point. At a meeting in Hamilton on 12th August he was asked how he proposed to make up the difference between the price paid to the farmer and the price realised overseas. He replied that the difference would be a debt payable by the Government to the Bank, and if the amount did not balance after some years, the Government, either by taxation or currency inflation, would have to repay it.

Few farmers realise what is implied by the statement that the amount might balance oveh a period of years. It means that, if the produce ever realised a price higher than the guaranteed rate, the surplus would be retained by the Government to make good the payments in previous years. This was made very clear by Mr R. Semple, M.P., at Lyail Bay on 26th August, when he pointed out that good years would cancel out bad years, and the indications were that the guaranteed price to be given to the farmers was nothing more or less than a repayable advance, and that m the long run the nation may lose nothing.”

These people have little conception of the practical side of the dairying industry if they think that any Government could get away with a scheme which proposes to pay a subsidy to one set of farmers in some years, and make a reclamation from another set of farmers in subsequent years—because presumably farms would still continue to cnange hands. It may be argued that farms would change hands on the basis of the guaranteed price for butter-fat—-Is 3d—but if the price rose to Is 5d I should not like to be with Government which attempted to withhold that extra 2d from men who had earned it and had never benefited by the receipt of any subsidy.

Something for Everybody.

But we cannot stop at £24,000,000 per annum while dealing with taxation. The propounders of guaranteed prices are not unmindful of the people with whom they have much more in common. There will be standard rates

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of pay for relief workers, for instance, while farmers are at their wits’ end to find labour for their farms. They have also promised increases in pensions and social services, restoration of wages cuts, and other concessions which can always be promised lightly just before an election—so long as the party is not in office ! A sum of over £30,000,009 of new money would have to be found in one way or another every year; and while a printing press driven largely by hot air may produce the paper money, every sensible farmer will realise that any attempt to carry out such a policy would involve this Dominion in chaos. Candidly, I cannot think that the propounders of these schemes seriously entertain the idea of carrying them out.

The Better Way.

There are sounder methods on which farmers should concentrate. Production costs must be lowered. Interest rates are coming down, but they should be still lower. Sine.; 1931, the bank rate for overdrafts has been reduced from 7 per cent, to 41 per cent. Land values must come down. Farmers cannot carry on dairying on land purchased at £5O to £6O an acre. The decision of the State lending departments that they are prepared to negotiate with mortgagor-’ on an entirely new basis for a voluntary adjustment of mortgages is one of the most important steps taken since the depression. The basis proposed is a reasonable one—namely, that farm lands should be valued on the average of prices realised during the past eight seasons, which include four good and four bad years. For butter-fat, this would mean approximately Is to Is Id per lb, and for a permanent and stable: adjustment this basis should be almost universally accepted.

It is on lines such as these that farmers should con centrate, rather than be misled by schemes which I char acterised at the National Dairy Conference in Palmerstoi North as “ illusory in their objectives, and dangerous hj their reactions.”

Waipa Post Print Te Awamutu.

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