The Auckland Star: WITH WHICH ARE INCORPORATED The Evening News, Morning News, The Echo and The Sun. THURSDAY, MARCH 26, 1931. MR. THEODORE'S PLAN.

Auckland Star, Volume LXII, Issue 72, 26 March 1931, Page 6

The Auckland Star: WITH WHICH ARE INCORPORATED The Evening News, Morning News, The Echo and The Sun.

THURSDAY, MARCH 26, 1931. MR. THEODORE'S PLAN.

For the cause that lacks assistance, For the icrona that needs resistance. For the future in the distance, And the good that tee can do.

A new stage in the development of Mr. Theodore's inflation scheme was reached at Canberra yesterday. To put it as briefly as possible, Mr. Theodore proposes to ship the Bank's gold reserve to London to meet Australia's obligations abroad, and then to authorise the Bank to issue a quantity of notes beyond the present statutory limit, so as to relieve unemployment and " rejuvenate industry." Stripped of all technical verbiage this is inflation " naked and unashamed," and it is not surprising that the project has been very rigorously criticised at Home.

A few days ago, Mr. Theodore, speaking at Brisbane, anticipated the Bill he is now introducing by explaining at some length the purpose and the probable effects of his scheme. As the gold on which note issues are usually based would no longer be held by the Bank, it would be necessary to substitute securities as a form of reserve, and Mr. Theodore apparently believes that the value of such securities would not be affected by his financial operations. But the natural and inevitable effect of an issue of paper money not based on gold is to raise prices and to depreciate the value of securities, thus at one and the same time undermining public credit and reducing the value of the reserve, while intensifying the demand for further issues based upon it. Mr. Theodore apparently ignores these difficulties, for he has not even attempted to show how they can be averted.

The attitude which the Federal Treasurer takes up in regard to the currency problem is sufficiently indicated by his reference to the Commonwealth Bank's gold reserve as " performing no discernedly useful purpose." Mr. Theodore knows that a gold reserve performs two functions of immense importance to the credit system. It supports public confidence in the circulating medium by assuring everybody that the paper currency has a sound and valuable material foundation, and at the same time, so long as the issue of notes bears any definite relation to the gold behind it, the reserve acts as a check on the volume of the currency, and therefore prevents inflation. In face of this, to say that gold " performs no useful 25urpose" as a bank reserve is sheer nonsense. Also, Mr. Theodore appears to believe that he can check or limit the issue of inconvertible notes at his will. It is sufficient to say that such a belief is contrary to all economic and financial experience, and if this experiment is once made it will inevitably follow the course that inflation has followed at various times in France and America, Britain and Germany, Austria and Russia, with results in this case most disastrous to Australia.