RESTORING THE DOMINION.

Press, Volume LXVIII, Issue 20463, 5 February 1932, Page 13

RESTORING THE DOMINION.

REDUCTION OF COSTS. HIGHER RATES OF EXCHANGE. PROFESSOR COPLAND ON ECONOMIC RECONSTRUCTION. Showing that a drastic reduction of costs in the proportion of the fall in national income would be impracticable, Professor D. B. Copland, Dean of the Faculty of Commerce at the University of Melbourne, advocated in a public address in Christchureh last night a partial reduction of costs together with an increase in primary produce prices, to be secured by a higher exchange rate, as the best means of overcoming the Dominion's present difficulties. He emphasised that this latter course would bring the farmer immediate relief, and although that relief would be secured at tho cost of the rest of the community, he believed that this cost would have to be accepted. Professor Copland proceeded to discuss the balancing of the Budget and other important economic topics of the present day under the general title of "Economic Reconstruction in New Zealand."

The address, which was delivered before a crowded audience in the Jellicoe Hall, was given under the auspices of the Economic Society of Australia and New Zealand, of which Professor Copland himself was one of the founders. The Hector of Canterbury College (Dr. James Hight) was in the chair, and Professor Copland was attended on the platform by the president (Professor A. H. Tocker), and vice-presi-dent (Mr W. Stewart) of the local Society. Heavy Loss of Income. Professor Copland said that New Zealand was suffering a loss of income from two causes. "There had been a fall in the price of exports from £55 millions to £32 millions, a direct loss in terms of money. Besides that £23 millions she had suffered a further loss because of the cessation of overseas borrowing which was formerly part of her national income, since from that borrowed money works were constructed and many people derived a livelihood. The total direct loss was therefore about £29 millions in money value. But the loss did not end there; it permeated the whole community. The first loss was not the only loss, since it would continue to grow as long as there was a disequilibrium in the economic system. The; loss of income must be spread evenly over the community, surely a fair proposition. The farmers had suffered a loss of 40 per cent, in gross income. If they could not get an adjustment of costs of the same order they could not make farming possible. Such a reduction meant a fall in the price level of 40 per cent. In other words, the national income must be revalued at 40 per cent, below the former income—a reduction from £l5O millions to £9O millions. Losses of Real Income. There could be no doubt that the absence of overseas borrowing meant a loss of real income. That fact could not be disputed. Another loss of real income arose from the fact that the prices of imported goods measured in terms of foreign money had not fallen in conformity with the fall in exports Thus the £32 millions received for exports would now buy a very much less volume of imports, again reducing the national income since these goods required less handling, less selling, and employed altogether less labour. For the time being the country was poorer in material things and must so adjust the economic fabric that incomes were 15 per cent, lower than before the crisis. There were certain surplus elements in income. Some people said, "Take the higher incomes and leave alone the working man's standard of income." But the loss of income was so great that the surplus elements could not meet it. The fact was that everyone must adjust himself to a lower standard of income until a thorough economic readjustment was made. There was involved an all-round reduction of income and a spreading of the loss in national income among all sections of tho community.

•*A Hopeless Position." "The farmer in New Zealand to-day is in a hopeless position," said the Professor. "He has built up a burden of debt on high export prices and his costs are very little lower than in previous years." The country must maintain it? production; but farmers could not be expected to maintain efficiency unless the future gave them some hope of improving their position. The farmer had to be helped out by the rest of the community. What had to be considered was how best that burden could be taken up. Every section of the community might resist this doctrine, but the position of the primary producer had to be relieved. The first course of action was that of the man who believed that there was always safety in going down. If all income could go down 40 per cent., the farmer and the people would be relatively in the same position as beftiro the drop in export prices. That was deflation, and it meant a wholesale and thorough cutting-down' of costs by 40 per cent. Was that a feasible proposition? He would say, no. It might be done over a period of 20 years without disturbance, but in this case it would have to be done immediately. Any attempt to cut costs 40 per cent, at once would fail, because: (1) The money value of everything would be written down until the assets of all financial institutions would be reduced, while their liabilities, in terms of money payments,would remain the

same. The United States was an example of the effect of this deflation. .Reduction of Revenue. (2) The Government's Budget was put" in a very precarious position, smco its sources of revenue in graduated taxes would fall more than 40 per cent, though Government expenditure cou not be reduced by an equal amount. (3) No community would face cuts of that order in its money incomes. The result would be that the distribution ot the loss of income would _ be uneven; some people would be left privileged positions. , (4) Falling profit would mean a dry-ing-up of enterprise, a contraction ot output, and a larger amount of unemployment Thus lie would reaffirm that the cutting of costs alone would not solve the problem. Professor Copland then proposed another way by which the situation could be handled. First, there was required a frank interchange of ideas among different sections of the community. The better method was to lift up the farmer's income by so much ana reduce his costs by so much, until an ii-'proximate equilibrium estao-Ji.-hed. This was a course which was almost universally blackguarded. The cuts in costs involved cuts in fixed charges, salaries, and wages, and in all services and prices of commodities. If the income fell from £.150 millions to £.130 millions a country could not afford to pay the same interest charges. It was not the country's fault, and the adjustment had to be made. reduction of fixed interest charges was inevitable. It might be brought about by the law of the jungle: every man for himself. But why should not the situation be faced straight-out? It was inevitable that real wages would fall. Why not face the position? Mr L. C. Walker: But are you right? Professor Copland: I am right. Depreciation of Currency. A reduction of money income, he continued, was a position accepted by reasonable people as inevitable. At the same time another course must be followed: depreciation of currency in terms of gold so that the internal price level was maintained. That, of course, was a very wicked doctrine. The New Zealand pound had depreciated in terms of British pounds and American dollars, but it had not depreciated in terms of what it would buy in New Zealand. No ono in the country proposed to follow gold down. There were several reasons why it would be desirable to keep the exchange up to 125 or 130, so that that internal price level was maintained. First of all, Such a high exchange would avoid adding to the adjustment process the alteration of money values caused by the cessation of overseas borrowing. It' the exchange was put at 30 per cent., the effect would bo to raise the gross interne of the export producer in the ratio of 110 to 130, an approximate increase of 18 per cent., which would be received at once. But of course tho rest of the community would have to pay for it. They must give the farmer quick relief even at this expense. If the income were so increased to £IOO millions from £9O millions (which it would be at 10 p«?r cent, exchange) the gap between costs and prices would be materially lessoned. The way to cut real costs was to sustain the price level and cut money incomes to a relatively small extent. Balancing the Budget. It had been argued that with a 30 per cent, exchange rate the Budget would not be balanced since 30 per cent, more overseas interest would have to be paid. For the' Government about £8 millions was the external debt service. If the exchange was increased to 30 per cent., £2,400,000 extra would have to be found in New Zealand currency. Actually, at the 30 per cent, exchange rate the burden of debt in relation to national income would be less than at the par rate of exchange. As rational income fell, Government revenue fell away; and it would fall away in greater proportion than the national income, and the Budget position would actually be more difficult under deflation than under the course he had suggested. If there wa3 any pressure to lower the exchange rate, and the farmers' position did not warrant it, external debt could be transferred to internal debt and the situation could be easily handled. That was his proposition, said Professor Copland, and he hoped that no one would Took for political jioles in an economic proposition. . Professor A. H. Tocker, the local president of the Society, briefly outlined tho Society's aims and work, appealing lor the greater interest and support of the public. /Tv? n -,H le J®°ti° n of the vice-president (Mr W, Stewart) a hearty vote of t .anlcß to Professor Copland was earned by acclamation." t-A- special article by Professor Copland appears on page B.]