SPENDING BY STATE

Press, Volume LXXV, Issue 22769, 22 July 1939, Page 16

SPENDING BY STATE

Recourse to Reserve Bank ADVICE GIVEN GOVERNMENT Report of Board Of Directors [From Our Parliamentary Reporter.] WELLINGTON. July 21. The desirability of avoiding further recourse to the Reserve Bank for financial accommodation and of limiting Government expenditure is emphasised in the report of the Board of Directors of the Reserve Bank for the year ended March 31, which was tabled in the House of Representatives today. If such a policy were adopted, the directors state, it would improve the capacity of the bank to give financial assistance during relatively unsatisfactory export periods “without jeopardising the financial economy of the Dominion.” In the general review of the year the directors state that general business activity and demand for imports continued at a high level in spite of a reduction. in the total value of exports and a considerable net outflow of capital. Notwithstanding the expansion of credit represented by an increase ot more than £14,000,000 in Reserve Bank accommodation to the State (including an increase of £2,300,000 in advances to the Primary Products Marketing Department), commodity prices remained relatively stable throughout the year. ‘‘Now that the surplus sterling reserves have been practically exhausted, however, and the Reserve Bank has been relieved of the obligation to pay its notes in sterling, a different situation presents itself,” the report adds. “No longer will it be possible for credit created by the bank to find an outlet to any appreciable extent in the purchase of goods from overseas (except by using the banks’ statutory reserves for that purpose). “While the demand for commodities was being partially satisfied by the use of the Dominion’s available sterling reserves, the effect of the expansion of credit on internal prices was not very great, but in the existing circumstances any additional credit expansion would inevitably tend to cause sooner or later a general rise In prices with a consequent diminution in the value of all savings, wages, salaries, and pensions. • • Government Expenditure “The board would therefore emphasise the desirability of avoiding further recourse to the Reserve Bank for accommodation, and of limiting Government expenditure to such a sura as can be raised by taxation In addition to what can be borrowed from the public either in the Dominion or overseas.-

“If such a policy were adopted, and still further, if steps were taken - to reduce outstanding advances from the bank, there would be a better prospect of the bank being able to assist by granting accommodation during relatively unsatisfactory export periods without Jeopardising the financial economy of the Dominion.’’