Money supply

Press, 13 June 1984, Page 18

Money supply

Sir,—The letter from P. N. Russell (June 6) was extremely valuable. It illustrated the appalling misconceptions held by some people regarding the purpose and mechanics of our monetary system. The New Zealand (sic) Party would not cause so much harm if they were only ignorant. What compounds the mischief are their fallacies. Mr Russell has failed to differentiate between an individual, A, lending to an individual, B, and the actions of the Reserve Bank

and the four private trading banks in creating and lending the original money supply at interest. All money comes into circulation in this manner. The interest bill is met by further borrowing. In 1974 the private trading bank lending was $1955 million. By February, 1984, this had grown to $9086 million. In a year the interest at 10 per cent on this will be $908.6 million. Where will this come from? — Yours, etc., A. R. MACKAY. June 9, 1984.

Sir,—l agree with some of Neil Russell’s comments about the National Party’s interest rate strategy. Social Credit agrees with lower interest rates, but disagrees with Sir Robert Muldoon’s methods. Since they do not have the power to get their own proposals adopted, they have to support Sir Robert Muldoon’s. Of course, he has a highly intuitive approach to day-to-day economic planning: at the moment he is gambling on a fall in international interest rates. If that happens, his strategy might work, but otherwise it will eventually fail. If his economic strategy fails, he may blame the finance sector in the hope of taking votes from Social Credit, but in the long term that would improve Social Credit’s credibility. — Yours, etc., J. C. RING. June 9, 1984.

Sir,—P. Neil Russell (“The Press,” June 9) over-simplifies the relationship between the money supply and inflation. It is true that the over-use of deficit finance by governments was one of the main causes of high inflation, but calculated deficits aimed at promoting growth and reducing unemployment are to be commended. If a government has to resort, like the present Government, to extraordinary internal borrowing to try to take money out of circulation, it is a sign that the deficit is too high. The New Zealand Party is to be congratulated for its plan “to cease government borrowing forthwith,” but it has yet to give us a convincing explanation of how it is going to work this desirable miracle. Meanwhile, I must agree with Mr Burdon that government controls on wage and price increases are a far better way of controlling inflation than the “extreme monetarist” method. — Yours, etc., MARK D. SADLER. June 10, 1984. Sir,—The report that the European Economic Community’s “butter mountain” has topped one million tonnes for the first time (June 9) is clear indication of the failure of the Community to solve Europe's economic problems. The million-tonne “butter mountain” is a monument to the demise of “market forces” economics, the fallacy of the economic philosophy of the New Zealand Party and the “return to private enterprise" of the National Party's Right-wing. The mechanics of the Community’s economic policy was devised to reconcile the incompatibility of capitalism's growing productivity and its diminishing profitability. Using European taxpayers’ money to create artificial scarcity of butter while a million tonnes grow in cold storage, in order that the taxpayers may buv their butter at *

artificially high prices, explains inflation (currency depreciation) more scientifically than a debatable “money supply.” — Yours, etc.,

M. CREEL. June 9, 1984.

Sir, — Those who advocate no controls on interest rates do not follow through. All costs are recovered from the consumer. The present Government removed controls on interest rates after its election in 1975. The damage done is belatedly recognised by the Prime Minister who knows rates must come down if he is to survive. During the Holyoake era rates were low and people still saved. Money cannot be regarded as a commodity like potatoes, which consumers can economise with if too expensive, or use a substitute. There is no substitute for money when a couple need it for a home. Exporters may survive with continued taxpayer featherbedding. Internally, unless the cost of debt and interest are minimised, we will stumble on as a nation, social bitterness growing day-by-day. Let Mr Neil Russell continue to publicise his party’s anti-social, retrograde interest rate policy. — Yours, etc., P. NORMAN DAVEY. June 9, 1984.

[This correspondence is now closed. — Editor.]