To Lift the Depression

Dominion, Volume 24, Issue 105, 28 January 1931, Page 7

To Lift the Depression

Sir, —“Trader's” suggestion in your issue of the 23rd sounds plausible, but is surely unsound. He proposes “to issue £5,000,000 in notes and make them legal tender; let the Government circulate these notes by paying Civil servants, etc., in Treasury notes. This would relieve the Government of a lot of cash payments, releasing more money to finance other undertakings. The notes to be redeemed at the rate of £500,000 a year out of revenue.” What does this amount to? It is either the same as a direct local loan free of interest against which certain revenue must be ear-marked, or else it is pure inflation as the notes in question would not be backed by gold. It is, in fact, one of the many suggestions, made to escape from the burden of interest and the inconvenience of loans, and which never “pan out” as expected. The most famous case where an exactly similar scheme was tried is the “Guernsey Market House scheme” which was to build a market house by the issue of one pound notes with which they bought the material and paid the wages. Those who used the market must pay rent in these notes, and as they came in they were to be destroyed; thus (it was claimed) as they would all be ultimately destroyed the island would have its market for nothing. It looks simple—but no less a person than the Socialist leader, Lord Passfield, then Mr. Sidney Webb, explained the actual effect of the scheme. He said: “What the Guernsey community did was what every community has done at one time or another, namely, issued paper money.” He then showed that this increase in the currency must result in higher prices. “If prices rose in consequence of the issue one halfpenny in the shilling this represented a burden on the Guernsey people as consumers exactly equal to 4 per cent, on all their purchases. Thus, instead of paying interest on a loan, they unwittingly chose to pay more for their bread and butter.’’ The only way in which such an issue of paper currency could be made without a rise in prices would be to withdraw from circulation an equivalent amount or metallic currency; this would defeat “Trader’s” object in increasing the money in circulation.” which he claims to be essential. “Trader” seems to overlook the fact that business transactions carried out by actual “money in circulation are a mere “drop in the bucket” compared to those carried out by cheque—“more money in circulation doesn’t appear to be any remedy. “Trader” also has a hit at the banks, a very popular target just now because so many people seem to entirely misunderstand the position that banks hold in our business life. He asks, What have the banks done to relieve matters. If he looked at the returns he would see that they have actually advanced more money than they have on deposit. bo many critics forget that a bank cannot start out as a lender; it must all be a borrower, and having by the offer of interest, backed by sound business reputation, attracted deposits, it can then become a lender. Bank shareholders are mostly small people ( tl,p holding in England is under £300) and the banks have to handle the e "' trusted to them very carefully, people would lodge their money somewhprp plsp. . • If “Trader” is right in his diagnosis that “more money in circulation is required. it is no solnton to create notes not bucked by a metallic holding as tha is purely and simply “inflation —a suicidal policy.—We are, etc., N.Z. WELFARE LEAGUE.