DANGER SIGNALS

Dominion, Volume 32, Issue 54, 26 November 1938, Page 13

DANGER SIGNALS

Warning To New Zealand By Bank President FALL IN EXPORT PRICES Financial Uncertainties Australia and New Zealand are both particularly sensitive to movements in overseas prices, as a large proportion of their national income is derived from the sale of primary products overseas. Therefore, any fall in the prices received for these products should act as a danger signal to both countries. The president of the Bank of New South Wales, Mr. Robert W. Gillespie, devoted special attention to the problem of readjustment to falling prices when he delivered his annual address to the bank's proprietors in Sydney yesterday. Air. Gillespie suggested that the proper way to short-circuit the effects of lower spending power because of the fall in export returns was, first, for primary producers and manufacturers to reduce costs by improving efficiency; and, secondly, for Governments to elaborate a planned monetary policy.

During the past year the economic position of the Dominion had shown some deterioration, he said. Trade figures revealed a considerable fail in the excess of exports over imports, and banking figures, with an increase in advances and a fail in deposits, provided evidence of the continued transfer of capital abroad. Statistics of the level of internal trade showed either a fall or a considerable slackening in the rate of increase.

"Though Government, revenue is expected to decline, the Budget for the current year provides for record expenditure, a large item in which is a further expansion of public works,” said .Mr. Gillespie. "In view of the probable reaction upon internal activity of a lower level of exports, some increase in this type of expenditure appears justifiable provided it is kept within reasonable bounds. But tire continued high level of public investment of this nature, particularly when much of it is being devoted to unproductive works, together with large disbursements from the' Employment Promo-, tion Fund, demonstrate 'the extremes to which the Government is being driven to find a solution of the unemployxnent problem. False Sense of Buoyancy. "To continue to augment spending power by lavish loan expenditure on public works during a period of high export income distorts tire whole structure of the economy and misdirects the application of the available capital and labour resources. To promote an artificial prosperity in this way creates a false sense of buoyancy in public and private finances which is most undesirable when export, prices are high. Furthermore, should overseas prices then fall seriously, it is doubtful whether it would be possible to finance additional public works schemes to take up the slack in employment and spending power, without imposing dangerous strains on tire economy of the country. . “Further far-reaching legislation has been passed by the Government in its third year of office. Power to control the internal marketing of dairy produce has been extended to cover the sale of all foodstuffs in New Zealand. An iron and steel industry is to be set up as a State monopoly to exploit extensive iron ore deposits in the South Island, but it is extremely doubtful whether the limited demand in New Zealand will be sufficient to allow the industry to operate on an economic scale. Social Security Finance.

“While the extension of pension benefits and the provision of a universal free health service foreshadowed in the Social Security Act are in accordance with humanitarian principles which need not be questioned, the financial uncertainty of the scheme as regards both cost and revenue is a considerable danger. The increasing revenue needed each year to finance tlie scheme is dependent upon a rising national income and the continual expansion of production at a comparable rate cannot be assumed. A less ambitious but more practical scheme would have greater chance of success, and, in addition, would have the merit of enabling expansion to take place in the light of experience.

“Witli the prospect of a lower export income and rising internal prices, it seems that the Government, returned to office at the recent elections, may have difficulty in carrying out its policy, which entails heavy spending. I would strongly emphasize the danger of inflationary methods of finance which; keep the national income at a nominally high level but reduce the purchasing power of money, with inevitable dislocation in the economy through rising costs and prices.”