INFLATION AND DEFLATION

Evening Post, Volume XCIX, Issue 71, 24 March 1920, Page 9

INFLATION AND DEFLATION

AN OPEN LETTER TO PROFESSOR MURPHY

The Evening Post has been asked to publish the following "open letter to Professor Murphy" :—- Dear Sir, —In your recent address to the W.C.T.U. Convention on "The Cost of Living" you found that the "reason for the jump" .in prices lay primarily in the (so-called) inflation of the currency, whilst your principal remedy was its deflation. Your finding rested largej ly upon what is known as "The quantity theory," which may be expressed by saying that, if the volume of money is increased more rapidly than the volume of goods coming to market, then there will be a general rise in the price of goods, and vice versa. .It may be objected that the quantity theory is 'but a theory; that as such it is fallible; that the war was the grave of many economic theories, and the reputations of their authors; a,nd that there are economists who contendl that in particular this quantity theory has been disproved by the war—vide Professor Todd in his book on the "Mechanism of Exchange." I leave the merits —or demerits —of the theory, however, to contending Professors, for practical men are. satisfied that prices have risen because of shortage of supplies. Last week in the British House of Commons, Mr. C. A. M'Curdy, as representing the Ministry of Food, stated that "the preponderating cause of high prices was that, the world's, supplies were unequal to the demands." In this sentence Mr. M'Curdy differs fundamentally fro/n you as to the "reason for the jump," and the cold facts, as differing from economic theories, are with Mr. M'Curdy: ■ "Becos a crook done in a Prince, an' narked an Emperor, An' struck a light that set the world., aflame." At least 30 or 40 millions of men in the prime-of life were t conscripted from productive labour, and mobilised for an unrrecedented wastage of life and of material wealth, extending over more than four years. Inevitably the world's output of goods shrank enormously, and in one respect-Hhe output of foodstuffs —supplies were so reduced that in the last stages of the war the danger of world famine was real and imminent. Given such a war, do you, know how the decreased output of goods could have besn avoided, or, given the decreased 1 output, do you know how the increase in prices could have been prevented! Suppose the note circulation in New Zealand had never risen beyond the two million figure of 1914—0r suppose it could be again reduced to that amount to-morrow—would it "multe a penn'orth of difference" in the price-we paid for cotton from Paisley; linen fx-om Belfast; tea from India; kerosene from America; or wheat from Australia? . Is it not a fact that either we should have to pay the world's price, or go without? Some of our products—wool, meat, butter, and cheese—were commandeered at a fixed price, and by Government regulation prices to local consumers were also kept at a fixed price. That price was considerably below the world level. Remove restriction and these commodities would immediately increase in price till they reached the open market level. A typical case is the recent "sensational" rise in hides, which, will add 30 to- 40 per cent, to the cost of footwear made in New Zealand. Is that increase dne to an inflated (blessed word), currency, or to a demand exceeding supplies? Professors may theorise, but, with all, respect, practical men will agree with Mr. M'Curdy. Instead, therefore, of the currency causing the jump in prices, the jump in prices necessitated an increase j in currency.

A well-regulated note issue is elastic, expanding as trade expands, and contracting should trade decrease—whether the expansion of trade be in'-volume or in value matters not. I have referred to hides and boots. If a pair of boots, costing 30s in 1914, cost 60s now, I have to hand over to the.retailer so much more money. If would be useless to go shopping with 30s in my pockets; I must be prepared to fork out 60s, or go without the boots; so I go with double the currency in my pocket. Apply this all round. Your own estimate is that "since 1914 the cost of living has gone np in Now Zealand by 100 per cent. Obviously the currency must increase till it is adequate to the higher prices. "you issue additional money because prices are driven so high, that you will not get what you want unless you give the additional money," and on your estimated 100 per cent, increase in prices, a corresponding increase, in the note {circulation is not inflation, but a legitimate expansion determined by the needs of trade. ■'■ Two additional reasons axe more local in character. They are: — 1. Government Borrowings Within the Dominion.—Money was required to carry on the war. Outside borrowing was impossible, bo internal loans were raised aggregating over SO millions. To lend was a duty, but the loan could not be in land, or stock, or industry—it had to be money. So subscribers had recourse _to borrowing,■' which meant an expansion of credit, which in.turn was reflected in the increased note circulation. Can you say how this could have been avoided ?. 2. Accumulation of Funds in London. —Our commandeered products were paid for in London, but the producei-s had to be reimbursed in New Zealand. Over the five years our exports exceeded imports by sixty millions.sterling. Without wearying details, the fact is that the usual avenue for, bringing these surpluses back to the Dominion—the exchanges—had not been sufficiently available; hence portion of these funds are still in London, although the producers have received credit therefor in the Dominion. This meant a further addition to the currency. What would ■ you have done to avoid it ? "Shoddy Money."—Due to the foregoing causes, the note circulation in New Zealand increased from two millions in 1914 to seven millions in 1919. Apart from the legitimate reasons for expansion, there is tho fact that to support | this seven millions of currency there-is held over eight millions in coin and bullion, and, in addition, it is a first charge on other assets aggregating over. forty millions. Yet you ventured to describe such currency as "shoddy money." Spoken by an irresponsible soap-box orator, the term could be dismissed as "hot air." In this instance the epithet is no more accurate, but it would depreciate you greatly not to recognise that it is capable of much greater mischief. ' Here let me quote The Statist of 6th December last in a leader on "Inflation," and written to show "how very few socalled educated people were capable of arguing from a given fact to' another given fact." .The article concludes thus:—"There is absolutely not the slightest possible excuse for the utter nonsense talked about inflation. ... If you say that the high prices and all the evils ■ that follow from high prices are due to the war —well, we at all events are not prepared to contradict you.. But to talk about such absolute rot as inflation is to try fco throw diuit in th« ey<« 'of the- people." And The Statist is

some "journal'of practical finance and trade." • A few questions about your remedy, viz. : Deflation.—You are reported as saying "the first.and foremost (remedy) is to deflate the currency. There are practical ways in which it can be done." A little constructive and practical economics would be appreciated. Can you say just how you would do it? Here are three suggestions : | 1. Restrict Credit.—Coll up five millions of advances, and thereby reduce I the circulation to the pre-war level. Would you recommend this ? Because I of our war burdens the slogan is production, more production, and still more production. That slogan has general endorsement, and' I think it carries j yours. But how can you at one and the same time contract advances and yet stimulate production ? 2. Bring back from London five millions- of the accumulation there, and thus reduce the circulation to two millions. With exports still exceeding imports, and with the. usual avenues of exchange practically closed, how can you bring back the funds, except—and this may heaven forbid—by a series of years over which our import trade exceeds exports ? 3. Or would you advocate releasing sufficient gold to redeem the increase in currency since 1914? All Governments, for good and sufficient reasons, have laid an embargo upon gold leaving the country. Regulations here limit the' amount a person may take away. Put gold in free circulation, and, because of the premium it brings abroad, smugglers—from Chinamen to prominent citizens—would be much in evidence, and the gold would leave the country. Would you recommend facilitating this? If these methods do not find favour in your sight, perhaps you can suggest others that would redress your imaginary, evil of inflation without seriously disorganising trade and inflicting grave injury upon the whole Dominion." The importance, of the subject, and its prominence in lectures, cables, newspaper leaders, ec, must be my for the length of this letter.—l am* etc., / INQUIRER.