ECONOMIC TANGLE

Evening Post, Volume CXII, Issue 82, 3 October 1931, Page 13

ECONOMIC TANGLE

WHAT ARE THE CAUSES ?

CONVENIENT THEORIES

PART PLAYED BY GOLD

(By "The Layman/)

"In timos of prolonged industrial depression' it is perhaps natural that men should single out some factor iv the tangle of economic difficulties and malto it tho scapogoat of the world's improvidence," statca "The Times" m commenting on the theory held by Professor Gustav Cassel, the Swedish economist, that tho present world depression is due essentially to monetary causes. " Mankind," continues the article, "we aro onco more daily informed, is being crucified upon a cross of gold, and tho wilful stupidity of the central banka is tho cause of all our numerous troubles." One of the reasons for the widespread belief in economic fallacies may be that when times are good the average man does not concern himself with economic or social phenomena, but that when times aro bad he at once looks round to find out what has hit his purse or his stomach, and, not being sure through unfamiliarity with human vicissitudes, seizes upon the first plausible explanation which comes his way. When the foreign exchanges were functioning smoothly they attracted only academic interest, but onco they began to falter unscientific attention, which is always vastly wider than scientific, looked for tho villain who had thrown tho spanner in the works, and joined in the hue and cry initiated by Bassanio: — ". . . . thou gaudy gold. Hard food for Midas. 1 will «one of thee." Or as Mr. Hartley "Withers has put it, "When in doubt abuse the gold standard." Tho present depression is commonly ascribed either to tho scarcity of gold, or to its mal-diatribution, or to the action of tho central banks in scrambling for it and hoarding it. If only the six or seven men who aro imagined as controlling tha financial destinies of the world would be a little moro\liberal in the manufacture of credit, the depression would be dispelled in a few w,eeks. This simplified picture of the situation is attractive on account of its simplicity, and the truth it contains isv arresting precisely because it diverts the mind from, harder and more complicated solutions. In an address to the Institute of Bankers in May last, Professor Cassel, Who haa for yoars been warning tho" world of a growing scarcity of gold, stated that roughly the present production of gold amounted to only twothirds of the quantity that was required for maintaining a stable price level. Tho only remedy for their present difficulties was a systematic reduction of central banks' requirements of gold resorves. By aid of a rational goldeconomising policy the- evil .effects of a growing scarcity of gold could be easily mastered, and such disastrous' revolutions in commodity prices as they wore now-■ witnessing/ with their inevitable consequences of devastating crisis, could be entirely avoided. It was time that tho leading central banks ,of the ■world came together and made an end to the depression simply by declaring that they intended, from that moment «n to supply the- world so abundantly with the means of payment that no further fall in prices would bo possible. INITIATION OP CREDIT. It is safe to say that if tho central banks knew how to supply Professor Cassel's simple remedy to a very deep and complicated dopression, they would very quickly adopt it, provided, of course, that they were satisfied that, the cure in tho end would not be worse than the disease. The creation of credit is not quite as simple as Professor Cassel apparently envisages it. "Credit" in the commercial sense means the power of inspiring sufficient confidence in others to induce them. to provide money or commodities without immediate compensation. It may be represented in a number of forms, but tho important matter, in all cases,, is the transfer of the control or uso of wealth. Though one generally looks to a bank for the supply of credit, initiation of credit does not come from a bank. It really originates from someone —it may be a Government or an individual —who desires to spend money on some project, good or bad. If the borrower's bank feels reasonably confident that ;the credit.will be repaid at maturity it grants the credit, and the expenditure of tho money sots the whole of the economic machine going. The placing of an abundant supply of credit at the disposal of the commercial and industrial world by waving a magic wand, so to speak, is not the simple process Professor Cassel would lead one to believe it. ■ ■ ■ . . . In a memorandum, published as a supplement to tho "Economist" oh sth July, 1930, Sir Henry Strakosch asserted that "over production" is or ought to be, an absurdity, that an increaso of production, extending over the whole range of, commodities in an orderly and symmetrical fashion, simply makes available to the population a greater amount of all the goods it currently consumes; and if money of all kinds, to an amount that corresponds to the increased volume of exchanges and production is available, general price level of commodities will remain stable. He found, however, that there is, in fact, a superabundance iv nearly three-quar-ters of the various kinds of raw materials that the world needs, and thougli the producers of each of these materials are anxious to exchange them, for others, yet they are unchanged. He therefore concludes that theso exchanges failed to be made, not because goods were in excessive supply, but because the process of exchange was in some way impeded. A similar line of reasoning was struck -by Mr, J. M. Keynes in a speech at the annual meeting of the National Mutual Life Assurance Society, when he- drew the attention of his audienco to the serious fall in prices, and then wont on to say: "I believo that theso events, so inimical to the wealth and happiness of the world, are remediable and avoidable. But they arc to "be attributed to tho want of collective wisdom on the part of tho central banking authorities of tho world taken together." rACTORS IGNORED. These arguments infer that the central bankers of tho world aro tha only obstacles standing between mankind and the enjoyment of prosperity. They assume that all production has been rational, and' ignore tho existence of now and higher tariffs, economic nationalisation, war debts, political disturbances, find other factors which aro necessarily detrimental to a frictionlesa economic system, and which are outside the scope and province of bankers. It is true that the Bank of Franco and the Federal Reserve Bank of America have been accumulating largo quantities of gold to such an extent that England was forced off the gold standard, but these banks themselves cannot be held directly responsible for this. America's tariff and not the bank has been mainly responsible for the gold sucked from all parts of the world into the United States. As for the accumulation in France, the French public was hoarding note's, and notes wero wanted for trade; to get ji'otes, owing to tho limited powers of tho Bank of Franco

in tho matter of holding securities and "opon market" policy, gold_ was necessary, and so gold went to Paris owing to circumstances for which the Bank of France cannot bo held responsible. And it stays there because tho French public is shy of lending abroad except on short-dated terms, owing to the general lack of confidence. It may be perhaps justly stated that these factors have been the reason for the "want of collective wisdom on tho part of the world's central banking authorities taken together," but tho real question is not whether this monetary argument is valid or not,- but rather how much truth docs it contain, and how many of tho facts docs it leave unaccounted for? 1 GOLD AND PRICES. la spito of tho fact that tho gold supply for monetary purposes has been decreasing for a number of years, England, according to authoritative data, in 1928 and for pai-t of 11)29, judged by post-war conditions, .enjoyed ,a "boom" period. In tho United States, from 1925 to tho third quarter of 1929, prices wero remarkably stable, and not all tho gold in Washington hns yet availed to stem tho ravages of tho ensuing dopression.A deficiency of credit due to tho scarcity of gold may therefore be ruled out as the sole factor on the question of the world depression. The world's troubles are due not to tho gold standard as such, but to quite different causes. A fall in prices may be due Knot to deflation, but to abundance. An increase in the supply of a commodity, the demand for which is not very elastic, may cause a rapid fall in its price without the agency of any monetary manipulation. Over-pro-duction in the economic sense of the term —an increase in supply which provokes no increase iv demandl—is a familiar phenomenon which has been observed by economists. And tho puzzling paradosi of. World-wide distress, caused by superabundance is best explained not by the working of the monetary system, but by a consideration of the statistical position of the world's principal commodity markets. For several years beforo the break in world prices in the latter part of 1929 the producers of some of the principal foodstuffs and. raw materials entering into international trade had begun to accumulate surplus stocks. The New Zealand primary producer knows full well that he has been meeting with increased competition on his various markots. Attempts to maintain an artificial levellbroke down, and the severity of the collapse was enormously increased by the crash on tho New York Stock Exchange, but the, position for some time had been intrins/cally unstable. Moreover the recovery from tho present depression has certainly been retarded by two factors, the importance of which should not be neglected—the immenso rise in the tariff walls in the United States and Central Europe, and the payment of reparations and war debts which tho fall in prioes has rendered progressively onerous. In the face of this situation it would seem the height of folly to ignore the lessons of history. and adopt a course of concerted inflation. It. would do little to femedy the asymmetry of production, for instance, 'and when the short period of artificial prosperity it might, create, was ended the .world would have again to clear up, the moss caused by its monetary debauch. : NEED TOR A POLICY. On the) whole, then, most people who are not obsessed by a belief in currency as tho root of all evil and the cause of all Aho mischief will be inclinedto accept tho view that the gold situation is merely a symptom and not a cure for the present depression. No general revival can be expected until tho nonmanotary Obstacles to international trade are removed. An international policy of tariff reductions and the scaling down of war debts to a reasonable level would pave the way for the rosumption of a stable international mechanism for tho distribution of goods and capital. In this matter tho banks cannot go far ahead of public opinion, If business men are always going /to be alarmed and nervous when gold m any quantity leaves their country, central banks are forced, in spite ot thenbetter judgment, to indulge in that gold scrambling and gold hoarding which has no doubt contributed to the present crisis and accentuated the effects # o£ the far deeper and wider causes which produced it. One' thing seems certainthere is no short cut to world prosperity by more monetary manipulation.