TOO DANGEROUS

Evening Post, Volume CXV, Issue 25, 31 January 1933, Page 8

TOO DANGEROUS

INFLATION POLICY

ECONOMIST'S ATTACK

HIGH EXCHANGE FALLACIES

RISK OF BANKRUPTCY

The following statement on. the exchange question has been supplied to ■ the "Evening Post" by the "Wellington Business Men's Committee: — -I am asked by the Business Men's Committee to express an opinion on the following questions: "Will the exchange inflation poljcy now adopted by the Government (a) increase the national incomej (b) increase the cost of living, (c) - lessen unemployment" ■ The real national income is, broadly speaking, the aggregate of the goods and services available for our people over, say, an annual period. The expression of this in money is the nominal national income, but owing to the statistical complications involved this money estimate cannot be exact, and the estimates employed in the present controversy are probably correct to within plus or minus 5 per cent. This gives a margin of error of considerable width, and invalidates, or at all events renders unconvincing, deductions involving incremental, variations in the amount; : ' . If other things remained equal, the exchange inflation policy would neither increase nor decrease the real national income, but would re-distribute it in favour of the rural section of the community, and its creditors, as against the rest of our people." If the redistribution involved exercised on balance favourable reactions, psychological and otherwise,' on business enterprise and confidence, a rise in the real national incomeover the level at which it would otherwise- have stood would be effected. If, however, the effect of the policy ia to lessen confidence and dimmish-enterp-rise, then the result would be a fall in the real national income. In my view the inflation policy will probably, but not certainly, exercise a prejudicial effect. As_far as the nominal or money expression of the national-income is concerned, it is alniost certain to'be increased, as a result of the policy, beyond the figure at which it would have stood if the policy had not been adopted^ The'normal, and intended, effect of inflation is a rise in general prices, and the rise would be more pronounced in some directions than , others, but there will certainly be an average rise, or a failure to fall, which] is the same thing. It is not, however^ possible to correlate a given rate of exchange with -any exact or very approximate alteration in the nominal national income. As a result, to claim that a given rate -of exchange will add a • determinate number -of millions, in local currency, ■to the national income, is an attempt at a degree of- accuracy which the available figures do not warrant. This ibeing so, much of the detailed inflationist argument is futile. The national income, measured in money, will rise, but just how far cannot be antecedently predicted. The policy is bound to lead to many and other reactions ■on our social and business life that will be inextricably blended and elude detailed analysis, and some of these reactions will elude precise evaluation or identification. ■ ■ ■• In any case it is fallacious to assume^ as inflationists do, that the total addition to the money national income as equivalent to increased taxable capacity. Some increase, in taxable and rateable capacity there undoubtedly "Will be; but'there is no evidence that the whole of the exchange bonus will be available forthis purpose. Much of it will be scattered over thousands of incomes which will be below the exemption limit for direct taxation, and if there is any other feasible form of tax that, will tap it at will, the inflationists have not disclosed it. A sales tax .would., apart from other objections to such a vicious and unsound impost, miss the exchange bonus, and strike with, mam on the incomes of those at whose expense the bonus is being ■provided, thus shifting the burden of past, rural land speculation, which is the real root of our troubles, on to the shoulders, of the rest of the community. Any gain in taxable capacity ■will be to some degree set off by' reduced taxable capacity in other directions. • ' . _ I think a rise in the cost of living is inevitable; in fact,'it seems to me an integral part of the v policy. The •New Zealand price of exportable commodities will tend toward London parity plus the exchange bonus, and with many commodities, this has already taken effect. The wide range of necessary imports, and it is wider than many realise, will rise in price because of the loading.of the exchange premium while the price of commodities manufactured in the Dominion with imported plant and raw materials, also a ,wide range, will also rise. . As I-think the.reactions of the inflation policy will on balance prove detrimental to our economic life, I think the .unemployment problem will' be' exasperated and not mitigated. It will reduce employment, initially, in the import trades, md probably also in. manufacturing,- largely because of shrinkage «f demand consequent on higher prices. ,The openings for- additional. employment in the country at any time are restricted, owing to the increasing laechanisation of farming; while if, as is claimed, the exchange bonus will only minimise farming losses, and not, of itself, restore the industry as a whole to 'a profit-making condition, it is hard to see how labour released in the cities can be absorbed in the country, nor is it altogether desirable that this should happen on a large scale. If the net effect of the policy over a long period were, to revive our industrial life, then it woul.d tend to reduce unemployment, but looking at the matter broadly, I do iiot think this effect will be projduced. , In conclusion, I should like to lay 'down three basic principles, which, though not arising out 'of the questions, submitted, go to the heart of the controversy, and are hot the result of a naif and superficial juggle with supposititious statistics: — (i) Government control of the supply and/or the value of money and credit to secure general social. objectives is a dangerous policy for which adequate guiding precedents do not exist, and •which ia fundamentally incompatible with the system of private business enterprise on which we rely, and for •which at present there is no practicable substitute. .'(ii) Competitive exchange deprepiation by primary producing countries must lower sterling values and world prices, but it ia only from a rise in world ana sterling prices that we can expect any real national economic relief. (iii) A policy of monetary inflation coupled with unbalanced budgets, involving the creation of a boating public debt of indefinite dimensions, is likely, if persisted in, to lead to national bankruptcy. • • ■ B. E. MURPHY. Professor of Economics, Dean of the Faculty of Commerce, Victoria Univer*itjj College, "Wellington.