Evening Post MONDAY, JULY 24, 1939. "ONWARD AND UPWARD" AGAIN?

Evening Post, Volume CXXVIII, Issue 20, 24 July 1939, Page 8

Evening Post MONDAY, JULY 24, 1939. "ONWARD AND UPWARD" AGAIN?

New Zealand was not required to give Britain pledges in respect to her future financial policy, said Mr. Nash in a statement to the "Financial News/ "All my assur|ances were confined to the operation ■of the import restrictions/ SupS porters of the policy that has been pursued in the past may regard this statement as freeing the Government from any obligation to reduce heavy internal .expenditure, the lavish use of credit, and steady piling-up of commitments. Possibly they will regard this as a successful defiance of their mythical "financial gangsters," and the signal for a fresh start "onward and upward/ No greater mistake could be made. Britain did not exact pledges in respect to New Zealand's future financial policy, because it is not the custom of British Governments to intervene in the internal affairs of the Dominions. She did require assurances, as she had every right to do, that, if Government assistance were given to maintain trade, a trading policy highly detrimental to the United Kingdom and contravening an existing trade treaty would be modified.

These assurances will affect New Zealand's internal policy inasmuch as they can be honoured only by largely abandoning the "insulation" plan under which British imports have been restricted with no provision for the "full opportunity of reasonable competition" promised in the Ottawa Agreement. The Government rmsst, therefore, find some means other than "insulation" of extricating the country from the sterling difficulty. Thus, indirectly, Mr. Nash's assurances call for an alteration o£ internal policy. This, however, is not all. The Government has yet to deal, with two further problems: (1) The conversion of the £17,000,000 maturing loan; (2) the provision of sterling funds when the export credits are exhausted. Regarding the conversion, we have no news except that negotiations are "proceeding satisfactorily" and that Mr. Nash is remaining in London "to complete the conversion arrangements, which admittedly are most difficult, with the Governor of the Bank of England, Mr, Montagu Norman." What is implied by "conversion arrangements" is not stated, but one fact should be borne in mind here: that this is a public loan and in dealings with public loans the part normally taken by the Bank of England and the British Treasury is not that of a lender. The Bank and the Treasury decide when the borrower shall go on the market, and they probably exercise some control over the terms to be offered, but the lenders are the public.

It is not the normal practice of the Bank- of England or the Treasury lo guarantee or to underwrite Joans for ihe Dominions. Export credits come in a different category. It is probable, therefore, that when conversion arrangements have been concluded with the Bank of England, it will still be necessary to present a convincing case to the people who are to lend the money—the hundreds of thousands of moderate investors in Britain if the loan is for a long term, or, if a short-term loan is arranged, the financial houses who use their own and their clients' funds in such investments. If these investors, large or small, are persuaded that New Zealand financial policy is sound, that the sterling position is secure, and that there is no risk of delay or default in payment of interest or principal, the loan will be a success. If confidence is not strong, however, higher interest or discount terms mayhave to be offered to avoid the result expressed in the phrase "the greater part of the loan has been left with

the underwriters."

This consideration—the restoration of 3. good reputation or "good credit" in London—and the provision of sterling when the export credits are exhausted, are factors which, more than any Government-exacted pledges, should cause the New Zealand Government to re-examine its financial policy for the future. The Government is free to disregard them if it foolishly chooses to do so. There is no "financial dictator" holding a pistol to the Dominion's head and saying: "You must cut down public works." But if the Government does ignore plain and compelling considerations, the country must pay the price for continued loss of investors' confidence. The issue is not political. As Mr. H. V. Hodson pointed out in an article in "The Post*' on Thursday, the credit of Socialist Sweden is high in London, that of anti-Socialist Spain is virtually zero. t{Jt is a matter not of social theories, but 6t economic arithmetic." If we

continue to spend more than we can

afford our credit will diminish and ihe risk-rate for our loans Avill rise higher and higher until finally borrowing at all becomes impossible. We are not facing threats, but facts. We must convert the £17,000,000

loan; we must arrange our own sterling requirements for the future, for Mr. Nash states that Britain was prepared to renew the export credit facilities if necessary, "but not in excess of the present £4,000,000." Clearly, then, our coux'se should be, not a careless reversion to "onward and upward," but a prudent reorganisation of finance io avoid the inflation of which the Reserve Bank has given a second and urgent warning and to reduce credit accommodation so that the Reserve Bank, as it advises in its annual report, may be able to help the country over difficult export periods.