ECONOMIC ADJUSTMENT

Evening Post, Volume CXXVIII, Issue 26, 31 July 1939, Page 10

ECONOMIC ADJUSTMENT

'"The securing by the Minister of] Finance, of certain export, credits from Britain gives New Zealand some little relief from a dangerous situation, and Mr. Nash is to be congratulated on the arrangements he h*-s been able to make in the difficult and unfavourable conditions that existed," says the statement prepared by the Associated Chambers. "At the same time, we consider it is imperative at the present juncture to sound a warning note that the danger confronting the Dominion has not been removed, and the financial position of the country appears to os steadily retrogressing. The success of Mr. Nash at Home cannot be regarded as estab lishing the means whereby internal' politics that contain many unsound \ features may be continued unabated in New Zealand. The finance for I which Mr. Nash has arranged provides j no permanent solution of the difficulties that led to his seeking it, but gives instead a period of respite for the adoption by New Zealand of measures oi' economic adjustment, without which the country still has serious difficulties! ahead of it. . NECESSARY THINGS. "It is true that, us Mr. Nash has stated, New Zealand has not been ro quired to give Britain any pledges in respect to her future financial policy, but it remains necessary for the Dominion to 1. Repay the short-term credit it has obtained. 2. Arrange its financial affairs so as to obviate the necessity—already mentioned by Mr. Nash as a possibility for 1940—0 i again seeking credits from Britain, if only for the reason that Britain, however wining, may not be able to repeat what has been done on this occasion; and 3. To raise the credit standing of New Zealand so as (a) tc' assist the £ 17,000,000 loan conversion operations, and on the most favourable terms, and <b> to revive confidence and encourage the investment, in the Dominion of local and foreign capi-i tal. DEPLETION OF FUNDS. "From May, 1936, to May, 1938, New Zealand overseas funds fell from £45.200,000 to £28.100,000. or, by £17,000,000. This fall was, in the' main, due first, to the repatriation Of overseas money left in New Zealand after the exchange rate was raised, and which would have reaped a profit had the exchange rate been reduced again; second, to the repayment o. £4.000,000 to £5,000,000 of public debt abroad; j third, to high tourist expenditure abroad; and, fourth, to some export) of money which was attracted from New Zealand by relatively more favourable investment conditions els_where. While this decline reduced both the exceptional accumulation of overseas funds and the abundance of money in New Zealand, most of it was the normal effect of post-depression conditions, and it left funds both at home and abroad ample for normal needs. i "The changes in overseas funds in j 1938 differed greatly both in their j causes and their extent. From May to ] December. .1938, these funds fell from I £28.100,000 lo £6.810.000. or by I £21,290.000. This exceptionally rapid ! fall was due, first, to the unfavourable | seasonal balance of payments which is j normal in the second half of the year; second, lo the fact that, although exports in 1938 were £8,340,000 less than in 1937, imports were only £720,000 less (owing largely to abnormal, and in some cases excessive, imports for Government purposes) and the excess of exports for the year fell about £8.000,000 short of what was required to balance payments; and, third, to some further export of capital. EFFECTS OF INFLATION. "Of these three causes, the first (the seasonal balance of trade) was quite normal. The second and third causes were both due mainly to the fact that in the second half of the year the Government drew heavily on the Reserve Bank for additional advances. From May to December these advances increased by £12,680,000. Of this increase £1,480,000 consisted of against dairy produce exported, and the remainder (£11,200,000) represented advances for other purposes. These 'other advances' of £11,200,000 constituted additional purchasing power created by the Government and spent mainly in New Zealand. As such they were inflationary. When distributed in payment for Public Works, etc., they increased the spending power of the people by a similar amount. Since about one-third of the Dominion's income is spent on imports, almost every third lime the extra money changed hands it bought imported "goods, and the process went on until imports were expanded by approximately the amount of the inflationary advances. Hence these advances were chiefly responsible for the over-importation that occurred. "In this way, the 'other advances' created claims on the Reserve Bank which were exercised in purchasing the bank's overseas funds to pay for imports, and consequently in depleting those funds to a point that made some sort of import restriction un- j avoidable. A further effect of this] newly created and inflationary money was to depreciate the value of existing money, and following a law well recognised since the time of Queen Elizabeth, that 'bad money drives out good money.' some New Zealand capital, apprehensive of the effects of inflation, left the Dominion. LICENSING EXPERIMENT. "In consequence of the critical short- , age of overseas funds, exchange and external trade control was imposed from December 5. 1938. and all imports were subjected to licence. The first object of the licensing system was to restrict imports and the demands '.hey. made on overseas funds, and so replenish those depleted funds. The second object was to select imports and. by protection against the competition of imports, to stimulate the produc-

REVIVING CONFIDENCE IN NEW ZEALAND PROPOSALS OF CHAMBERS OF COMMERCE Suggestions for the economic rehabilitation of New Zealand have been made by the Associated Chambers of Commerce. Referring lo the result of Mr. Nash's visit to England, the Associated Chambers say that the credit standing of the Dominion must be raised lo assist the loan conversion operations and to revive confidence in the Dominion as a means of attracting investment capital. Advances from the Reserve Bank should be repaid by the Government, and a free exchange market might then be restored. It is urged further that, to stop inflation," the creation of new money must be stopped, leaving genuine production to create ks own finance. The Government, like the people, must live within its income. Other recommendations are that exports should be stimulated; that industrial awards should be made for a longer period than twelve months; that there should be greater flexibility in hours and conditions of industrial employment; that taxation should be easier; and that the population should be increased by immigration.

I "As a means of restricting impi-rts I the licensing system, after seven month.' trial, has proved cumbersome. { costly, complicated, and ineffectual. In I the first half of 1939, it has apparently | had no influence in the directioxi of reducing imports. For the four, months for which figures are available and in which its effects were expected to show, February to May, .'939. imports amounted to £18,260.000, or £320,000 more than the £17,940,000 recorded for the same months in 1938 It has been announced that the licensing system will subject imports to : much heavier reduction^ during the J second half of 1939. Bur licensing has j already ceased to be effective in I another way. Many importers have learned that, even though they hold ! licences, the banks are unable to pro- | vide overseas funds to pay for the, | licensed imports, and rationing of ex-; I change by the banks has been super- j ] imposed on the licensing • system In, I view, however, of the Reserve Bank j announcement of a few days ago con- j cerning a new procedure that is to operate, under which there will be a certainty that sterling will be available on approved dates for approved imports as far as sterling funds permit, we withhold meantime any further comments on the import control scheme and any proposals for an alternative system. "Regarding internal readjustment in other directions, we consider that as the direct cause of the last £12,000,000 or more by which overseas funds were reduced, and therefore of the necessity !to restrict imports, was the Government's inflationary borrowing from the Reserve Bank (borrowing which converted the bank's liquid assets in London to frozen assets in New Zealand) these advances should be repaid as soon as possible. Their repayment would, within a short time, result in reconversion of the bank's frozen assets in New Zealand to liquid assets in London, and hence in a substantial increase iv London funds. A tree exchange market might then be restored and the conditions provided in which capital recently exported might be attracted j back to New Zealand. "In addition, New Zealand must learn the lesson of the unpleasant results that have followed and that must inevitably follow inflation. The normal economic activities of the Dominion, including production, trade consumption, and the provision of productive employment, cannot be carried ->n effectively unless exchange is free from the present type of rigid control. Overseas funds, which constitute the working balance essential for the operation of overseas trade, must therefore be protected against the extraordinary claims and the consequent depletion which are the direct result of inflationary practices. To avoid inflation the Government must, at all costs, stop the creation of n. ,•*. money, nd must leave genuine production to create its own finance, as it always has done and always i will do under a monetary system !• free from objectionable interference. | "To this end the Government, like | the people, must live within its income, | and must confine its expenditure lo j what it can get in ordinary revenue j j and what it can borrow from genuine | I savings. The adoption of this rule alone i will ensure freedom from inflation. Whatever steps are taken now, if the rule is not adopted and rigorously adhered to, the present difficulties. which arc the direct consequence of inflation, must be expected to recur, or become accentuated. OTHER REMEDIAL MEASURES. "There are other internal matters which, in our opinion, need revision an oroer ro eotaoiisn sound conditions wnmn tne nonunion. witnout entering into oecaned treatment or tne of.L_cts or certain iines of Government poncy tnat are being pursued, we would raaue our recommendations as _ouows: — "Summation of Exports.—One of the principal national necessities is the stimulation oi exports. Since rising costs ot prouueuon in New Zeaiand Inave been one factor tending to enecit exports, together with the iact that vie continuance of heavy Public WorKs activity in a time of nign export prices nas been inimical to economic equuiDi'ium, it is essential that conditions of Pubic WorKs employment be less attractive than employment in farming and other productive pursuits. "Encouragement of Investment. —Although the outflow of capital from New Zealand has been enecked by regulatory methods, the inflow of capital for investment has been deterred. We urge that the Government encourage the return to New Zealand of investment capital by removing excessive Government regulation and restriction on commerce and industry, and by removing the arbitrary limits on interest rates. "Hours and Conditions of Labour.— Tire present standard practice is to make awards for a period of twelve months. A substanial increase in ,this duration period would enable business to plan ahead, and action in this direction is accordingly recommended Also, it is considered that there should be greater flexibility in hours and conditions of industrial employment, especially in those industries which contribute to the building-up of London funds. "Taxation.—Since the present weight and incidence of taxation imposes a heavy burden of overhead costs upon industry, particularly on primary industry, it is essential, if production is to be maintained and expanded, for .that burden to be lightened. "Immigration.—An attempt should be made to increase the population of the Dominion by attracting suitable types of immigrants." '