"BLOWS AT CREDIT"

Evening Post, Volume CXXVIII, Issue 49, 26 August 1939, Page 15

"BLOWS AT CREDIT"

PROSPECT OF INFLATION

(To the Editor.)

Sir, —In your sub-leader of August 16 ."Blows at Credit," you state that "The Budget borrowing programme and the impossibility of further resort to Reserve Bank credit without serious inflationary consequences indicate that it will be necessary shortly to "raise further sums." As a constant reader of your leading articles on public finance, may I ask for a more explicit explanation as to what you mean by "serious inflationary consequences"?

The years during which the now famous surplus sterling funds, or reserves, as some people call them, accumulated were the greatest period of inflation that New Zealand has ever known. Where are the serious consequences of that inflation? The situation arose through the farmers selling their exports for British currency and not New Zealand currency. Some of this sterling was bought by the Government of the day for debt services, importers had their requirements, and other users of sterling too, but every year there was always a surplus of sterling that no one in New Zealand would use. There was absolutely no embargo on the purchase of sterling until this Government applied it. According to Mr. Nash's figures the accumulation of surplus sterling reached its peak at some £46,000,000. This means that over a period of years out of the total amount of primary products sold in Britain for British currency £46,000,000 was not sold to purchasers of sterling for New Zealand currency. Strange to say the farmers were paid in full with New Zealand money. The trading banks could not find the extra New Zealand money needed, for they only have loan money available on which an interest charge must be levied— otherwise bankruptcy. The only means of paying New Zealand farmers on account of surplus sterling was by inflation and no ill results have been apparent.

To keep trace of these past transactions it is necessary for any individual commentator to keep a persona) newspaper "Hansard." At the time the exchange rate was 'pegged the trading banks explained the position to the then Government. Treasury bills were issued to the trading banks to make available New Zealand funds to pay the farmers in full. After the farmers were duly paid the Coalition Government redeemed its Treasury bills with Reserve bank credit, £16,000,000 was involved and this deal was pure inflation. The "Evening Post" coined the term "costless credit" in criticising this transaction. Since the present Government has been in office only £12,000,000 of fresh credit has been drawn from the Reserve Bank, so what justification is there to get hot under the collar?

The point of this letter is not so much what has been referred to above but rather what is to come. In. your sub-leader you had your back-chat with various Government members on their financial views, yet you totally neglected the most vital aspect of these sterling transactions as affecting New Zealand. The conversion of New Zealand loans is more the concern of British investors in New Zealand stock. These investors knew when they-took New Zealand bonds that they were investing in funded loans, and only a fool would expect New Zealand to pay off its overseas National Debt as it fell due. There is no doubt that this Dominion will always be able to meet its interest charges, and the payment of capital owing can only be done as opportunity arises.

Mr. Lee referred to the disappearance of sterling as due to the raids of "financial gangsters." You expressed your views on such talk, but the position to a receptive mind is quite understandable. New Zealand investors have lost their usual channel to invest their savings. The Government has not borrowed" internally. These investors, through finance companies, have been financing traders in New Zealand to sell to a .consuming public sterling purchased goods ten years ahead of their capacity to pay. The hire-pur-chase system is the means to this end. They are making available the products

of the machine age. The companies purchase the hire purchase agreement for New Zealand cash, which is exchanged for sterling by the trader. Qne would be quite safe in saying that 90 per cent, of motor vehicles on the road are not paid for by the users, but the trader paid sterling cash to the maker. So really people with savings to invest in New Zeland are the "financial gangsters" referred to.

Finally, one comes to the £4,500,000 internal loan at a high rate of interest that you-do not object to. Yet it has a significance* all its own. On the one side the Government has a taxation revenue unequalled by previous Governments, on the other side there is the Reserve Bank, which can issue credit at 'the will of the Government. In spite of this, fresh taxation is levied on beer, petrol, and incomes to provide internal needs. Sterling surpluses have disappeared and as far as one can see the New Zealand credit that purchased surplus sterling has disappeared also. During the last year sterling reserves have been depleted by some £15,000,000; that means that £20,000,000 New Zealand money was required to purchase it. Where has this, money gone? Why was it not paid into the Consolidated Fund to relieve taxation? It seems to have vanished altogether! If the Reserve Bank has cancelled this credit, it should be reissued and paid into the Consolidated Fund as profit from the sale of surplus sterling, as required by the legislation governing the Reserve Bank. One thinks that this subject should be thrashed out on the floor of the House and broadcast to listeners, and let them judge of what is being done under the very nose of a Government pledged to control credit and currency.—l am, etC-' G. H. WILKIN. [Space cannot be given for a complete answer to the many involved issues raised by the correspondent. The raising of the exchange and the redemption of surplus sterling by Reserve Bank credit were undoubtedly inflationary; but the effects were modified, spread and hidden by a variety of circumstances. The high exchange was artificial, hence the accumulation of sterling. It did not immediately produce an equivalent direct increase in costs because its first effect was to stop the cost fall ("reflation' this has been termed), and because slackness in business and unemployment retarded the upward movement. The issue of credit for the purchase of surplus sterling assets again did not have full inflationary effect, because it was partly offset (1) by the new provision that the trading banks should maintain deposits with the Reserve Bank: (2) by the recall of trading bank-notes so that the banks had then to use part of their resources to purchase notes from the Reserve Bank; (3) ing banks in not issuing credit to the public to the full extent permissible by the credits they held in the Reserve Bank. We mention these factors to show that the circumstances differed from those attaching to present and future issues of credit. Our reference to "serious inflationary consequences" from further resort to credit is supported by the annual report of the Reserve Bank, which states: ". . . in existing circum-

stances, any additional credit expansion would inevitably tend to cause, sooner or later, a general rise in prices, with a' consequent diminution in the value of all savings, wages, salaries, and pensions." A similar warning in different terms was given by the Minister of Finance to the Labour Party Conference when he stated the limited use of credit and the necessity for savings to finance development. The Prime Minister, in the Budget, spoke to similar effect when he- stated: "In present circumstances, when sterling funds are short and imports have to be restricted, this type of finance [credit issue], while justifiable and beneficial under certain circumstances, has obvious limitations during. the current year. In fact, it must be clear to anybody who studies the position that we are not suffering from a shortage of money in New Zealand, but from a shortage of what money will buy." •

The correspondent's opinion that the "financial gangsters" responsible for the disappearance of sterling are the people with savings who have financed

hire-purchase, is answered by two facts: (1) That the hire-purchase system has been in operation for many years and cannot be blamed for a crisis of the last eighteen months; (2) that hire-purchase terms, particularly for expensive articles, usually require payment in deposit and early instalments of a sum covering much of the sterling cost—particularly when the goods are partly manufactured in New Zealand.

There is no mystery attaching to the "vanished" £5,000,000 profit on.the sale of sterling. In the year ended March 31, 1939, sterling (Reserve Bank and trading banks) declined by £17,293,000 (in New Zealand currency) representing approximately £ 13,800,000 actual sterling. • But the profit (except on the small part representing sterling held before the -exChange was raised) had already been paid to exporters who sold their.goods at the high exchange. -The recent sterling sales simply recouped the banks who had paid to the exporter £125 (New Zealand) for goods sold for £100 (sterling). The Governrnent paid in New Zealand currency for. the sterling reserves which it transferred to the Reserve Bank, and the "Reserve Bank's profit therefore was only the difference between its buying and selling rates for sterling (£124 .and £125 respectively). This) as the. annual report explained, contributed to the profit of £250,000 paid to the Coa»* solidated Fund. —Ed.]