CREDIT EXPANSION

Evening Post, Volume CXXX, Issue 134, 3 December 1940, Page 10

CREDIT EXPANSION

A FALLACIOUS IDEA

PROFESSOR CASSEL'S WARNING

"Evening Post," December 3.

The National Bank of Australasia, in its latest summary of trade conditions observes that secondary industries arid trade turnovers in metropolitan areas continue to exhibit the stimulating effect of heavy Governmental expenditure, masking the unfavourable conditions ruling in most country districts, due to rainfall shortages and consequent failure of crops and pastures to make a normal growth. Rural incomes this season will inevitably be lower and will react on trade turnover. Increased amounts to be taken by taxation and borrowing to meet defence expenditure will, for the greater part, be redistributed within the country, but the shrinkage of production for civil requirements and the "change in the incidence of demand are factors needing close scrutiny. ' . In some quarters, the bank remarks, it is held that such difficulties can be overcome by credit expansion, "but that is a short-sighted view." The bank quotes Professor Cassel, the wellknown Swedish economist, writing in the "Skandinaviska Banken," as stating that "it is a very widespread view that such borrowing, i.e., State borrowing to cover current expenditure on defence, shifts the burden on to the future." But the idea is false and should be eradicated. The truth is that moneys required to meet present expenditure must always be fully provided by the present. An increase in current expenditure may, however, entail a reduction of the expenditure on capital account. The country's capital resources will then be smaller than they should normally have been. In this way the effects of an abnormally large expenditure in the present will always be felt by the future. Nevertheless, the moneys required to meet this expenditure must always be provided by the present itself. Professor Cassel points out, however, that the banks, provided they are not needlessly interfered with in the normal course of their business and are not robbed of their deposits, can "afford invaluable assistance in the smooth transference of available savings to the State"; they can do much to facilitate a readjustment of the granting of credits, corresponding to the required readjustment of the entire economic life of the nation. "But the banks cannot by magic create money which in reality does not exist, nor cause capital which has already been earmarked to be used at the same time in the service of defence.

"If such things are expected from the commercial banks, we may easily glide into an inflationary bank policy, which expects the national bank to create means of payment to cover extraordinary State expenditure."