A WARNING NOTE

Evening Post, Volume CXXXIX, Issue 92, 19 April 1945, Page 8

A WARNING NOTE

CREDIT CREATION

WHAT OF THE FUTURE?

The realities of the financial position and prospects of New Zealand as he saw them were discussed by Mr. Leslie Lefeaux, former Governor of the Reserve Bank of New Zealand, in an address as guest speaker at a business men's luncheon held in the Concert :CEamber, Town Hall, today, under the auspices of the Khandallah branch of the National Party. Emphasising that his sole concern was the welfare of New Zealand, Mr. Lefeaux warned against the temptation, in financing the future development of the Dominion, of recourse to dangerous I and illusory expedients involving inflation of the currency. He also point-! Ed out- the far-reaching consequences of abusing a central bank by compelling it to go too far in the creation of credit, and urged that adequate reserve powers should be retained for use ft and when temporary slump conditions threatened. To exhaust such powers when conditions were moderately good was, in his opinion, the height of financial folly. To "begin with, Mr. Lefeaux said, . there were the overseas loans raised years,, for development purposes. *'So long as such funds were applied in such a way as to increase the value of the;, exportable surplus of produce to at: least the equivalent of the service- o£ that debt, well and good. Such conditions are. quite normal and healttiy. By and-large, I think that is what happened, although there may have been some unfortunate exceptions in which the money was used for purposes which did not contribute either directly or indirectly- to that end. But for some .time to come ,it may be impossible to raise any such loans, however desirable and proper the transactions might be in principle. . If that should prove to be the case, New Zealand may well be confronted by a real testing time. "DANGEROUS EXPEDIENTS." "Pride may reasonably be taken in past achievements, but in , assessing future prospects it does not do to forget that considerable benefits have from time to time been derived from assistance rendered by others. Take >the last war as an example. Although it was a relatively favourable period as regards exports, and little if any material damage was sustained here, yet payments have been suspended for many years on £24,000,000 of sterling ■war debt,, and I suppose they may never be resumed. To that extent this country's burden has been borne by others; but complete self-support may be- necessary for some considerable time. Capital is synonymous with savings. Will savings be forthcoming to the-requisite extent for the future development of the country? Otherwise, how is it intended to finance any s such developments? Will the patient rise to the necessary heights of selfreliance and abstinence, and not try to avoid them by seeking relief in recourse to dangerous and illusory ex-pedients-involving inflation of the currency? ,'T contend that there is a limit to the amount of money which can wisely be spent otherwise! than on the production of consumer goods, for all other expenditure tends to increase the demand for such goods. In this respect a country is, in, the main, similar to a trading concern or even an. individual. What usually happens if a trading company locks up an unduly large proportion of'Ss capital in fixed assets? Overhead charges tend to become greater than can be met out of trading profits, and- in the absence of a composition with, creditors the ultimate destination is'probably the Bankruptcy Court. A somewhat similar result may eyen be brought about merely by allowing expenditure on revenue account to become too high in relation to turnover, as, for example, by paying top much in the form of wages, rent, "etc. But in the latter case the remedy is: usually easier the'contractual obligations are of shorter term and, should therefore be mo£e easily adjusted. INTERNAL PAYMENTS. "A country, however, differs in two important respects which, unfortunateJ&Tenable unwise financial- conduct to be'persisted in without a halt necessarily^ being called. True, overseas payments; may - become impossible to the desired extent; but that situation can be dealt with by means of exchange , controls. Where, however, there is' a currency-issuing body, such as a central bank, subject to political control and free from statutory restrictions, internal payments can' go on indefinitely. There is then no such thing as Hiternal national bankruptcy. Instep, money becomes plentiful and cheap?- but its purchasing power becomes less and less. "Do : hot, however, jump to the erroneous conclusion that it is better to be without a central bank, for no modern civilised State is complete without one. Like with many other of the best things in life, it is abuse of the thing—and not the thing itself— . which is the cause of trouble. . . . - "What happens if a central bank is abused by being compelled to go too ■far in the creation of credit? All creditors —including those who have lent iiidney to the State-=-find that on repayment their money is ,worth less thantwhen they loaned The real values- of all contributory insurance benefits— including those under socallecTsocial security schemes—are less when received than when the relative premiums or contributions were paid. The real value of^. wages becomes less and less, and an endless struggle ensues to make up the leeway, although there is almost invariably a time lag. The burden of fixed interest, including that on Government securities, becomes progressively lighter; but those relying on> that source for subsistence find themselves severely penalised for having practised the virtues of thrift and self-reliance. Meanwhile the national income in terms of money tends to rise, and Budgets are more « easily balanced. "Such, roughly, are some of the things "which follow if the creditcreating functions of a central bank are used too freely. A Government so doing weights the scales in its favour to the disadvantage of all who depend on money incomes, such as wages, pensions, and interest, as well as those' whose savings are held in the form of post office or trading bank deposits, or fixed-interest-bearing securities such as Government loans. On the other • hand, those whose savings are invested in tangible assets, such as land, buildings, plant, and goods, can sit back and smile, as the values of such assets are automatically forced up in terms of the depreciated currency. And I, for one, do not think this natural consequence can be prevented indefinitely, whatever restrictive measures are attempted. "I do not suggest that certain alleviatory measures should never be adopted. What I do stress is that adequate reserve powers should be retained for use if and when temporary slump conditions threaten, and that they should be applied with a view also to their long-term effect and to the possibility of their being required again later. To exhaust such powers when conditions are moderately good is, in my opinion, the height of financial folly. It is like living on capital as well as income, when the income itself is about as high as can normally be expected." i FAITH, HOPE, AND CLARITY. While he felt that various things that had been done deserved wholehearted approval, said Mr. Lefeaux, in other respects he could not get away from a considerable degree of uneasiness. For \ example, although he fancied that some of the ill effects of certain practices were now recognised, he would .like to feel sure that the strength of will existed to discard them altogether. Furthermore, he was afraid that the Dominion was consuming more than it ought in existing circumstances, as well as drawing too heavily on reserves of strength which would be required later. It was extremely hard to arrive at definite and reliable conclusions. There was uncertainty in respect of the full implications of lease-lend and similar transactions, and-then there were the present sterling war debt commitments and the London funds position generally. What semed necessary in the circumstances

was a large measure of faith, hope, and clarity, but the greatest of those was clarity. The total available purchasing power in the hands of the public had reached the staggering total of over £250,000,000, a figure which appeared to be out of all proportion to the supply of goods and normal services at the current level of prices, said Mr. Lefeaux. Of course he appreciated that; a large part of the savings bank deposits might represent semi-perman-ent investments; but a considerable portion did not, and in any case the whole amount could be drawn upon at will if so desired. BORROWING—OR INFLATION. j Looking to the future, Mr. Lefeaux spoke of the likelihood of a fall in the prices of primary produce on the world's markets, of - obligations under UNRRA, and the possible effects on the Dairy Industry Account and the financing of the national programme of public works, State housing, and rehabilitation. "To what extent can these projects be financed out of the current national income?" he asked. For there is no other way of meeting their cost except by borrowing overseas—which may be ruled out for some time—or by inflation; supplies of domestic capital may be assumed to have become exhausted. Current income can, of course, be tapped either by taxation or by the issue of Government loans. How long the country will agree to a high level of taxation like the present you are better able to gauge than I am. During the war, patriotic fervour can be counted on to make the floating of war loans a comparatively easy task. But what are the prospects of being able to issue large Government loans after the war, especially if the doubtful moral expedient is then followed of offering them at less than their market value? In the first place, it seems likely that there may even be a considerable amount of dis-investment. For example, the trading banks appear to be over-invested if anything, and it is almost certain that many merchants will have to reduce their holdings of Government securities to enable them to restock their shelves with goods. And after their very large subscriptions to war loans various others may hardly be in a position to add largely to their holdings of Government securities. "I do not want to paint an unduly gloomy picture," concluded Mr. Lefeaux. "But I do think it important that the realities and possibilities of the situation should be faced without any evasion or pretence. For I should be extremely sorry if unsound financial practices, combined with any exaggerated ideas as to.what living standards can be maintained, should result in j New Zealand's credit being brought again to the low ebb reached just before the war when the trading position was relatively favourable. Yet that is what might easily happen unless the Dominion learns to live within its income. "This is the day of the common man. In large numbers they have offered their all in defence of our and their heritage; and I feel we are in a way trustees for them. We-must not let them down or deceive them. I feel sure we all want the mass of the people to have the best chance they can in life. How, then, can this be ensured? Can it be by following the easy path of inflation and merely, in effect, turning the printing press to finance a considerable amount of Government expenditure? What would happen in such circumstances? The huge mass of floating money for which consumer goods are not available at current prices would simply be added to and progressively depreciated in value. Artificial controls and restrictions would be perpetuated indefinitely. Wage-earners would be hoodwinked; •pensioners would be betrayed; those who have invested in Government loans would be defrauded; and returned servicemen would find themselves rewarded by having the real value of all their money savings seriously diminished. Such a method of finance is, in my opinion, as dishonest as it is unskilful. I sincerely trust it will not be countenanced by the party to which you belong. For—apart from the moral aspect-I firmly believe that, in finance, as in other things, honesty is in the long run the best policy." The Concert Chamber was filled to capacity, with many people standing at the sides and back of the hall. The chairman was Mr. G. H. Swan.