PROGRESS TRACED

Evening Post, Volume CXL, Issue 148, 20 December 1945, Page 6

PROGRESS TRACED

GOVERNMENT'S ACTIONS

The extent to which inflation has occurred in New Zealand is shown in the latest bulletin of the Canterbury Chamber of Commerce, prepared after consultation with the Department of Economics of Canterbury University College.

Definite inflation began short of the middle of 1938, the bulletin states. To get comparable and up-to-date figures the ends of September, 1937, before inflation began, and 1945, after the war ended, have been chosen. The figures show the following increase? (in millions) over that period:—

Assets.—Reserve Bank, investments and advances to Government, 25.9; trading banks, Government securities, 19.7; total on Government account, 45.6; trading banks' other advances,' —1.4; all banks' overseas funds, 53.3; total. 97.5, Liabilities.—Reserve Bank, Government deposits, 3.8; trading bank deposits, 68,6; note circulation, 26.0; total. 98.4. Savings Banks deposits:—Post Office Saving Bank, 61.1; Trustee Savings Bank, 11.1; total savings banks, 72.2. Add total for Reserve and trading banks, 98.4; grand total, 170.6. . "The total bank money available m New Zealand in 1937 was £154 millions," states the bulletin. "In 1945 it was £324.6 millions. The increase over the period is £170.6 millions. Of this increase £53.3 millions was due to increases in overseas funds. The remainder, £117.3 millions, represents credit expansion in New Zealand. Assuming that the volume of goods and services available is the same as in 1937, which is probably optimistic, this figure of £117 millions represents the extent of monetary inflation, of which the savings bank returns account for £72.2 millions, and the Reserve and trading banks for £45.6 millions, less £1.4 millions reduction in trading bank advances. HOW INFLATION DEVELOPED. '.'lt would be incorrect to place the responsibility for this inflation on either the savings banks or the trading banks. In both cases the initiative was with the Government, which borrowed from the resources of both 'the savings and trading banks to meet its heavy expenditure.

"The initial movement was in the Reserve Bank, which alone can issue the notes required as cash to support credit expansion. It is not generally realised, however, that inflation, once begun, and sheltered within a blocked exchange market, may proceed cumulatively and indefinitely so long as the banking system continues to expand its loans.

"The process is simply explained. The Government borrowed in the first place from the Reserve Bank, which created additional credit money to lend. This increased the amount of money available without any corresponding increase in goods. With a closed exchange the excess money so created had to remain in the country With relatively fixed prices and goods in short supply, a floating excess of money was created which was held in notes or deposited in the trading and savings banks. Having additional resources available these banks lent to the Government, which spent the money. Again it reached the hands of the public and was again deposited in the banks. Their deposits rose, and their Government advances and securities rose too. REPEATED AGAIN AND AGAIN. "This process was repeated again and again. With every repetition the trading and savings banks deposits increased, their advances or holdings of Government securities increased, and the total of Government debt increased correspondingly. In this way a relatively small initial inflation by the Reserve' Bank was used again and again to effect a cumulatively large increase in bank loans on the one side and of bank deposits and notes on the other, together with a correspondingly heavy increase in the accumulated Government debt. This is what happened in New Zealand. The process can br> traced step by step in the official bank figures for the period covered. "Comparable figures for the distribution of trustee savings bank assets are not'readily accessible. It may be assumed that they have exercised their 'customary discretion, like the trading banks, and have maintained a safe measure of liquidity. In the Post Office Savings Bank, a Government institution, little regard has been paid in the past to the need for liquidity, land the custom has long been to m'vest almost all new deposits in Government securities. Hence its securities normally increase at about the same rate as its deposits. It would be difficult to devise any surer method of securing continuous credit expansion. TRADING BANKS' SHARE. "The evidence of the official figures lis that the trading banks have made 1 real sacrifices to prevent inflation. Over the period 1937-45 their Government securities have increased by £19.7 millions, while their advances and other securities have declined by £1.4 millions, leaving a net increase in their advances and securities of £18.3 millions over the £8.8 millions held there tomers' deposits have increased by £68.6 millions. If advances alone create deposits, there is £50 millions here unaccounted for. On the assets side the trading banks held m September, 1945, £53.7 millions on deposit and earning no interest in the Reserve Bank, an increase of nearly £45 millions over the £8.8 millions held there in 1937. If the.trading banks were merely profit seeking institutions. with no regard for banking liquidity and soundness, they might readily use much of this deposit to invest in Government securities to earn interest for themselves, and to, inflate credit further.

"That they have not done this and that they have shared to so small an extent in the inflation that has occurred, affords convincing evidence that they at least have understood what was happening and, at considerable cost to themselves, have done what they could to limit the cumulative inflation in which the Government and Government banks indulged so freely."