POINTED ADVICE

Evening Star, Issue 23324, 21 July 1939, Page 8

POINTED ADVICE

RESERVE BARK REPORT GOVERNMENT SHOULD SEEK NO FURTHER ACCOMMODATION EXPENDITURE SHOULD BE LIMITED fFUOM Quit I’iRLUME.N-TARV REPORTER.] WELLINGTON, July 21. Profits totalling £250,285 and pointed advice to the Government to avoid further recourse to the Reserve Bank for accommodation are features of the annual report of the Reserve Bank of New Zealand, tabled in the House to-day by the Prime Minister. Generally reviewing the economic position, the report, states: Developments outlined earlier reveal that, not only did general business activity and the demand for imports continue at a high level in spite of a reduction In the total value of exports and a considerable net overflow of capital, but that, notwithstanding an expansion of credit represented by an increase of over £14,000,000, Reserve Bank accommodation to the State, including an increase of £2.300.000 in advances to the Primary Products Marketing Department, commodity prices remained relatively stable throughout the year. “ Now that the surplus sterling reserves have been practically exhausted, however, and the Reserve Bank has been relieved of the obligation to pay its notes in sterling, a different situation presents itself. No longer will it be possible for credit created by the bank to find an outlet to any appreciable extent in the purchase of goods from overseas except by using the bank’s statutory reserves for the purpose. Whilst the demand for commodities was being partially satisfied by the utilisation of the Dominion’s available sterling reserves, the effect of expansion of credit on internal prices was not very great, hut in the existing circumstances any additional credit expansion would inevitably tend to cause, sooner or later a general rise in prices, with consequent diminution in value of all savings, wages, salaries, and pensions. “ The board would, therefore,” the report continues, “stress the desirability of avoidance of further recourse to the Reserve Bank for accommodation, and limiting governmental expenditure to such a sum as can be raised by taxation, in addition to what can be borrowed from the public, either in the Dominion or overseas. If such a policy were adopted, and still further, if steps were taken to reduce the outstanding advances from the bank, there would be a better prospect of the bank being able to assist by granting accommodation during relatively unsatisfactory export periods, without jeopardising the financial economy of the Dominion.” MARKET ACCOUNT DEFICIT. The survey of the Internal Marketing Account contains the prediction of a substantial deficit at the end of the season. Valuing stocks of butter and cheese on hand at March 31, then current prices, and allowing cost of realisation, the dairy industry account then showed an estimated deficit of approximately £1,000,000, but since then London prices have fallen still further. “ To the extent that such deficits exist,” adds the report, “ they represent a creation of credit beyond the equivalent of the commodities produced. The board considers it important that the inflationary tendency of such accommodation should not be overlooked.” EXCHANGE CONTROL. ' The section dealing with the exchange control recapitulates information published regarding tho broad lines on which the system operated, adding: “ In operating the permit system for transfers tho bank has been guided by vour assurance to the effect that one of tho objects of exchange control is to enable overseas debts, whether Government, local body, or private, to be met on their due dates.” Attention is called to the fact that, although exchange control has covered a considerable portion of the export season, the bank was only able to build up the sterling holding by £527,000. An estimate is made of £l4 million annually r.s the normal requirement for the overseas debt services, other transactions including travellers’ requirements. Attention is called to the fact that the surplus of exports over imports for tho year fell to £3,459,000. It is suggested that the decline in the favourable balance of overseas trade accounted for one-half of the shrinkage of overseas funds. It is also evident that there was an abnormal outflow of capital. The report then comments: “ In view of the relationship between internal credit expansion and the demand for overseas funds the connection between the total increase of more than £14,000,000 in accommodation granted by tho Reserve Bank to the Government and the loss of overseas funds which occurred during the year is significant.