The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES.’’ TUESDAY, JANUARY 9, 1940. NEW ZEALAND FINANCE

Gisborne Herald, Volume LXVII, Issue 20140, 9 January 1940, Page 4

The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES.’ ’ TUESDAY, JANUARY 9, 1940. NEW ZEALAND FINANCE

A sudden drop of £1,680,000 in the Reserve Bank’s holding of sterling exchange is explained by the operations in connection with the loan of £17,000,000 which fell, due for repayment in London on January 1. Since Mr. Nash was unable, to renew the loan in the ordinary way a special arrangement had to be made with the banks to provide the necessary finance under special conditions, the most important of which is that the whole of the loan must be repaid within five years. The English banks between them have guaranteed £16,000,000 and the amount owing in excess of that sum was to be provided out of sinking funds held in New Zealand. It is this latter payment, plus the interest due to January 1, that explains the call on the Reserve Bank’s London funds. During this year a further £2,000,000 is to be repaid and £3,500,000 has to be found in each of the four succeeding years. In announcing the initial repayment yesterday, Mr. Nash stated that “the reception given the issue must be regarded as satisfactory.” If this is, indeed, the case, Mr. Nash should make the facts public, for the last official information available was that he could not approach the open market at all, on account of New Zealand’s shattered credit overseas, and that he was forced into the onerous agreement with the banks.

This loan operation, incidentally, calls attention to the position of London funds and Reserve Bank finance generally. On the face of it, New Zealand’s holding of overseas exchange has improved materially during the past year. At the beginning of 1939, London funds totalled just over £4,000,000, but at the latest return, despite the loan payment, it was more than £7,000,000, an increase of £3,000,000. It might be inferred that this improvement was the result of the drastic import control scheme that was initiated a little more than a year ago, but it seems probable that the improvement is far more apparent than real. Under the war-time control of produce New Zealand is being paid in advance for all exports to Great Britain and there is little doubt that this is the main factor responsible for the increase in London funds. The altered procedure is illustrated by the position of the dairy industry account. Twelve months ago the advances by the Reserve Bank for this purpose amounted to £5,731,000, but at the latest return the amount was only £3,375,000, or £2,356,000 lower; and a substantial part of this advance was on account of last season’s deficit. Advance payments for meat and wool would further supplement London funds and it is probable that had it not been for this new system the position would have been worse to-day than a year ago.

It is clear that the agreement reached with the United Kingdom for advance payments on produce has considerably relieved the strain on the Dominion’s finances, but it must not be overlooked that this procedure is for the duration of the war only and that a readjustment will ultimately have to be made. In the meantime there is cause for serious concern at the rapid growth of other advances by the Reserve Bank to the State. Last week, the amount owing under this head exceeded £20,000,000 for the first time and represented an increase of £9,250,000 in a year. To some extent this issue of credit by the bank is offset by the demands made upon the unused balances of the trading banks, but insofar as the advances are not covered in this way they represent credit expansion or, in plain language, unadulterated inflation. The existence of this huge debt to the Reserve Bank is a grave danger to the

financial stability of the Dominion and the position requires the most careful watching. The strain should be relieved in the near future by substantial income tax payments, but in view of the heavy commitments which must be met by the Government on account of the war the possibility of the situation getting out of control cannot be overlooked. The war emphasises, rather than dispenses with, the necessity for a return to more orthodox methods.

The ‘ continued inflationary process of the past year has naturally resulted in a still further increase in the note issue, the figure of £19,000,000 in the last return representing an increase of more than £2,500,000 in a year and of nearly £9,000,000 compared with four years ago. The free use of the printing press to provide more money for State purposes is now being reflected in the returns of the trading banks. Compared with a year earlier, the last return shows an increase in deposits of £8,500,000. Advances, on the other hand, have declined by £6,500,000', and the result is that the margin between deposits and advances totals £19,000,000 compared with only £4,000,000 a year ago. This seemingly satisfactory position, however, is also largely explained by the advance payments for produce which lessen the demand for accommodation and provide additional funds for deposit. In the meantime the banks have a record total of funds which have no outlet other than to meet the demands of the Reserve Bank. The lesson from this position is obvious. The Government should go on the market while ample funds are available and raise longterm loans to meet its current needs. If this procedure were adopted it would not only stabilise the financial position of the country but would also serve, in some measure at least, to counteract the inflationary position created by the indiscriminate use of Reserve Bank facilities.