The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES." GISBORNE, FRIDAY, MARCH 1, 1940. FINANCING THE WAR

Gisborne Herald, Volume LXVII, Issue 20185, 1 March 1940, Page 4

The Gisborne Herald. WITH WHICH IS INCORPORATED "THE TIMES." GISBORNE, FRIDAY, MARCH 1, 1940. FINANCING THE WAR

While Mr. Nash has announced that the New Zealand Government does not contemplate an early loan issue to assist the Dominion to meet the cost of the war, Australia has launched its first war loan of £18,000,000, the lists for which open to-day. The fact that the loan is to carry interest at the rate of only 33 per cent indicates the extent to which the Commonwealth has succeeded in keeping interest rates at a low level. Last year, when 31 per cent was offered only £8,650,000 was subscribed by the public, while in 1938 more than £20,000,000 was obtained at 3rJ and 3J per cent. Judged by these results the appeal for £18,000,000 at 3g per cent might appear to be unduly optimistic, but at the present time there is an abundance of funds available for investment in Australia and recent sales of Government stock have been at prices which yield 31 per cent on the shorter-dated issued and per cent on the longer-dated ones. These rates are about J per cent lower than those ruling in New Zealand and it seems clear that Australia has struck the psychological moment at. which to approach the market. Whether the Government will succeed in raising such a large sum at such a low rate—the lowest since 1934 —remains to be seen, but the purpose for which it is to be used is certain to attract larger subscriptions than would otherwise be made. The action of Australia in floating a loan for war purposes directs attention to the whole question of war finance and the time is not far distant when Mr. Nash, if he is to avoid disastrous consequences, will have to revise his attitude on this point. The raising of loans in war-time serves a dual purpose and the immediate objective of providing for war expenditure is not the more important. Its greatest advantage, and one that needs to be doubly heeded in New Zealand, is that it provides a necessary check to inflation. Expenditure on war inevitably means that there is an expansion of incomes. The same expenditure, however, means also that there is a diversion of the national effort away from the production of goods. With concentration on the prosecution of the war it is manifestly impossible to increase real consumption because the national resources are being utilised for war purposes. There is thus cx-eated a situation in which the people, through the higher State expenditure and the consequent increase in individual incomes, have more money to spend but fewer goods upon which to spend it. Unless this position is checked there is unhealthy competition for goods which are in short supply with the result that prices advance and there is an inevitable demand for higher wages to keep pace with rising costs. This inflationary process was In operation in New Zealand long before the war started because the Government had been expanding credit through the Reserve Bank, thus increasing the internal purchasing power at a time when the production of goods was actually decreasing. A warning against this method of finance was issued by the Prime Minister in his Budget speech, when he said “it must be clear to anybody who studies the position that we are not suffering from a shortage of money in New

Zealand, but from a shortage of what money will buy.” Since those wise words were uttered the war has intervened and the shortage of goods has been greatly accentuated. Notwithstanding this fact, and in disregard of the Prime Minister’s plain warning, the Government has kept the printing press turning and the issue of credit through the Reserve Bank has increased from £12.000,000 to £22,000,000. This policy is the very negation of sound finance for it adds further to an already excessive supply of money at the very time when the outlet for money is severely restricted. Unless a halt is called the inflationary process will become entirely out of hand and the Dominion will face a crisis surpassing anything previously experienced. The present situation, as Mr. Savage has said, “must be clear to anybody who studies the position,” and since it is obviously clear to the Government itself it is high time that steps were taken by the Government to impose the necessary remedial measures.

The problem is an excess of spending power and a shortage of goods. Since, under war-time conditions, the shortage of goods cannot be remedied the problem must be tackled from the other angle and steps taken to curtail spending power. There are various ways in which this can be effected. The simplest and most effective method is heavy taxation extending to ail but the lowest income levels. Unfortunately, New Zealand already has 'he heaviest taxation of any country in the Empire—income tax on individuals reaches a maximum of 13/6 in the pound and on companies is nearly 10/- in the pound, compared with 2/6 in New South Wales—and the scope for further increases is strictly limited. An alternative means of reducing the spending power of the consumer, and preventing him from contributing to a rise in prices, is by raising Government loans, as is now being done in Australia. This has the effect of contributing to the cost of the war and, at the same time, taking money out of public circulation but the procedure in New Zealand is the exact opposite because, to flnance the war, the Government simply uses the printing press and puts more money into circulation. The weakness of the loan procedure, however, is that the mass of the people, who comprise the bulk of the consumers, do not contribute largely to loans. What must be devised, therefore, is some system which will bring the spending power of the whole community into closer relationship with the reduced quantity of goods available.