ECONOMIC POLICY

Hawke's Bay Tribune, Volume XXIII, Issue 80, 16 March 1933, Page 8

ECONOMIC POLICY

EFFECTS OF SELF-PRESERVA-TION CURRENCY DEPRECIATION. lb IT A DEFLATIONARY FORCE? (By Professor D. B. Copland.) Sydney, March 9. During the depression the forces oi •conouui nationalism have been greatly strengthened. Normally, Unei national competition is looked upon as a healthy influence and we would all be greatly disturlied if we thought that powerful groups of producers and finaiieiers were able to combine for the purpose of controlling production and prices of the important commodities of Ulternational commerce. But, in a period of acute depression when price levels are tumbling dow n and financial institutions watch with dismay the collapse of the value of their assets, ami ■re threatened with insolvency, our attitude towards cut-throat competition i» different. We fear that it may lead •nly to worse conditions, and as each nation takes measures to defend its economic position, others will follow. These measures may take the form of any one or a number of the following: —Higher tariffs, embargoes and quotas upon imports, controlled home prices with lower prices for exports, exchange regulations, drastic reductions in internal costs or currency depreciation. Their general object is to restrict imports and to expand exports. Whilst the control of imports causes disorganiaation of international trade, it is m respect of the expansion of exports at lower real costs that fears have been expressed concerning the effect of these measures upon the international price level. The reduction of costs in the export trade may come about by means of direct cuts in internal c<<ts or by currency depreciation. In so far as these reductions in costs lead to competition at a lower level of prices, it is feared that the net result is a continued fall in international gold prices. In particular, the view is frequently expressed that currency depreciation has accentuated the fall in gold prices, and that the countries now off the gold standard have not benefited by their higher exchange rates. It is proposed to examine this problem briefly in this article. THE FALL IN GOLD PRICES. Britain’s departure from the gold standard has not resulted up to the present in a rise of sterling prices which, according to the “Economist” index number, are now at the same level as in September, 1931. Australian export prices in sterling values are no better now than they were in the middle of 1931. Only a few days ago the Chancellor of the Exchequer warned Great Britain that there would be no return to the gold standard unless prices rose and the standard itself promised to work more satisfactorily. But, in spite of the coincidence of a fall in gold prices, and a depreciation of most of the currencies of the world in terms of gold, it may well be • gross fallacy to assume that currency depreciation is the cause of the fall in gold prices. To raise doubts concerning this assumption it is only necessary to point out that prices hail fallen very heavily before Britain went •if gold, and took with her so many other European countries. Thus, the Bureau of Labour index number of wholesale prices for the United States fell from an average of 136.5 per cent, in 1929 to 102 in September, 1931. This is a drop of approximately 35 per cent. The latest quotation to hand •hows that for November last the index was 91.6 per cent., a fall of approximately 10 per cent, since Britain went off the gold standard. This does »ot suggest that British currency depreciation has been a fundamental cause in forcing a fall in gold prices or in accelerating the fall since September, 1931. It certainly shows that deflation has continued in the United States, despite the suspension of the gold standard throughout most industrial countries, and all primary producing countries. In Australia export prices in sterling fell from IGO in 1928 to 40 in September, 1931. Alter some improvement late in 1931, they remained during 1932 above the level of September, 1931 and were 13.3 for January last. Tnis again does not suggest that the depreciation of sterling is a fundamental cause of our low export prices. Professor Copland proceeds tn make an examination of Australian export pl ices from the beginning of 1929 up to this year, and proceeds: In view of these figures it cannot be contended that the depreciation of the Australian currency in terms of gold has been the cause of the fall in gold prices. But on the whole these prices fell more ateeply before currency depreciation became an important force. It is true that they have fallen since the currency has become heavily depreciated, but this is only one force of many at work to bring abo t a fall in prices. It may just as readily be claimed that the fall in prices of cotton, tin, and rubber was due to the depreciation <f currencies. There is little or no ground for any such suggestion in the case it these commodities. If Australia had gone further in reducing her costs of production and had placed supplies on the world market at lower rates, this also could be regarded as forcing down world prices. Yet the measures so taken would be rightly claimed as acts of self-preservation. EXCEPTIONAL POSITION OF BUTTER. Special forces have been at work causing a substantial fall in the price • of butter. Quite apart from the re- | duetion in costs of production, whether by currency depreciation or by direct cuts in costs, the production of butter throughout the world has rapidly expanded during the depression. In almost every country primary producers have found it expedient to produce small quantities of butter, because it brings in a cash return anil can assist in making up the losses incurred on other crops. In addition, there have been favourable seasonal conditions in some countries, and the net result is a glut in the markets. Unfortunately nutter producing countries like NewZealand and Denmark are gravely affected by a slump in their principal export, and they have sought measures to protect the position of their own producers. Roth countries have raised their exchange rates and the coincidence of higher exchange with falling butter prices has led to the suggestion that it is the depreciation of the currency that has caused the fall in prices. It is perhaps important to point out that the price of Danish butter on the London market fell from 120/- per ewt. on December 2 to 102/- per cwt. en January 13 while New Zealand buttar in the same period fell from 88/-1

to 81/-. All this happened before Denmark and New Zealand placed their exchange rates at 25 per cent, above parity with sterling. During the remainder of January the Danish price rose in London but fell again in February. For New Zealand there was a further fall from 81/- on January 13 to 77/- on February 10. It is not so much currency depreciation as the general international competition to secure a foothold in a limited market that is forcing the price down. The imports of butter into the British market, now practically the only international market lor butter, expanded between 1929 and 1932 bv no less than one-third. It is small wonder that prices have slumped. NEED FOR INTERNATIONAL POLICY. But the discussion on the effects of the depreciation of cuneiieies upon gold prices is not without its lessons. Measures of any kind aiming at merely under-cutting competitors must, in the absence of other influences, have some adverse effect upon the general price level. Similarly, restrictions on imports and exchange regulations by their effects upon the volume of trade, will necessarily cause some reduction in the volume of output and possibly also in international price levels. In other words, if each country is forced to take measures of self-preservation regardless of the effects upon other countries, the forces of deflation will continue to operate What is required is an international agreement among the leading monetary ccnties to take measures to expand credit. Ultimately the world will get out of the crisis by some expansion of credit; but the longer action is delayed the more severe will the crisis become. This follows inevitably from the efforts of each country to protect its own position. It is scarcely an exaggeration to characterise this development as a survival of economic ‘barbarism quite out of keeping with the progress made in science and methods of production. The fundamental cause of continued deflation in the gold standard countries is the unwillingness or inability of the leading financial nations to come to some agreement upon an international economic policy that will counteract the depressing forces of economic nationalism.