Monetary Policy

Hawke's Bay Tribune, Volume XXIV, Issue 233, 14 September 1934, Page 5

Monetary Policy

REPORT RELEASED COMMITTEE’S VIEWS Banking and Exchange RECOMMENDATIONS MADE [By Telegraph—Special to “Tribune”! WELLINGTON, Sept. 14. Tile report of the Monetary Committee, released this morning, reviews the main aspects of the monetary and banking situation of the Dominion, including the institution of the Reserve Bank; it traces the effects of the many schemes put forward and in particular deals with the proposals advanced by Major Douglas and his adherents; in a special section it discusses the exchange rate adjustment and its f uture. The report is not signed by the Hon. W. Downie Stewart, who said that by inference it advocated Socialism and socialised banking. A memorandum of dissent is signed by the Labour members of the Committee and by Captain Rushworth. A summary of their views is given. lhe committee consisted of Messrs •I. A. Nash (chairman), A. J. Murdoch, J. 11. Massey, F. Lye, (J. 11. Chnkurd, H. Holland, H. M. Rushworth, E. W. Schramm, J. W. Munro, F. Langstone and the Hon. W. D. Stewart. lhe report affirms the paramount authority of the State in monetary matters and emphasises that the serving of the national interests, rather than the quest for profits, should be the motive of the banking system. It condemns the exorbitant rates of interest charged by the banks on Treasury bills. These rates were LU 5.9 per cent, and more recently 5 per cent, when other Dominion Governments were paying far less, e.g., India 1 per cent., South Africa If to 2J per cent., and Australia 2j per cent. The establishment of the Reserve Bank of New Zealand is therefore welcomed. As the State appoints twothirds of the directorate of the Bank of New Zealand, the State should use its power of appointment to see that profit-making is subordinated to the end of public welfare. STOCK AND STATION AGENTS. Stock and station agents engaged in deposit and exchange banking should be controlled by the Reserve Bank; the position of other institutions taking deposits should also be considered. Stock and station agents are banking institutions and have in the past materially affiected land booms by their competitive activities. The overdraft rate for first-class accounts should be reduced to 3j per cent, with a maximum of 5 per cent, for other accounts. This is necessary in present circumstances to assist in the revival of industry and further to reduce overhead charges. The bank charge for keeping accounts should be reduced from £1 to 10/- and the internal exchange on cheques should be reduced, the total reduction being equip to the relief of note-tax and income-tax owing to the setting up of the Reserve Bank. It may be noted that consequent on the last increase in note-tax, the banks doubled their bank charge. The report recommends that the system of bank taxation remain unchanged. GOLD STANDARD REJECTED. The gold standard is i ejected as a basis for the monetary system, especially as New Zealand has evoived away Hom it. Hence gold reserves should be exported and converted into interestearning assets. To ensure a unified and consistent lending policy and to bring the monetary system further under centralised control and to eliminate overlapping, Government lending departments should be amalgamated. A Government Mortgage Board should be constituted to take over the long and short term loans which are at present administered by the Lands Department, the State Advances Office and the Rural Intermediate Credit Board. This Mortgage Board should also investigate the possibility of adjusting mortgage charges to farm returns and also ensure an even flow of income to the mortgagee. Mortgage bonds of the long-term amortized types are recommended, with interest adjusted to current rates at five-yeatjy intervals. A Development Commission or Board of Works should bo set up to dovetail Public Works and co-operate with the Government, local authorities and the banking system, to mitigate some of the effects of booms and slumps. NEW ZEALAND POUND. The New Zealand pound should be devalued at the 125 rate in the interests of certainty and economic recovery, but a swing of five points on either side should be permitted in order to control the internal price structure, the exchange rate being the most potent instrument of monetary control. The Reserve Bank should quote a “forward” exchange rate tn safeguard importers. For the purpose of open-market operations, a short term money market should be built up, the Reserve Hank Act to be amended to make this more easy to attain For cheaper and more efficient financing of production, trade and agricultural hills should be encouraged in place of overdrafts. GENERAL summary The report gives a detailed and reasoned analysis of all the topics re viewed. The present monetary system is clearly explained. It is shown that New Zealand, even before the war, was not on the gold standard, but on tho sterling exchange standard, gold being unnecessary. Credit in the main has been based on production. Free deposits and their rate of turnover are shown to be the indicator of business conditions. Fixed deposits have been increasing absolutely and relatively and thus less money has been used by the business world. There is plenty of credit available, the difficulty

is that there is little expectation of profits while farm returns remain low.

Hitherto the trading banks, the m*> jority being controlled by outside interests, have had no conscious monetary policy; but these defects in the banking structure should be remedied by the operation of the Reserve Bank which, with, the acquisition of sterling funds, will be in a strong position. STATE AND BANKING. Ln a discussion of the relation of the State to the banking system, the committee remark that the State appointees on the directorate of the Bank of New Zealand have not acted tor the Government but for the shareholders. The report discloses that the original internal debt conversion scheme was a voluntary one, but was rejected by the banks. The committee consider that the banks could have co-operated more and that for the future the Bank of New Zealand, while subordinating the profit-motive, should be used to give a lead to the commercial banks. The non-rnonetary factors in the depression are used to show the main underlying causes of maladjustment as far as New Zealand is concerned, the conclusion being that a monetary solution is not sufficient. Banking and credit is discussed and it is shown that the volume of credit depends on the value of production, the real fault of the price and production system being that it is out of balance. The concept of a stable internal price-level, the difficulties of index numbers are also examined. It is shown that if the internal price policies advocated in many schemes are pursued, a rigidly controlled economy would be necessary to avoid inflation. QUANTITY THEORY. The quantity theory of money is examined in relation to tho difficulty; of controlling inflation ; currency inflation as a method of taxation and ita effects on various economic classes are also discussed The extreme difficulties of controlling the monetary situation are stated clearly, it being shown that inflation can exist ewu with a stable price level. In a discussion as to why the exchange rat* has been comparatively stable, the gold standard explanation' being rejected, the purchasing power parity theory; and the “demand and supply of sterling funds” theory are examined, 'lhe conclusion is that the banka have always pegged the exchange rata and that the term ''natural” is inapplicable, The banks have always kept “and exchange insurance fund'* in London. Demand and supply <’f London funds have not determined the rate of exchange in the short run. HIGH EXCHANGE. The high exchange rate is fully discussed, the conclusion being that, compared with other countries, New Zealand has been extremely conservative as far as depreciated currencies are concerned. After examining the Danish situation, it is shown that Denmark did not depreciate her exchange as a competitive move against New Zealand. The evidence also makes clear that the high exchange rate has had no material adverse effect on the prices of our primary products—that is, it has been a net gain and incidentally has saved the fruit industry from bankruptcy and benefited the manufacturers. The London funds are discussed and it is disclosed that previously there have been large accumulations. A strong case is made out for devaluing the currency at 125 and using the exchange rate as an instrument of control. MAJOR DOUGLAS. The committee, in their discussion, have avoided mentioning names of those who put forward schemes, but have placed them in general groups, but in regard to the two different schemes put forward by Major Douglas and by the Douglas Credit Movement respectively, the plans arO given rigorous and extended analysis. “The committee feel that for its intrinsic value” the scheme put forward by Major Douglas “need not have been specifically mentioned; although it is somewhat involved in its presentation—in fact, unnecessarily so, —it is not constructive, nor are its general defects so elusive as to warrant any detailed analysis. However, in consideration of those in the Douglas Social Credit Movement who attach importance to the schemes of Major Douglas, the Committee consider that it should be made known exactly what the scheme for New Zealand involves.’’ Although the Committee specifically stated that they would not exclude criticism of the present monetary system, Major Douglas preferred not to put forward the Douglas analysis, but sent in a scheme which hti said could he applied to the present system. Hidden bank reserves were to be taken to pay off overdrafts, and dividends over 6 per cent taken in reduction of interest on overdrafts. Similarly insurance company earnings over 6 per cent were to be given to all adult New Zealanders who possessed “debenture stocks” based on the hidden reserves of insurance companies. INTERESTING EXTRACTS. Extracts from the Committee'» conclusions are:— ‘‘The dissipation of reserves by way of gift to borrowers is merely a short and sharp method of wrecking the banking system. This finnricinJ sabotage would operate by rendeinng the banks insolvent when the value of their assets was impaired by the slightest fall in prices.” “While it is mere fantasy to regard the scheme ns a suggestion of a permanent nature, wo are also of the opinion that it is hopeless even as a stopgap. It would nut affect prices in the primary producing industries nnd would not add to anyone's spending power.” “Tho proposal to distribute preference shares broadcast to all New Zealanders of voting age would be fantastically ineffective as a method of distributing the country's wealth.” “Whether one blievos in pri'itc pro perty rights or not, the taking of the property of insurance policy holders i> mere caprice. The insurance proposal ’ u absolutely no cor-cia*i"n —ith soDouglas is that—qui e apn t frot eir arbitrariness, their injustice and irrationality—they would bring a net decrease of purchasing power, and would add to the burden of unemployment nnd reduced incomes.” The Committee state in various places that the scheme and evidemi- nf Ma jor Douglas were capricious, indefinite, cir-

cumlocutory and even self-contradic-tory, his replies to questions being often evasive and irrelevant.

DOUGLAS CREDIT MOVEMENT.

The proposals of the Douglas Social Credit Movement also come in for discussion. “Although the social credit plan put forward belongs to the group of schemes which the Committee consider to be inherently unworkable, we have treated it separately, both because it is part of the widely advertiser! gtnus of 'social credit’ proposals and also because the Douglas Social Credit Movement was given a special invitation to submit an alternative monetarv scheme for New Zealand.”

The scheme included, on the assumption of a chronic deficiency of money in circulation, the application of a Price Regulating Factor to reduce prices onethird. Farmers and the unemployed were to be guaranteed standard payments. The Committee state that the ’* assumptions put forward are all of dubious validity.”

The Douglas Credit representative stated that “Deficiency of purchasing power will be the determining factor in calculating what are A and B payments.” The report says: “A refer ence to the Minutes of Evidence will show that the Douglas Credit representative made yet anothher interpretation of the A plus B theorem and brought it still nearer to those propositions which must be accepted on faith and not by scientific demonstration.” NEW THEORY OF VALUE. The Douglas representative produced a new theory of value, saying that the valuation of a ton of butter woulij be determined by “the amount of physical support it will give a man with a family.” The Committee state that “it is impossible to equate money and goods for there is no common scale on which to equate them.” The Douglas representative stated that a statistical estimate could be obtained to disclose the alleged deficiency of purchasing power. The report shows that when by correspondence the Committee asked for the factors which would have to be measured to calculate the Just Price Factor, no reply was received from the Douglas Credit movement.

The Douglas Credit proposals are “technically and administratively impossible to achieve with the present economic system. The application of the Price Factor is also so extremely cumbersome as to be almost impossible quite apart from the financial ehaos which would ensue. It is a purely arbitrary procedure savouring of wish fulfilment rather than clear thinking. It would entail rigid control of economic life comparable with that of Soviet Russia.” “THROUGH THE WISHINGGLASS.” The whole scheme is merely “economics through the wishing-glass. ” The application of the Price Factor would bring progressive inflation because of uneancelled credits; “the expressed intentions of the propounders of the plan as to avoiding inflation would be merely idle words.” “The proposals are retrograde in every way,” says the report. “They put forward an incorrect diagnosis of the economic and financial situation, envisage a purely monetary solution of our economic problems, do not offer proof of any chronic tendency to deficiency of purchasing power, have no logical connection with any of the known versions of the A plus B theorem, omit important problems of valuation, give impractical definitions of the factors to be calculated, would give additional stimulus to a boom, and in general, would be highly inflationary be cause of the cumulative effects of the issue of non-repayable “free credits” •as subsidies to retailers and as payments to exporters and unemployed workers; the results, if the proposals were applied for any length of time, would thus be to depress living standards and ruin the saving class. To prevent inflation they could be administered, if at all, only with rigorous cohtrol of our economic life—an undefined type of control both in its methods and in its purpose. DETRIMENTAL AND RETROGRESSIVE. “The analysis of banking and credit and of price levels and the influence affecting them is to be found in other sections of this report. It should thereipre bo sufficiently clear that the Douglas Social Credit proposals for the reform in our monetary system are illconceived; they are perhaps idealistic in intention, but certainly detrimental and retrogressive if ever the application of them were attempted. The expressed and implied assumptions cannot bear logical analysis, nor, even allowing for the falsity of the assumption, is there anv attempt made to derive logical com fusions. This is perhaps to be expected where the action of mass psychology is used as an iuatrument instead of a less picturesque, but more exacting mental discipline. “There are many intelligent and well-intentioned people who. instead of seeking for a solution of the problem presented bv haphazard production, have been misled bv the superficial attractiveness of schemes for quickly curing the world’s ills. When one of the leading advocates (C. H. Douglas) of a purely monetary remedy states that ‘almost the only thing which is not open to destructive criticism about the banks is their dividends,’ he illustrates how the minds of a considerable section of the public are being diverted from the more basic problems of the day by placing all the emphasis on monetary reform; they are focussing attention on symptoms rather than on monetary causes.”

SUPPLEMENT ARY STATEMENT

The report v as not signed by Mr. Donnie Stewart, who in an explanatory statement, said that by inference it advocated Socialism and socialised banking. Also that “the hostile criticism of the trading banks was mischievous.” He justified the high profits earned by the banks because the State has a one-third holding in the Bank ot New Zealand, “and draws a rich revenue therefrom.” He added that the report discusses too many theoretical schemes and the remarks on the gold standard are superfluous, nor did he know of any banker 1 who did not fix the rate of exchange on the demand and supply principle. His conclusion is tffat, because qf

the establishment of the Reserve Bank. I it would be unwise to experiment with any new monetary schemes and “it would onlv create confusion to consider the adoption of other schemes.” “It is not credit that is lacking in New Zealand to-day, but adequate markets overseas.” MEMORANDUM OF DISSENT. A memorandum of dissent was signed by the Labour members on the committee and by Ca.ptain Rushworth. They state that the non-monetary factors in tile, depression are a result of the monetary system. They cite the Southampton and London Chambers of Commerce and the World Economic Conference as stating definitely that the cause ot the depression was monetary. They say that since the Royal Mint ceased manufacturing all the money I required, a fundamental change has ; come over the monetary system in that ■ money can now be withdrawn from circulation. Because New Zealand operates on a sterling base, we are j subject to the policy of the Bank of England and under the control of the i Bank ot International tiettlupients. They allege that tile associated banks and now the Reserve Bank are the instruments of the Bank ot England. In stating that banks create money and also vast debts, the four signatories contend that when advances bring money into circulation it should not create a debt. The amount of money should represent the amount of real wealth. The recommendations are unified control ot the volume ot currency and credit, the elimination ot private interests and sterling restrictions from the Reserve Bank Act. the creation ot [ apparently non-repayable money for 1 consumers, pensioners, the unemployed, the incapacitated and all pro- ; ducers whose prices do not reach pre- . depression values, monetarv policy to I aim at stabilising the New Zealand 1 wholesale price level. “Credit expansion to be limited only by the volume of consumable goods produced and desired by the people.” If exchange stability is not otherwise possible, then exchange should be rationed for essential commodities. The report is on sale at post offices.