Currency Fallacies

Hokitika Guardian, 12 February 1938, Page 2

Currency Fallacies

(By X),

A recent article in the Examiner ou “Real Money,” illustrates the prevalent confusion of thought on the question ol “currency." That article, if taken seriously would .be alarmist as it contends that while bank deposits in N.Z. total £64,000,000, there are only 12£i millions of money available to redeem these deposits. The proposal appears, therefore, that the Government should provide 100 per cent cover for all bank liabilities by the issue of interest free paper currency. This proposal is said to have received the support of quite a number ot eminent bankers,, and is alleged to liave emanated originally from Professor Irving Fisher of the Yale University. It is incomprehensible that a-propo-sal which on the face of it is unjust, uneconomic, and unnecessary should receive the support of any accredited financial or economic authorities. The proposal is unjust, as it transfers the liability of those who have incurred debts to those who were in no : way responsible —the people as a whole. It is unnecessary because these debts to the banks are recoverable by them, and are covered by securities held. It is uneconomic because the issue of pnper currency to meet contingencies which may never arise has merely an inflationary tendency, depreciating local currency and at the same time removing the safeguards against reckless and thriftless expenditure which normal banking practice provides.

Banking conditions in America, to which Professor Fisher refers differ materially from those in N.Z. and only once in the history of this country it been necessary for the Government to come to the assistance of the banks bv backing them with public credit. There appears no indication that there Is ampresent necessity to do so, though ttufull effect of recent banking legislation and the 4 repercussions which it wtP eventually have on the credit of the coUntrv may not yet be fully and clearly realised. There are one or two economic fallacies, however, which are obtaining credence and one of these is that our troubles in the past have been due to a shortage of currency.. This was not so. There was always currency available to moel demands. The real trouble was that the \yenlth producing power of the people had fallen, as a result of the, fall in values of our marketable commodities As they produced less wealth—-ns gauged by market values—there was less for them to exchange for . other classes of wealth (or commodities). There was, therefore, less demand for currency which consists merely of credit notes or tokens declared to be legal tender, and useful only as a- medium of exchange. Thp less wealth people had to exchange obviously the les.s demand there would be for currency—the medium bv which such exchange is made. . .... . .. Another fallacy is that “currency” must be available equivalent to the total value of all trade transactions* That is not- so. , Though barter in its crude form is rarely used,'the principle ot barter governs all trade, so that in practice 90 to 95 per cent of trade —both internal and Overseas—is covered by cheques, bills of exchange, bank drafts etc.,' which ore merely credit notes adjusting the debit and credit balances between individuals or commercial institutions. Currency in the form,of bank notes or coinage lias a limited scope of usefulness. Very seldom is it used except for wages, petty cash, personal expenses and payment of small debts. Even wages are frequently paid by cheque. It should be noted that the essential difference is that cheques, bills of exchange etc. are based on personal security, and must be paid in or met within a limited period of time, while currency is supposed to retain its face value indefinitely, and must be accepted at all times within the country of its issue as legal tender. Both are based on credit —one 1 on personal and commercial credit, with a definite and short time limit, , and the other on the credit of the State with an indeterminate time limit. The essential factor in both cases is the maintenance of this credit.

It is fallacious to assume that “currency” represents “real money,” or that the short-dated credit certificates with which nine-tenths of the trade ot the world is conducted is “imaginary money;” Both are merely a medium of exchange and as. such the latter is the more practicable, convenient and reliable. The’ value of a cheque is proved \or disproved) at once on presentation, and a bill of exchange,’ or bank draft, on its due date. On the other hand a bank note may or may not be worth its face value. In the' country of its issue it must, if declared legal tender be accepted at such value, but on the foreign exchanges its value fluctuates and in some cases, ol which examples have been available within the past few years, may practically disappear. It may be doubted whether there has been “real” money in circulation since gold and silver were weighed out in shekels for payment of debts in the highly, civilised nations of antiquity, Egypt, Babylon, and Assyria. When the Creeks introduced coinage and the stamping of plectrum, and subsequently gold and silver with the face value of the. coins the fiduciary element was introduced, i.e. the face value was greater than the intrinsic metallic value. Also the more precious metals were alloyed with baser metals, providing larger profits on the mintage. It is on record that Aristophanes denounced the currency of the Athenian democracy (about 406 8.C.) as “sorry brass just, struck last week and branded with a wretched brand.”

Jn ancient- times the control of the mints provided a lucrative source of

revenue for the governments, kings, and rulers of the various countries, in later times a more universal standard of purity in metallic currency obtained owing to the developments in international trade. But these developments eventually rendered metallic currency quite inadequate, and with its virtual disappearance recently when nearly all countries went off the gold standard, “real money” may be said to have disappeared. Unfortunately the paper currency with which it wag replaced offers wider iacilities for inflation than was possible by mere manipulation with metals and alloys.

Still the trade of the world can. be carried on. Wealth in the form of commodities can be produced and exchanged quite effectively while the credit of each country is maintained and reflected in its currency. This can only be done, however, by watching carefully any tendency toward inflation, which the excessive issue of paper currency ia,s compared with actual wealth production must inevitably bring about. Emphatic warning has been given regarding this by many economic authorities. If there is a feeling of uneasiness in New Zealand at present, it is based on the fear that these warnings are being disregarded, and that in consequence, our currency may be ultimately affected, as were the mark, the rouble, the franc, and to some extent, the “dancing dollar.” Lavish expenditure of paper currency, unless it produces in return tangible and revenue-producing assets, has this effect. The first sign of depreciation of currency is of course, its reduction In purchasing power, manifested in die rise in the cost, of living. If this danger signal is not regarded, the next development must inevitably be a rise in exchange rates indicating that internal currency has fallen further below parity with “sterling.” If this tendency is not definitely checked, the consequences must be disastrous to the future prosperity of this country, one essential feature of which must be a stabilised currency.