THE ECONOMIC OUTLOOK.

Lyttelton Times, 9 August 1920, Page 6

THE ECONOMIC OUTLOOK.

AN EXAMINATION OF THE BUDGET By J. B. CONDLIFFE, M.A., Professor of Economics, Canterbury College. L—THE BACKGROUND. In normal times, it is easy to attach too much importance to political questions and Governmental policy. After all, a great part of our everyday life is, providentially, outside tho normal scope of political control. Even in the economic world, the main bread and butter questions such as wages, prices, employment, respond to forces which the politician seldom understands and over which ho rarely has any effective, influence, so that while a wise policy of administration is always ultimately a boon to any country and bad government always reacts on national prosperity, yet in normal times a Government may be merely negative or may even play at experiments in State pocialißm and bo forth without doing much injury to the community. But in abnormal times like tho present governmental regulation is extended into a great many departments of the (national life, and the reactions of political decisions become extremely serious. New Zealand has been drifting along for bo many years on the full tide of prosperity that it is' hard for the younger generation to realise what adversity means, and tho burden it puts on the comntunity. Yet at the risk of being compared with Jeremiah, it is incumbent on those who know the circumstances of the laßt period of depression in New Zealand and appreciate its cause 3, to sound a warning against the ourrent polioy of inflation. Ever since 1895 the export prices of our produce have been rising steadily faster than our costs; trade and employment have been good; land values have steadily increased, and wages have risen. On the basis of that prosperity we embarked on a series of social experiments that have still to be tested, and. of course, built up a respectable public debt. The only check to our triumphal progress came in 1907 when, because of a passing crisis, the prices of our produce fell sharply, and as a direct and immediate result, there followed the unemployment and depression of 1908, which we can all remember.

THE AFTER-WAR BOOM. Since tho war began, the urgent heeds of the Old World have yielded us higher and still higher prices, and a lavish expenditure ot borrowed money has helped on a boom of dangerous dimensions. In a future article, some criticism will ba offered of the method of war finance used in the Dominion, but it ia sufficient to state here that the present situation presents to an economist all the familiar and recognisable features of the boom period that precedos a serious commercial and financial crisis. There are sharply rising prices and, inevitably associated with them, abnormal profits; a feverish speculation in land and real estate; excessive issues of credit by the banks; great numbers of projects for floating uew and enlarging old coinpanieSj and generally a scramble to get rich quickly. Experience in this and other countries has shown that after the boom there comes first of all a sharp panic and then a fairly long period of depression, during which industry readjusts itself on the new basis. The greater the boom,, the sharper is the reaction and the longer the period of depression, and it is obvious that the danger lies in the boom period when extravagance is rifo and all kinds of misdirected investment waste the national capital. The resulting period of depression is only the painful writingdown of wasted resources. THE VOGEL BOOM:

These facts are-very well illustrated by the Vogel boom in the seventies, which, indeed, remains a standing warning to New Zealanders, especially of this generation. Notice the many points of resemblance to present-day conditions.

Ten years before, the gold discoveries had initiated a period of great prosperity. Immigrants poured into the colony, prices were high but work was plentiful and wages were good. The production of gold rose rapidly to a maximum of nearly £3,000,00 , 0 in 1566; but an even greater source of ?irosperity was the demand of the now mmigrants for foodstuffs, clothing, eto. Prices of farm products rose and with them land values, and both farmers and traders were prosperous.

Toward 1870, however, the production of alluvial gold fell off rapidly; the only other considerable export was wool, and in _ accordance with general prices, the price of wool began to jail steadily. A natural reaction set~iii, and most unwisely", instead of countering the depression by seeking othor sources of productivity, New Zealand staved off tho evil day by embarking on a borrowing policy. Under tho guidance of Vogel, millions of pounds were borrowed for the twin purposes of publio works and immigration. In themselves both the objects were as desirable then as they are to-day, and oven if the executiori of the projects was faulty, no great harm would have been done in normal times. But the times were abnormal, the orest of rising prices had been reached, and thereafter prices fell steadily till 1895. The borrowed money promoted a feverish boom for* a time, a boom similar in all respects to that of tho present day; but the resulting panic was sharp and the long depression of the eighties and early nineties, dospitethe development of refrigeration from ISB2, is a clear warning to us" to-day. As prices fell, tho cumulative burden of the national debt bore heavily on the national finances, and, in just ihQ same way, those hopeful settlers who had taken up land at inflated values found their interest charges eating up a larger and larger proportion of their produce. Tho.y threw their farms back on the mortgagees, relinquishing their own share in them, and finally the financial difficulties recoiled on the estate companies, the banks, and particularly the Colonial Bank and the Bank of New Zealand. The danger point then proved to be Australia, where many of our banks had their head offices. Tho boom of the seventies and the depression of the eighties was world-wide, as tho present' crisis is. And then, as now, the Australian boom was wilder than ours. . '

Surely the lesson h plain in our history; but bur eyes seem closed to the facts. Jft is often argued that Europe is, after, all, in great need of our produce, and tbat prices will not fall. To take that view is to look only at one eide of the question, and even to ignore many of the relevant facts on that side. Europe's need is no doubt urgent, but is it an effective need? Those who know most of the condition of Oontral Europe hold out little hope of markets ther© for many years. The United States may become a consumer of our meat and wool; but it is only Bince tho tariff was lowered in 1913 that our produce has been able to enter the States, and a victory for the Republican Party might easily mean a rermposition of the high proteotive tariff. In any case prices will fall through the deflation of credit in the older countries. Tho war inflation must result *ath«r in gradual deflation such »* is apparent!,? happening; in Britain m. i*. ts&s&m* wss&fi** J»

utter depreciation, such as Russia, and Germany are suffering, and France and Italy _ are threatened with. In any case it is clear that prices cannot remain at their present level, and the experience of history teaches us to believe that the fall in prices will be continuous over a series of yearß. SUMMARY. This then is the background againsti which we must consider the national finances. During a long period of prosperity we have indulged in a great deal of development and costly experiment. The prosperity brought to us by tho war has been exaggerated by a governmental borrowing polioy into a well defined commercial and financial crisis. Wo stand .to-day at the crest of the boom, faced by the certainty (or a risk so great that prudent men assume it as a certainty) that once the boom bursts, prices will fall perhaps for ten, perhaps for twenty years. And there is further th e 'lesson to be gained from our own history, where a similar boom at a similar period was staved off for a few years by a borrowing policv that finally plunged New Zealand into her worst period of depression.