PRICE RECOVERY AND STABILISATION

Manawatu Standard, Volume LII, Issue 269, 13 October 1932, Page 12

PRICE RECOVERY AND STABILISATION

THE NEED FOR HIGHER PRICES.

(Prepared by the Department of Economics of Canterbury College.) The fall in’ prices during the last three years has been so severe and, its effects so disastrous that much attention has been given to investigating its causes and to devising means which might raise prices to more profitable I levels. Several authoritative . bodies, including the McMillan Committee, the Gold Delegation of the League of Nations, and the Currency Committee at the Ottawa Conference, besides many individuals, have expressed the view that it should be possible to raise prices again to the levels prevailing in 1928-29 and to stabilise them approximately at that level. The opening paragraph of the Ottawa Currency Committee’s report states: ‘‘A world-wide rise in the general level of wholesale prices is in the highest degree desirable. The evil of falling prices must bo attacked by Government and by individual action in all cases, whether political, economic, financial or monetary.” This report quotes also the statement made, by the British Chancellor of the Exchequer, “His Majesty’s Government desires to see wholesale sterling prices rise. The best condition for this would be a rise in gold prices. The absence of a rise in gold prices inevitably imposes limitations on what can be done for sterling. A rise in prices cannot be effected by monetary action alone, since various other factors which have combined to bring about depression must also be modified or removed before a remedy is assured.” (Sterling prices refer to prices expressed in British currency; gold prices to prices in tile currencies of countries still on the gold standard. On account of the fall in the exchange rates for sterling, sterling prices of British imports and exports are now considerably higher than gold prices for the same goods.) The reasons for this general agreement on the desirability of higher prices are readily understood. The fall in prices has occasioned a depression which has brought unparalleled and world-wide unemployment, a decline of about 50 per cent, in the value of the world’s overseas trade, severe contractions in industrial production, and an increase in the burden of public and private debt which has already led in some cases to default, anil which, if continued, means wider default. It is recognised that higher prices would make profitable much production which can now bo carried out only at a loss, and so would stimulate trade expansion, promote the absorption of the unemployed, and lessen the present heavy burdens of debt. THE SPREAD OF PRICE DECLINES The- following table gives some indication of the change in world prices since 1929: Price Indexes, 1929-32.

This table shows how unevenly the fall in prices has been spread. New Zealand export prices have fallen by per cent., while New Zealand import commodity prices have fallen by only 4 per cent. The fact is that, while some items, chiefly farm products, metals and raw materials, have fallen very heavily in price, finished goods have declined much less and in some cases to a very small extent. The variations in the extent of price decline shown in the table are duo, therefore, largely to differences in the items included in the various index numbers. New Zealand wholesale prices, for instance, have fallen 13 per cent., but that fall is duo mainly to the farm products included in the index number. Most finished goods have fallen in price less than 13 per cent. The Economist index number shows a fall of 35 per cent., but the extent of that fall is due to the inclusion in that index of many primary products. Had the United States index covered the same group of items, the fall in prices shown there would certainly have been greater than in the case of Britain. In both Britain and New Zealand, too, retail prices have fallen only 13 per cent. These differences in price changes may be explained by differences in demand. It appears that the depression has caused a heavy decline in the demand for finished goods. Figures for industrial production in Britain and America suggest that, in response to the reduced demand for finished goods, production has been contracted more than prices have been reduced in the manufacturing and distributive trades. The reduction in the demand of these trades for materials, consequent upon contracted production and sales, has brought very heavy declines in the prices of primary products. The problem is therefore not so much to raise all world prices by 30 or 40 per cent., as to restore the world demand for finished goods. _ Such restoration would raise the prices of finished goods the 10 per cent, or so that is required and would increase the demand for materials in a way that would raise their prices to a much greater extent. NON-MONETARY FACTORS IN THE DEPRESSION.

The world-wide contraction in demand has been described as due to a 'general fall in business confidence. Confidence in this sense refers mainly to the expectation of carrying on production and trade with reasonable security and profit and without unreasonable risk of loss. The real causes of depression are therefore to bo found in the conditions which have occasioned the decline in confidence. These conditions include the general dislocation and lack of balance in world production and trade during the period since the war. They have been accentuated by the growth of nationalism and the recent increase in tariff barriers and other obstacles to trade. by big changes in the flow of capital, both long and short term, between debtor and creditor countries, by the Stock Exchango boom, particularly in the United States 1 , and its collapse in 1929, by the rigidity of industrial costs and industrial structure consequent upon the increased size of business units, inflexible regulations and wage rates, and heavy burdens of taxation and debt. They have included the questions of reparations and war debts which, besides interfering with the normal flow of capital and trade, have been the occasion of much political discord and of general insecurity.

CREDIT AND PRICE LEVELS. All these are noil-monetary factors bearing on the depression and all have been obstacles to recovery. It is doubtful whether any monetary system could have withstood the strain that these combined influences have imposed. But many people believe that the fall in prices is due to monetary factors, and mainly to the contraction of credit. The next table, showing the total of bank advances and securities in

Britain, United States and New Zealand in June of the last four years, throws' some light on this matter. The British figures are for nine clearing banks and the United States figures are for the member banks of the Federal Reserve system. BANK ADVANCES AND SECURITIES.

The table shows that in every case cited the amounts of bank credit outstanding were greater in both 1930 and 1931 than in 1929, The depression was precipitated by tlie collapse of the Stock Exchanges towards the end of 1929. The contraction of bank credit was not appreciable in these countries until nearly two years later. It appears that bankers have followed their usual course and have lent freely to help their customers over the early stages of the depression, and that the contraction in credit which occurred during the past year was due in the main to the fact that bank customers have needed less credit to finance a lower volume of business. The contraction of bank credit is therefore an effect rather than a cause Of the depression, It is generally agreed now that nonmonetary factors are the chief cause of depression, but there is some difference of opinion as to how far monetary action may be effective as a remedy. The report of the League of Nations Gold Delegation (par. 183) states: ‘ ‘Thero is general agreement that price disturbances due to monetary factors should be avoided. There are some who. woul,d go farther and use monetary policy as an instrument to correct fluctuations in the general level of prices, however they’ arise. But there are others who consider it neither posible nor desirable, by the application of monetary policy, to correct fluctuations in the price level due to nonmonetary causes. The majority of the delegation hold the latter view.” The League Delegation’s report also discusses the degree of stability which might be attained: “The stability of the price level which we envisage as being practically possible is a relative but not an absolute stability of wholesale commodity prices as measured by their movement over a long series of years. AVe do not conceive it as possible to eliminate short-term fluctuations of the price level, but we believe these shorter-term fluctuations would be appreciably reduced in severity if the longer-term trend were relatively stable. Nor do we conceive the possible measure of stability as inconsistent with slow movements of the long-term trend either upward or downward. What it is desirable to avoid, as far as possible, are such violent price fluctuations as the world has recently witnessed. Such a measure of stability, however, can, in our judgment, be achieved only by the development of a flexible monetary and general economic policy which would allow the play of economic forces to bring about minor short-term fluctuations in individual prices and the average level of prices.” METHODS OF PRICE REGULATION.

The methods of price control by monetary management are such that it is impossible to regulate the movements of particular prices, though monetary action may be sufficient to prevent heavy upward or downward swings in the general level of prices. Broadly speaking, the method consists in expanding the volume of credit when prices are falling, and contracting that volume when prices are rising. It is based on the fact thatr the total volume of money in circulation multiplied by its velocity must be equal to the total volume of exchanges multiplied by their prices. This is obviously true, and it follows that if the velocity of circulation and the volume of trade remain the same, any expansion of money must be in increasing prices and any contraction in reduced prices. The difficulty of price stabilisation lies in the fact that neither velocity of circulation nor volume of trade do remain tire same in time of changing prices. In most countries the volume of production and trade has declined during the last three years much more than the volume of money, and, if velocity of circulation had remained the same, the price level would have been higher ancf not lower. In New Zealand, where adequate figures are available to measure the velocity of bank credit, the total amounts debited to bank accounts have fallen during the past three years by about 35 per cent. This is due to n slowing down of the rate at which money changes hands and has occurred despite an increase in the amount of bank credit. That is, it represents a decline in velocity of circulation and it is due largely to the decline in confidence which is an effect as well as a cause of the prevailing depression. None the less, it appears possible that an increase in the volume of credit may offset a decline in velocity and may stimulate an increase in velocity, an expansion of trade, and a rise in prices. If this stimulus could once be given and the movement towards recovery were well started, it would almost certainly feed upon itself and develop without further stimulus. For every improvement in prices and trade conditions tends to promote further improvement. If the movement were carried too far and a speculative boom threatened to develop, it might be checked by credit contraction. PROBLEMS OF CREDIT MANAGEMENT.

There is again some difference of opinion as to the possibility and desirability of following such procedure. The practical commercial banker naturally takes the view that his is a position of trust; that his first duty is to safeguard his depositors’ funds by lending them out only on safe security, and by keeping the major portion of his assets in liquid form. In times of depression he finds it difficult to meet borrowers who are able to offer the security he desires. Usually those clients whose position is soundest reduce their borrowings as their volume of business is reduced, and their action contracts credit. Credit expansion may involve lending to borrowers whose security and prospects of success are less atrtactive to their bankers. There are others who consider that price stabilisation, through credit contraction and expansion, is a task that the banking system might well undertake, but that it is a task to be undertaken mainly by central banks acting, in co-operation with commercial banks and Governments and operating in the world’s most important and most sensitive money markets. It is in such markets tliat the demand for credit reacts most readily to changes in the supply and price of loanable funds. In times of depression, ordinary bank advances respond much less readily to lower rates of interest, and sound potential borrowers are often unable to find profitable means of employing money. Hence they may refuse to increase their loans, however low the rates of interest be reduced. It is recognised, therefore, that the avenue through which credit should be expanded is the short-term money market The Ottawa ’Currency Committee Report states; “The primary line of action in the monetary sphere toward a rise in prices should be the creation and maintenance within the limits of sound finance of such conditions as will

assist in the revival of enterprise in trade. These conditions include low rates of interest and an abundance of short-term money. The rate of interest on all the various types of loans should be kept as low as financial conditions permit. It is necessary at the same time that these favourable monetary conditions should be achieved, not by the inflationary creation of additional means of payment to finance public expenditure, but by an orderly monetary operation, safeguarded, if the necessity should arise, by such steps as will restrain or circumscribe the scope of violent speculative movements in commodities or securities. It must be remembered that the success of such a policy would be hampered and might be nullified by failure to modify or remove important nonmonetary obstacles, many of which are international in character and require an international remedy. The British Commonwealth should nevertheless take all steps in its power to increase public confidence, especially in the field of business enterprise, and to facilitate trade.” THE RECORD OF PROGRESS.

There has already been considerable progress in this direction and it is becoming increasingly clear that in Britain at least an orderly monetary policy has been followed aiming at lowering rates of interest, encouraging borrowing, and so stimulating recovery. Little more than a year has passed since what was probably the greatest financial crisis in England’s history culminated in her suspension of the gold standard in September last. Since that crisis bqgan, Britain has imposed substantial public economies and balanced her Budget. She has taken a lead in securing an agreement on the reparations question, which, though not yet finally settled, has effectively removed the evil influence of reparations from European politics. She has also successfully carried through the conversion of £2,000,000,000 of debt, and brought tho long-term rate of interest on firstclass securities down to about 3} per cent. The Bank of England rate of discount, which was 6 per cent, last February, is now 2 per cent, market rates are very low, and Treasury Bills have been floated recently at less than 4 per cent. In England, too, the customary minimum rate for bank advances, 6 per cent, has for the present been abandoned and bank advances are available at lower rates. All these changes have encouraged confidence and promoted easier credit conditions. The Ottawa Conference marks a further attempt to promote recovery within the British Emnire.

In the United States, the Reconstruction Finance Corporation has endeavoured to liquidate much credit frozen by the depression. A Bill has been passed enabling the banks to use additional securities as cover for note issue, which has permitted more notes and credit to be issued on a given basis of gold, and the Federal Reserve system has bought heavily of securities. All this has meant much easier credit conditions and has been accompanied by a falling tendency in interest and discount rates.

RECENT PRICE IMPROVEMENT. One result of the fall in rates has been an increase in security prices. In England bond prices have risen since the beginning of 1932 by more than 30 per cent, and between June and July share prices rose by 16 per cent. Similar rises in Stock Exchange prices have occurred in other countries, including the United States, Australia and New Zealand.

More encouraging, perhaps, is the upward movement in commodity prices since June last. The next table shows tho London Economist price index numbers from June 15 to August 10, 1932, the latest date available: — ECONOMIST PRICE INDEXES. September 18, 1931. equals 100. June July Aug. P.c. 1932. 15. 13. 10. Inc. All prices .... 97.8 97.5 101.0 3* Primary products 99.7 101.3 108.6 9 Gold prices .. 80.2 82.6 88.5 104

This table shows that, after their long and continuous decline, prices expressed in gold have advanced 10 per cent in less than two months. British prices of primary products have increased nearly as much, and the index as a whole shows some improvement. The improvement is mainly in textiles and metals; the cereals and meat group has declined, and New Zealand meat is at a very low level. Up to the end of July, the latest date for which figures are available, the price decline has been checked, and prices were practically stable in France, Italy and Germany. But an improvement in prices has been recorded in the United States. For New Zealand and Australia there is some encouragement in the higher prices of dairy produce, in the marked improvement over the whole group of textile prices, and in the definite upward trend that has been shown at the recent wool sales in Sydney and London. On the other hand, this encouragement is discounted by the recent heavy decline in meat. It is possible that this upward turn in the general level of prices, and the higher level of confidence reported to be developing, are the direct results of a policy already in operation. It must be remembered, however,' that there are many non-monetaiw obstacles to be overcome before ceapplete recovery can be assured.

Wholesale Prices. 1929. 1932 (Juno or 1931. July) British (Economist) . 100 ' 70 65 U.S.A . 100 77 67 France . 100 74 70 Australia . 100 79 77 New Zealand . 100 90 87 Retail Prices. Britain . 100 89 87 U.S.A . 100 864 684 Now Zealand . 100 90 87 N.Z. import commodity 100 974 (Fob.) 96 N.Z. exports . 100 bOi 514

Britain N.Z. TJ.S.A. Juno. £ m. £ m. Dols. m. 1929 ... 1434 53.6 22.270 1930 ... 1464 60.4 22.850 1931 ... 1444 58.4 22.480 1932 ... 1352 60.1 19.750