Managed Currency As Depression Cure

Manawatu Times, Volume LV, Issue 6834, 15 April 1932, Page 8

Managed Currency As Depression Cure

CHAMBER OF COMMERCE .ADVOCATES STATE BANK. Agreement with the New Zealand Civil Scrvico Association that an alternative way of meeting the present economic crisis was by a managed currency, was reached by tbo Palmerston North Chamber of Commerce which met yesterday to consider the question. The chairman (Mr. M. H. Oram) said it was understood when it was decided to sponsor the public meeting of Wednesday night, that many members of the Chamber would bo able to be present. Ho personally was not able to hear Mr. McKenzie and would not like to pass judgment on the scheme just from the newspaper reports. He thought it would be better to get representatives from the civil servants to address tbe Chamber.

State Bank Scheme. Mr. D- Morrison presented precis of tho Civil Service case which read as follows: — Briefly the proposals of the service organisations arc based on this: the fact that our present troubles arc due, in addition to tbo burden of war debt, to tho unprecedented fall in prices. Ail authorities agree that the quantity theory of money is a true one. That is to say, when the amount of money in the market decreases, so prices fall. Money consists chiefly of bank credits. These have of necessity been reduced through the policy of the British Government in returning to tho gold standard. It is not possible for tho banks in New Zealand to incrcaso credits under present conditions. The service organisations claim that the only safe method of increasing credits, that is of increasing money, and as a result of increasing prices, is by legislative action, creating a currency board or (State Central bank directed by statute to control the issue of money in New Zealand in an endeavour to get the quantity of money and therefore New Zealand prices as closely as possible to an agreed upon level. The organisations claim that authorities such as Keynes, Cassell, McKenna, Irving Fisher and others definitely state that this is possible, practicable and desirable. The oiganisations claim that if such a board or Stato Central bank acted in this direction, the results would bo:— (1) A rise in all prices in New Zea-

land. (2) Exchange if left free would go against New Zealand. (3) Primary producers would bo in a position to carry on their business

at a profit. (4) The overseas interest bill of New Zealand would bo increased by the higher exchange. (5) The cost of imports would be increased by tho higher exchange and imports would bo reduced. (6) The higher cost of imports would act as added protection for locally manufactured goods. (7) As a Tosult employment would increase. (S) On account of the increased spending power of tho primary producers employment both in the town and country would be increased. (9) On account of the greater profits of primary producers and of the cessation of unemployment the taxpaying power of tho people would be increased and as a result the

real burden of public debts would be reduced. (10) Tho knowledge that it was the definite intention of the State Central Bank to stabilise prices would restore confidence, thus checking the present tendency to invest on fixed deposit and encouraging investments in industry and farming. (11) If overseas prices increase the Tate of exchange against us would reduce proportionately. (12) If overseas prices still further fall tho rate of exchange against us would' increase proportionately.

q’he service organisations stress the fact that the banks really and actually create money in the shape of credits when granting overdrafts and similar accommodation, and cancel money 'when overdrafts and similar accommodation are paid up. For example, if as suggested by the Chamber of Commerce, £2,000,000 Treasury Bills arc issued this year, the fact is that immediately in the banks’ books a creciiz of £2,000,000 is set up for the Government, or in other words that £2,000,000 of money is created. For this the banks make an interest charge, say o per cent., that is £IOO,OOO per annum. The banks do not necessarily lend their own money or anybody clsc’s money. They merely create the extra money and make a charge for doing so. It is held that a very real economy could bo enforced by giving the State Central Bank this power of creating money. Mr. Morrison said he could not see where the arguments were wrong.

No Other Way Out. Mr. Oram said lie believed the Civil Servants had proposals worthy of consideration, but they involved a ceitaia amount of inflation and inflation bv means of currency notes, was one of the most dangerous that eouid bo contemplated. In the case of Gcimany it led to chaos and ruin. Right from the start ho personally had held that there was no need for tho deflations that had taken place since post-war days. Both periods of deflation were injurious to a country. However, the country was not going to get back to the high prices forproducts that were realised in the past and that fact had to bo borne in mind. The sole real wealth of New Zealand came through the primary producers and tho national income had been tremendously reduced when it need not have been. However, whatever adjustment was made, it would have to bo done on prices that did not reach the high level of the past. There were two ways jf making adjustments —either »y building-up tho income or by attacking costs beginning with wages until everything was down to the level corresponding to the lower level of primary products. The task of reducing costs was one of tremendous difficulty and anomalies and injustices were inevitable. Wages had been reduced and might have to bo reduced further; and interest and

rent had to bo brought down to a corresponding level. Tho recent Economy Commission evolved a schcmo whereby a managed exchange would give an increased income. One effect of the managed exchange was practically the same as the effect obtained by managed currency but without tho fear of dangerous possibilities. The Government had reduced wages without making adjustments on tho other side. He feared the result. If there was an increase in prices of exports tho downward movement would be stopped and more money would conic into tho country. This was the effect produced by a high of cxchango as in Australia. The Government \iad failed to tackle the cxchango question and had nullified tho findings of the Commission. It seemed the only way now was the creation of a Stato Bank but it was a dangerous step unless surrounded by rigid safeguards. Ho thought the Chamber should only commend the suggestion to the Government and m the meantime find more out about the effects of a managed currency and the safeguards neccssqry. Mr. Oram moved:

“That as a means of checking the general downward tendency- of prices and at the same time counteracting the policy of deflation that has been in vogue for the last few years, this Chamber commends to tho consideration of the Government, the advisability of tho establishment of a Stato Central Bank and the institution of a controlled currency with a view of effecting stability in tho price level.” Answering Mr. W. 11. Brown, Mr. Oram said he thought a cut in wages would still be necessary and especially a cut in interest and similar charges. The matter was one for economists. Tho position was the Government did not have the money to pay its employees and economics had to be effected.

Mr. Brown thought there should be no further reduction in wages till rents and interests were cut. Treasury notes issued in England during the war were not a failuro and as a temporary measure they should not fail in their purpose in New Zealand. At least further wage cuts should be postponed till interest charges were cut. The chairman said it was not equitable to reduce rents and interest 20 per cent, and wages only 10 per cent, any more than it would be equitable to reduce wages 20 per cent, and interest and rents 10 per cent. The Chamber should not advocate that wages should receive more considerate treatment than rents or interests. Mr. Brown agreed that there should be equality of sacrifice but tho wages cut had been in operation for 12 months already. The cut in interest and rents should be higher to make up for this 12 months loss of wages. Air. Brown seconded the chairman’s motion.

Replying to Mr. Brown’s contention that the trouble with central banking systems in Germany and the United States only arose because the position there was controlled by private interests. Air. Oram stressed the fact that banking was a highly technical and difficult science and stated that he doubted very much whether our larliamont had either the knowledge) or the ability to control the banking system and the control of a central bank and the currency of tho country could only be entrusted to a body of men entirely divorced from political control, of unquestioned integrity, possessing courage and a wide knowledge of banking practice and business methods. Tho whole position was fraught with difficulties and dangers, and he only subscribed to it at the present tiifie as there seemed no other way out. . Tho motion was carried and copies arc to be forwarded tho Associated Chambers, Prime Alinister, Air. J. A. Nash, ALP., and Palmerston North branches of the Civil Scrvico Association. Air. R. L. C. Aitchison urged that Air. Nash should be w-aited upon and not let the matter rest with a communication through tho 'post. Petitions and such like invariably reached the waste-paper basket. He moved that a special meeting of the Chamoer be called for Saturday at 0.3 L) wnen Air. Nash could bo present to hear the Chamber’s view's. This was agreed to.