THE-PRICE PROBLEM.

New Zealand Herald, Volume LVII, Issue 17483, 29 May 1920, Page 1 (Supplement)

THE-PRICE PROBLEM.

THE NEW ZEALAND POSITION; BY H. W. SEGAH, M.A., F.N.Z., INST..' In the previous article we saw that fil- ■ ing prices were a common historical phenomenon. We are not concerned here. _ with those that come in a night, as it were, such as the recent collapses ,iii Japan, America, , and England. From;, these there is generally a more or less speedy and substantial recovery, whether, they arise from Joes of confidence, panic,, or restriction of credit. Confidence is.restored, panic does not endure, and credit ' does not remain coy any more than it will continue for long unduly venturesome. We are concerned with changes of a more steady and permanent character. To understand clearly present possibilities in this respect we have to q.wtinguish between countries such as the United States, where the currency ro mains on a gold basis, and all the recent European belligerents, where the gold basis has, for the timo being, been abandoned. Unless we include Japan, the United States is, in fact, the only one. ; ' of the leading nations in which the gold standard still obtains, although there are ' several others of minor rank. Even in these countries, in which the currencies remain on a gold basis, prices have ripen considerably in the last five years. This has been due to the cessation of import and the actual export of gold by the warring nations increasing their basic currency, and to war a.nd after-war" conditions interfering with tho production and distribution of goods. Tho rise in prices in these countries measures the depreciation of gold. i Paper Prices. 1 In the European belligerent countries, on the other hand, the increases in price* are more excessive. Paper money has been issued to such an extent in some of 1 them that the prices no longer depend on gold. Gold may still be retained by, a " Government or bank; but the amount ' more or less does not affect the prices. It J prevents for the present, however, a collapse in confidence, and so keeps the paper ' circulating. Prices depend on the amount of paper issued, and the connection, is 1 very close, as recent statistics' testify. } Even the rates, of exchange are shown to 1 be closely proportional generally to the " expansions of currency in the several. 5 countries. The inflation is least in the » United Kingdom; it is greater in France; » still greater in Italy; tar worse in Garr many still worse in Austria; and; in r Kuisia the currency is chaos. Prices and t exchanges follow tne same order. Neither prices nor rates of exchange can come back to normal until this nidation is rer moved. There is no exception in the.case. 5 of Britain. The only peculiarity in her 1 case is that'her plight is not so bad as - that of the others. A large proportion ..of. c the paper money has b-;en issued since the armistice. In Great Britain the. issue ' of Treasury notes reached its maximum, 8 only last December. The amount then.is- • sued reached no less than £556,152,000, • and the excess pf this over the amount, t £275,169,000 at the end of the last quarter preceding the armistice, as much.as ' £80,y83,000. This increase alone is some '"' two-thirds of the whole estimated/cur-. II rency before the war. In fact, judging • from the now well-recognised amount .of paper inflation of prices in Britain, this ./Uitinnal M«im since the termination of

additional issue since me wumnonyii v. fighting, is in itself very largely responsible for it. Most of the rest of the. issue would represent the currency necessary to carry on the business of the country, in the absence of the circulation of gold, at the advanced prices due to the depreciation of gold itself. New Zealand Note Issues. In New Zealand wo have not had to issue paper to pay war expenses. We have, however, maintained a parity of price levels with Britain by maintaining practically a parity of exchange. To conduct our business at the greatly in creased price level, a greatly enlarged currency has been required. This has forced the banks to greatly enlarge their issues and circulation of notes. This would appear to support what, some erroneously maintain as a general theory, namely, that prices determine the amount of currency and not currency the level of prices. If prices, are otherwise fixed arid the amount of currency can be altered at will, this no doubt is true. Rut usually and normally flic currency is limited, and prices must regulate themselves according to the currency. A careful statistical analysis of historical cases and of move ments during the war, abundantly prove that normally rises in prices follow, and do not precede the issue of notes. ./.We/ however, in this country, have been in the peculiar circumstances that fit.'the ordinarily erroneous theory. The. issue of notes has largely resulted from'the. prices and not the prices from the issue of notes. ■.■:.':: : '-' i Paper currencies have been previously regulated so as to keep exchanges at par. with gold currencies elsewhere, in-order to avoid the inflation of the paper),.curV rency. It is the recognised way of securing this. We, on the other hand are. J" effect, regulating our paper so as to.'keep our exchange at par with an inflated paper currency. We thus having rejecter] the gold basis in our exchange, are const".:! quently constrained to abandon it in our currency. •.-'•• - vThe situation resulting from (hose remarkable features is truly fJilbertian-; for. though we have more gold in the "banks than we have notes in circulation...yet. gold is, in practice if not in theory.;, at a substantial premium in notes! .:.N'oth'-' ing ran show better than this, the highly. artificial character of the position. s" ■,' Currency and Prices. v.■'■'.-, Under these circumstances it may"-he well for us to give every attention to the conclusion arrived at in the final.-report of the- committee on currency and foreign exchanges after the war. "We"-'have found nothing in the experiences of 'the war to falsTy the lessons of previous- exI perience, that the adoption of a currency I not convertible at will into gold or other - exportable coin is likely in practiced load i to over issue, and so to destroy the ? -me,;i.; I sure of exchangeable value! and cause!: a I general rise in prices and an adverse move- ' ment in the fore : en exchanges." '%*' : .'.'■'; | Had New Zealand, at the l imp.''.'.-when I the American exchange on London .'became I free, about the middle of last year., it hen . put. her exchange on London on -a-,cold basis, we should probably have maintained an approximately par exchange with New | York, and a favourable exchange oii-.Lbn I don similar to tint which Amerie'aVi.lia! I since maintained. This would hav.e;arte<; ! as a gate, shutt'ne out from N'ew' v Zea: . ' land the flood of Brit ; sh paper inflation The troubles that have arisen in Now;Zr-,i' ■ land an a result of the rontipued-!'a.nr , ' heavy growth of the cost of living" : general increase in prices dunig ihe.li?. nine months, would have been. larpeh J avoided. The railway and public./pervici i I agitat'ons might never have reached; at i I acute stage. The increase in A.ucklanc , I tramway fares even might have, bee) . ; avoided. On the other hand, it ''m.ay- : , I admitted, an abnormal and fluctuating :ex • i change on London would have .been' V- ! great business inconvenience, at has ho.ei ,' the actual exchange with New York ' 01, the more serious as -ifTcrtinp, i far'Vff f volume of conimei-ee. It is rl^vih*frl I howevp'. vl-rthcr the advantage even ''« . ; a ftendr exchange on London ha« c"" 1 ] ' pen sated fullv for the serious hardship 1 and inconveniences resulting from th n ' post-war increase in prices, and th I necessity- of having hao to make man a I economic adjustments which may soc i have to be readjusted or removed again. ——■ -jjjjjjjaemßjasm