DEPRECIATION THEORY.

New Zealand Herald, Volume LXIX, Issue 21098, 4 February 1932, Page 11

DEPRECIATION THEORY.

RISKING UNKNOWN DANGERS;

LOWER COSTS THE REMEDY. INFLATION OF LAND VALUES. The opinion that it would be better for New Zealand to rely upon direct reduction of costs, which is the sound and honest procedure, than to attempt to raise the returns to primary producers by exchange depreciation, was expressed by a prominent, industrialist in a statement published in the Evening Post. He said the fallacy of the inflationist case is the assumption that there is no practicable alternative to their proposals, and disregard of the fact that, in introducing inflation, incidental drawbacks of a serious nature may also be brought into effect, so that on balance the community might be the loser and not the gainer. "Initially it would seem that exchange depreciation would have the effect of lightening the burden of the farmer by sustaining his gross returns in New Zealand currency, as compared with his outgoings," he continued. "This has in fact been carried to a considerable extent already. Whereas a year or so ago, when our currency and sterling were at gold parity, £IOO in New Zealand would purchase about 486 dollars in New York, row it takes about £llO in New Zealand to purchase under 325 dollars in New York. No Limit to Depreciation.

"This is equivalent to a currency depreciation of about 33 per cent., yet it does not satisfy (he fortunate recipients, who call out for further depreciation, and will continue to do so, as long as there is a chance of being heard. There is no limit, short of absolute worthlessness, that this may not bring our currency to. Controlled inflation' is a plaything of the study. It is not feasible in practice, and has never been kept in effectual control when once inaugurated. Final control resides with politicians, who are influenced by the pressure of powerful sectional interests. In this way currency values, when inflation is once admitted aB a policy, become the plaything of politics, and shift with every movement of the political centre of gravity. The influences dominant, to-day in politics are such that if once inflation is admitted as a policy it will go further and further. This turns business into a gamble on exchange movements, and paralyses legitimate industry and commerce to the profit of currency speculators. All through inflation tends to grow, because its immediate beneficial effects wear off to a considerable extent, owing to the incidental rise in the cost of living forcing up the price of goods and services. Situation of Farmers. "Until much more information is released as to the actual position of the farmers it cannot be held proved that such a remedy is desirable. There are doubtless many farmers who will come through without any such bonus at all, while at the other end there must be many in so desperate a plight that no reasonable policy could save them; and in between there must be some who will stand or fall, individually, in accordance with the measure of assistance afforded them. How large is this group? No evidence has been made public by inflationists on this point. It is unnecessary to give a bonus to those who do not need it, and useless to give it to those who are too far gone. What are the facts as to the others ? Until this is known surely the policy is a leap in the dark. An exchange bonus is of a totally undiscriminating character, both in its benefits and its injuries. It falls with equal weight on the just and the unjust. Aftermath of Speculation.

"As regards the farming costs that are cut of step with values, the largest of these is interest, including interest on capital that is now fictitious and nonexistent, and some of which never existed except in the optimism of farmers and their undiscriminating financial backers. It a farmer is paying interest on a farm nominally worth £IO,OOO. but of which the true value now is more like £SOOO, then half these costs are fictitious, and the proper course is to leave it to ' the farmer and his mortgagees, bank, and stock agency to adjust the matter and write, off the water in the capital. - It is a matter for voluntary or forced adjustment among the parties concerned, who presumably entered into their contracts with their eyes open as to future possibilities. The depreciation clamour is simply an attempt by the farmer and his financier backers to avoid the loss due to over-capitalisation of land values, the result of their own speculative mania, greed of gain, and unwise extensions of credit in the past. It is notabie that the principal platform advocate of currency depreciation is an Australian university professor, on the paid staff of one of the largest banks, who has been conducting propaganda campaigns here in the last year as the avowed agent of this bank. Adjustment of Land Values. "The writing-down process would involve some failures. That is inevitable, as farmers who could barely. struggle along at the peak of prices—there are probably not a great many—could hardly expect to carry on in a depression without a drastic adjustment of land values. The process would involve little necessary loss of production. Some marginal land would go out of cultivation. It is doubtful whether such land has ever paid, but there would not be much, and there is no reason why production should not be carried on much as usual during a readjustment of values among the interested parties. Why should the community have to bear the burden of fictitious land values ? That is a matter for the parties themselves. One of our most urgent needs is to get land values into touch with average export price productivity, because we depend, and will continue to depend, on the market in Britain, expressed in sterling. Exchange depreciation can only at best delay this process, to the profit of financial institutions involved. Once they get clear they will suddenly cease to notice the benefits involved in depreciating our currency. "If the interest burden were reduced by direct adjustments among those involved, and other costs were reduced by cutting out the effects of our burdensome industrial arbitration system, then there would be no need for an exchange bonus to help the primary industries round the corner. The burden of proof is at all events on the advocates of depreciation to show the contrary."