A BANK'S WARNING

New Zealand Herald, Volume LXXVI, Issue 23405, 22 July 1939, Page 12

A BANK'S WARNING

The Government has again been warned by the Board of the Reserve Bank of New Zealand against consequences which must follow its expansionist policy if the inflationary tendencies are not checked in time. The board issued a similar, if less detailed, . warning last year, and got .'. no return, except a certain amount of abuse in Parliament, for its pains. Subsequent events, of which Mr. Nash's difficult negotiations in London are a reflection, may have had a sobering effect. The main points made by the board are first, that a direct connection may be traced between the Government's policy and the depletion of New Zealand's sterling resources. That, will not be disputed by anybody who understands the elementary principles of these movements. Next, the bank notes that in spite of the inflationary influences of extensive resort to Reserve Bank credit by the State—including a substantial added amount by way of advances to the Primary Products Marketing Department —internal prices have remained relatively unaffected. But it adds that, with sterling resources so low that further calls on them would reduce the bank's reserves below the statutory limits, "any additional credit expansion would inevitably tend to' cause, sooner or later, a general rise in prices, with a consequent diminution in the value of all savings, wages, salai'ies and pensions." In other words, the board tells the Government and the people that the . financial policy pursued since 1936 has gone as far as it can with i safety. Carried further, it is likely to cause that sky-rocketing of domestic prices which is at once* the sign manual and the most disastrous consequence of uncontrolled inflation. When to this •is added the board's further comment that financing deficits in the Dairy Industry Account by resort to shortterm Reserve Bank credit is directly inflationary, the main points of its serious warning are covered. They are all unanswerable, because they are based on plain facts and established principles..; It .is: for the Government to take* heed, and to consider the alternative suggested—limiting expenditure to income and loans raised in the orthodox way. If it fails to do these things, it will be running a risk of financial chaos i which hardly; bears contemplating.;