LEGAL TENDER

New Zealand Times, Volume XXXI, Issue 6769, 17 March 1909, Page 6

LEGAL TENDER

(To the Editor "N.Z, Times.") Sir, —Few proposals can* be mode, atf once more fascinating, more plausible and more fallacious, than that of a State note issue. Its warmest advocates state for it a most attractive case as against our present expedient of borrowing. Here it is in a nutshell: 1 (1) Borrow, and you get a public utility. Owe for it, and pay interest on tho debt. (2) Issue paper and you get> a public utility, don't owe for. it, and pay no interest. If this were th©' sum of <he matter only a fool would oppose a State note issue, but th© mere scanning of propositions so alluringly simple gives rise to an unappeasable, suspicion. . Can the conclusions regarding such a very important question, be thus skimmod from its surface. I believe not, and will endeavour to justify my unbelief. To be hypothetical: The Government is about to make 6, -61,000,000 , railway. Let us suppose that it borrows the money. What does this really mean ? Surely that it acquires private savings to tho tune of a million, thereby enhancing its spending power to precisely that extent. The Government being regarded as the agent, for the community in its collective capacity, it means tliat an addition of a million, has been made to the communities'■ spending power. This is plain to triteness. Next let us suppose that to make its railway the Government puts out .£1,000,000 in pound note currency paper. First, to dispose of a side issue, if its credit is judiciously and honestly expended, there need be no question as to the security Tor the said By tho time the line is finished there will bo a million pound concern as an offset for £1, 000,000 in notes.: Second, to return to the main point, •what is th© economic resultant of such a not© issue? That tho Government has mad© an .effective demand for j 61,000,000 on the production of the country as a whole. With every pound'it. pays for work done to its lino it as good as says to ■ th© recipient: This entitles you to .£1 worth of the products of your fellow citizens' labour. If, prior to the line being started, the labour were fully occupied, labour will be diverted from private to Government employ. In private lines there will be a shortage* of labour and consequent shortage of production. The nett result then will bo that the country, in order to build its railway, will have to curtail its other requirements. In reality the issue of Government paper for -61,000,000 is a tax of, -61,000,000. As regards the - incidence of this taxation there may bo made the following deductions :

Prior to the note issue consumers were credited with, say, ,£17.000.000, this being their acknowledged lein on the sum total of production. Subsequent to tjio note issue production available to meet the accredited demands of consumers has been reduced to .£16,000,000. But the accredited demands are still the some. Hence it follows that purchasing power per .k 1 is reduced and. that every man is mulcted of an amount directly proportionate to his income. State paper is then merely another name for a noexemption income tax, and -as such will hardly commend itself to the growing body who advocate scientific land taxation.

But there' remains to be considered the relation of a S.P.I. to the unemployed. Suppose the Government, In, order to absorb those out of work, issues them paper pound notes in return, say, for road-making, what will be the general result? Unemployed mean depression. Depression means a tiinewhea at their best earnings can hardly ba got to balance liabilities. By issuing State paper the,Government throws ono more liability on the community as a whole, increasing therefore the general tension. Brieflyiput, we may say that at a time when' private credit is coming to a standstill the Government arrogates credit to itself for purposes of road construction. ■ But should the Government find the unemployed occupations the products whereof can be put into immediate circulation, then, of course, while making no demands on the public credit it increases the bona fide demand for commodities and tends to improve the home market.

Finally, the necessity of a maximum of condensation has prevented me from pursuing many implications arising out' of the course of reasoning hero pursued. (There are, for instance, the considerations due to the fact that neither this country ; nor any other is economically self-contained.) At the. same time I do not think that if these implications, were followed out my mam position would be, substantially altered. And that is; that a State paper issue used to produce utilities not put back into circulation is equivalent to a no-exemp-tion income tax. , The question is a vexed one, and hardly to bo, written of with the hope of being final. At the same time it will in a practical way amply require investigation, and it is-to be hoped it will receive it.—X am, etc., v EHXtU'. March 13th, 1909.