FEAR OF DEFLATION

NZ Truth, Issue 1017, 23 May 1925, Page 4

FEAR OF DEFLATION

WILL GOLD EXPAND CREDIT AND PRICES, OR ? The partial return to the gold basis recalls the fact that m August of last year "Truth" editorially observed: "Deflation, with its crucifixion of the debtor, has some appalling prospects. And stabilisation, with its idea of fair play between debtor and creditor, is attractive. But how? Can the stabilisers find a way? And, after all, is not pur financial fate being dictated m the Old World?"

„ No light on the subject was provided by Parliament, which was m session when those' words were written. In fact, with the exception of Mr. F. J. Rolleston, no one m Parliament seemed to have any ideas on the gold basis. From Ministerial and banking circles no light was shed. "Truth" was clearly right m its deduction that the" older countries were even then settling the question, and that New Zealand would simply join the procession at the appointed time.

As to Rolleston, one sentence of his immediately comes back to memory. New Zealand, he 'said, must "get rid of the war debt, because, as deflation proceeds and the return to the gold standard approaches, the burden of the war debt is gradually getting greater and greater." Rolleston's concluding words refer to what "Truth" summed up as "the crucifixion qf the debtor."

And now, after the lapse of more than half-a-year, what change has the prospect undergone? Now that gold is again proclaimed to be the basis of international (not domestic) currency, how do the advocates of its partial reinstatement reply to the deflation argument ? »

If the Rt. Hon. R. McKenna, Chairman of the Midland Bank, be accepted as their spokesman, it is clear that their reply is a challenge to the whole assumption that the gold basis mean's dearer money and lower prices; or that it means a degree of deflation disastrous to the debtor. Mr. McKenna, m fact, abhors both deflation and inflation; and m effect regards himself (though a gold basis advocate) as being as good a stabiliser as the champions of "a managed currency."

The idea that the gold basis means falling prices rests upon the assumption that a currency based on gold will mean a contraction of credit, because there will not be enough gold to meet the existing credit-demand; and that therefore money will be inflated while goods and services will be deflated; m 'other words, money will be up, goods and services will be down.

' , Mr. McKerma . is against this assumption at the outset, for he declares —speaking with a banker-economist's claim to special knowledge of the facts — that there WILL be enough gold;, that credit will 'not contract but will EXPAND; that prices and wages will therefore' rise, giving greater purchasing power and prosperity.

The argument appears to pivot on whether the available gold will be sufficient (or not) to facilitate the expanding credit (expanding- not too quickly) required by prosperous production. The sufficiency of gold, be it noted, will very largely depend on the success of the expedient whereby gold is to be reserved as a medium for bank's and nations, not for individuals. Can gold be made an international and banking chattel without falling- into the hands of hoarders?

Only a f aw months ago Sir Harold B,eauchamp remarfted that "the gold held m New Zealand was about 6% or 7 millions, and if it were brought into circulation it could quickly filter from the Dominion." , -

To prevent any such filtration, the authorities expressly announce that gold is not to r be brought into popular us?. But will Britain be able, by any expedient, to prevent undue leakage of the yellow metal into a gold-sink like

India? The whole advocacy of the gold basis, as a factor to expand credit, appears to rest upon control of circulation.

Whether people adhere to the McKenna notion of what the limited gold basis means, or whether they accept the idea that it is inseparable from a deflation disastrous to debtors, is a matter of personal inclination. Neither version can be proved m advance. Economics is by no means an exact service; and the proof of the pudding is m the eating. Experience alone will teach.

But it can be taken for granted that the financial leaders of Britain did not launch tha Empire into the new gold policy unless they were honestly convinced that it does not mean sacrificing the debtor, to the creditor, or sacrificing the Empire on the altar of ■ the United States' accumulated gold.

Those critics who hold that "the gold basis means a deliberate deflation,that is nothing less than the robbery of the debtor" (the debtor, m the case of Government bonds, being the nation itself), and who declare that the gold basis makes a present of millions to big contractors (examples: the Sydney harbor bridge builders, the WaihiTauranga railway . constructors, the contractors for Arapuni, etc.), will point to the comparative failure of the New Zealand'loan as evidence of tightening money, supporting their argument.

The reply from the McKenna side will no doubt be that ths New Zealand loan — though vital to us! — is only a drop m the bucket of the world's finance; and that, when tested over a long period, the gold basis will not prove to be harshly deflationist.

Clearly it is not a moment for extravagant statements, but for watching what effects follow the innovation, and for observing closely the movements of prices, particularly where they move m. sympathy with the presence or absence of credit rather than m conformity with the ordinary supply and demand of commodities.

Improved credit would affect the wool market favorably to New Zealand, yet it might not help this country m commodities m which there is^purely economic competition. But all business would benefit when improved credit came to be reflected m more employment and higher purchasing power.

The best buyer is the man who has the least to buy with. Giva him a little more, and . then Avatch trade boom! The small man's" spending power makes the bigger man's wealth. Reciprocity ensues when that wealth, legitimately re-invested, reduces prices for the less wealthy community.

In exchange, New Zealand will derive advantages. Gold, without being rigid, will remove the extremes of exchange. The shipment of gold may not bi. as cheap as some people think, but it has cut recent exchange rates, and will give New Zealand a means (other than importing) to get back the exportar's credit balances oversea.

~lt is now apparent that for years past British financial policy mas aimed consistently at raising: the pound to a point at which a return could be made to the gold standard. To force up the currency, credit has admittedly been restricted m Britain, causing deflation, stagnation, "doles," etc. Thus, according to the McKehna view, the worst bogs of deflation have already been passed through. -

Without such a hard preliminary training:, the gold policy would have had to be deferred. As it is, political as well as economic events have hastened it. When the Republican President and the stable British Conservative Government took office about the same time, "Truth" emphasised that great results must flow from this stabilising of political power on both sides of the Atlantic. One. of those results is the return to the gold basis.