INFLATION STEPS

Otago Daily Times, Issue 21983, 19 June 1933, Page 9

INFLATION STEPS

WHAT IS THE LIMIT? COMPETING DEPRECIATIONS. The financial editor of the Sydney Morning Herald sees in the legal abandonment of gold by the United States a policy of inflation the future of which is obscure, but the immediate result of which is to aid the American producer, by raising his internal prices; while the suspension of gold clauses in debt contracts will lighten the interest payments of America's foreign debtors. Depreciation of the dollar helps the American, exporter. ' l "It is evident," he writes, that the legal abandonment of the gold standard in the United States is dictated solely by policy and not by the necessity which drove Britain off gold in 1931. America has probably the largest stock of gold in the world, a favourable balance of trade which normally suffices to keep her gold stock replenished, and not enough foreign short-term balances in New York to jeopardise the position of the dollar in international exchange. So that there were three quite sound reasons why, from an external point of view, she could have remained, at least technically, on gold. "Obviously the freeing of her cuirency from the last bonds of gold is intended largely to correct an internal situation. The continued fall in gold prices has placed farmers and other mortgagees and debtors in America in an almost intolerable position. Many of their debts were contracted at absurdly high rates of interest, and the low prices they have received for their produce have made it increasingly difficult for them to pay what they owe. Freedom from gold will pave the way for the inflation which, in the opinion of many American authorities, can alone stave off an internal crisis.

" The suspension of gold clauses in debt contracts entails a sacrifice; foreign debtors will now be able to pay in paper dollars, or in any other form of legal tender, instead of having to buy gold, frequently at a large premium in their depreciated currencies, and_ pay in that medium. Evidently the gain America expects to accrue from her inflationary programme outweighs any losses she may sustain in .receipts of debt payments. Besides, if the dollar falls to any great extent —and the fall will depend on the amount of inflation —countries _ with already depreciated currencies will be deprived of much of the premium on exports to America which have been sheltering their industries during the past j-car or so. England falls into this category. The American exporter will benefit, providing the countries to which he exports do not take further defensive measures to prevent undue appreciation of their currencies in terms of dollars. " One of the first effects of inflation is usually a mild boom on commodity and security markets. Where the people distrust their currency they hasten to put their money into concrete things, anticipating a further fall in its value. A mild boom has certainly begun in America, but it would be unwise'to attribute it solely to distrust of money. Time will "show whether the American programme will usher in the gradual rise in prices which economists believe is most beneficial; it will also show whether that programme will have any permanent effect on world prices. All that is apparent at the moment is that the American producer will be aided and that the foreign debtor will probably find his next interest payment a lighter burden than the last. "It is still difficult to determine what steps President Roosevelt contemplates. There will undoubtedly be inflation, but of what form? New money can be got into circulation mainly in two ways, by increased Government spending and by creating the psychological atmosphere that results in increased private spending. From the confused information available it appears that both methods are being followed. Tremendous loans are to be made to farmers by the issue of bonds which will bo immediately convertible into cash, and by this means one avenue of Government expenditure will be followed. As for private spending, the right atmosphere has already been created, but whether that elusive thing confidence will survive the first spectacular burst of investment remains to be seen."