The Lesson Of The London Funds

Southland Times, Issue 23674, 24 November 1938, Page 4

The Lesson Of The London Funds

We printed yesterday, in adjacent columns, the opinions of two economists on the marked fall in the Dominion’s London funds that has taken place during the last two years. In an address at Christchurch Professor A. H. Tocker spoke at greater length than did Professor T. Hytten in an interview at Auckland; but on all essential points, the causes of the fall and its consequences, the two economists were substantially in agreement. They agreed, for instance, that although the funds are (in Professor Hytten’s words) “rapidly reaching a dangerously low level”, the position will not immediately become acute since the heavier export returns of the next few months will outbalance the withdrawals and provide some temporary relief. “I don’t think the situation is nearly as desperate as many people say,” said Professor Tocker. “. . . We

can get away with it again this time without 'taking drastic steps.” But while his own and Professor Hytten’s remarks were not in any sense alarmist, they left no doubt that if the Government continues its policy of internal credit expansion, or inflation, there will be a problem to be faced in the not-too-distant future —probably in the latter part of 1939, almost certainly by the end of 1940. The fall in London funds is in part the result of high export prices and prosperous conditions stimulating the demand for imports, and in part the result of a repatriation of British capital and a transference overseas of New Zealand capital. But the main influence causing an abnormal fall in. the funds has been heavy Government expenditure of borrowed or “created” money, which has set up an abnormal demand for imports. Professor Tocker said it had been found that money put into the hands of the people, after circulating internally twice, left the country the third time (i.e., was spent on imported goods of one kind or another). In the case of the £8,300,000 that the Government had taken from the Reserve Bank (“this was undoubtedly inflation”), the ultimate effect, according to Professor Tocker, would be that the bank’s non-liquid assets in the shape of Government bonds in New Zealand were increased by £8,300,000 while the bank’s liquid assets, in the shape of London funds, were diminished. It should be clear enough that this process of creating nonliquid assets in New Zealand and demolishing liquid assets in London cannot continue unchecked. Professor Tocker mentioned three methods of counteracting the fall in overseas assets: a rise in the exchange rate, control of imports, or internal borrowing to cancel the effects of inflation. Of the three, he believed the loan was to be preferred; “but,” he concluded, “the country will have to live within its income.” Professor Hytten was conveying the same warning when he said that the present position of the London funds was “at least symptomatic” of a partially unbalanced economy. More than any other country in the world New Zealand is dependent on overseas trade—it sells overseas and it buys overseas. In the long run, what it can buy is limited by what it can sell; its power to consume is limited by its power to produce, and the stimulation of consumption by artificial means—the creation of money—is foredoomed to failure because it results only in a depreciation of the value of money.