NEW ZEALAND’S POLICY

Southland Times, Issue 23737, 8 February 1939, Page 16

NEW ZEALAND’S POLICY

EFFECTS DISCUSSED IMPORTANCE OF SECURITY AND STABILITY Effects of, and possibilities arising from, the economic and monetary policy being pursued in New Zealand a't present are reviewed in a bulletin prepared by the Canterbury Chamber of Commerce, in consultation "with the Faculty of Economics of Canterbury University College. Emphasis is laid on the fundamental importance of the stability and security of money and capital. This, it is stated, can be restored and maintained only if the Government and the people live Within their respective incomes. This is the essence of all sound finance. A brief survey is made of economic conditions in New‘Zealand after the depression and of legislative changes introduced by the Labour Goverriment in 1936 and subsequently. The general effect of the changes, the bulletin states, was to increase greatly the Government control of industry and hence the restriction of production and trade that accompanies such control, to expand greatly public expenditure both from revenue and from loan money, and to increase the burden of taxation on productive industry and on the community. Moreover, most of the increased expenditure was unproductive in the commercial sense, and the productive section of the community was called upon to bear the rising burden in order to support the increased expenditure on the unproductive section. In addition every indication was given that the Government intended to continue and expand this policy. In the circumstances, it was not surprising that some capital took alarm and drained away tp countries where the security and the prospects for investment appeared much more attractive. INCOME CONTRACTION Referring to developments in 1936, the bulletin states that the decline of about 10 per cent, in export receipts in that year found the country in no condition to meet a serious contraction of income. Public expenditure had been pushed to the limit of income and the Government was committed to continue expansion on tlje same lines. In addition, the Social Security Act, passed in the 1938 session provided for further heavy increases in public expenditure. The provisions for financing this expenditure and the explanations given were unconvincing and, after the Government had been returned at the midOctober elections, the increased concern about the Dominion’s stability~and future found expression in an accelerated export of capital. UNCERTAINTY INCREASED After referring to the growing advances of the Reserve Bank to the Government for purposes other than dairy marketing, the bulletin proceeds to deal with the steps taken to impose exchange control. “The uncertainty and insecurity and the difficulties of industry under the Government’s policy have been increased rather than diminished by exchange and trade control,” the bulletin states. “The imposition of this control is itself in effect an expression of the Government’s own fears regarding the position to which its policy has led the Dominion. “Had there been no control and no rationing of exchange,. some exchange depreciation appeared probable, for the scarcity of sterling funds would cause New Zealand prices of those funds to rise. Such depreciation would have shown the effects of the flight of capital and of the inflation that has occurred. Now the pegging of the rate of exchange prevents' it from showing the effects of any further depreciation that may occur. But the pegging of the rate, while it is a safeguard against, external depreciation, is also a source of danger of internal depreciation, for behind the pegged rate and under the cloak of control, the purchasing power of the ‘Dominion’s money might- continue to fall. This would be the inevitable result if inflation were to continue. LIVING STANDARDS “When inflation occurs the amount of money increases in relation to the volume of goods and services bought with the money. There is then more money a unit of goods and services, and, since the chief purpose of money is to buy, the prices of these goods and services rise. and each unit of money will purchase less than before. Hence the purchasing power of income declines and, though the community may seem richer in money income, that income will buy less and the standard of living falls in consequence. This has been, the case in practically every instance of inflation. It has usually been the case where currencies and exchanges are subjected to official control, or blocked, as in New Zealand today. “If the- Government continues to borrow from the Reserve Bank while the bank’s liquid -resources remain dangerously low, it can do so only by the creation of additional credit. This means the creation of additional money to spend, unbalanced by similar increases of goods and services to be bought. In these conditions, prices must inevitably rise, or, if price control could be effectively enforced, goods would be scarcer, and money would buy less than'before. Hence in either case the purchasing power of money and the standard of living would fall. In addition the restriction of imports must result in scarcity, higher prices, and a decline in the purchasing power of money. “These are the direct results which might follow from the control imposed and the inflationary policy that caused it, if that policy were to continue. Money is primarily a medium of exchange and a measure of values. The basis of real value lies always in marketable products and is increased only as the production of those marketable products increases. It cannot be increased, and may be seriously diminish' ed, by monetary manipulation. MONEY CASTS a VEIL “A policv which aims to increase the general welfare of the Dominion should, therefore, see past the veil which money casts over the reality of economic transactions, and should realize that money must be equated, as it will be if left free from ill-advised manipulation, to the marketable production on which its purchasing power depends. The surest method of increasing this production and promoting rising standards of living is to restore the profitability and, therefore, the volume of value of production. Here farm production, which is the major part of total New Zealand production, provides a ready test. It has been a general rule throughout New Zealand history, which no policy is likely to change appreciably, that, when the farmers are prosperous, the whole country is prosperous; when the farmers are depressed, all others become depressed.