The Southland Times SATURDAY, OCTOBER 7, 1939. The Way Is Cleared For Inflation

Southland Times, Issue 23942, 7 October 1939, Page 4

The Southland Times SATURDAY, OCTOBER 7, 1939. The Way Is Cleared For Inflation

MR NASH has admitted that the Reserve Bank Amendment Bill would have been introduced this session regardless of the outbreak >of war, and he should therefore be prepared for criticism of the measure on a peace-time basis. The Bill is the most dangerous piece of legislation that the Government has brought down during the whole of its career. It clears the way for unlimited inflation and there is, unhappily, strong reason to fear that it will be used by the Government in such a way as to inflict grave damage on the financial structure of the Dominion. In his standard work on Public Finance the British Labour economist, Dr Hugh Dalton, writes: “From the revenue point of view, resort to the printing press is often the line of least resistance for an embarrassed government, which dare not cut down expenditure or take the steps necessary to pay its way by taxing straightforwardly or ordering sufficiently high rates of interest to attract an adequate supply of new savings.” Those are precisely the circumstances in which the present Bill has been introduced. The Government has over-taxed, over-spent and wasted the country’s accumulated resources; and now—because it will not reduce expenditure or increase interest rates and cannot levy any further substantial taxation —it is going to follow the last resort of monetary inflation. Up to the present the issue of credit from the Reserve Bank has been limited by the statutory requirement that the bank must hold a minimum reserve, in gold and sterling exchange, of not less than 25 per cent, of the aggregate amount of its notes in circulation and demand liabilities. The amount of new money that the bank can create has thus been limited by its holdings of gold and sterling exchange; and, under the existing Act, the limitation can only be removed if the board of directors requests the Minister of Finance, in writing, to permit it. This safeguard is swept away by the Reserve Bank Amendment Bill. The Minister of Finance is given complete authority over the board and may vary or suspend the minimum reserve requirement just as he wishes. It is, apparently, not enough for the Government to have a majority of its own nominees on the board, as it has today; nothing less than complete and absolute control will satisfy it. The Reserve Bank has been very close to the limit of its lending powers since last January; once this Bill is passed the Government (for the bank will become in effect a Government department) will be free to issue money in any quantity, without the backing of productive effort or anything else. £1,750,000 A Month

Is there any reason to believe that the Government will use this power with restraint? There is not. Its financial policy during the last four years has neither moderation nor wisdom. After a reckless career of taxing, spending and borrowing, it has moved in recent months from one expedient to another. In the last Budget Statement the pretence was made that issues of credit from the Reserve Bank were to be restricted. “In present circumstances, when sterling funds were short and had to be restricted,” said the Budget, “that type of finance . . . had obvious limitations during the current year. In fact it must be clear to anyone . . . that we were not suffering from a shortage of money in New Zealand, but from a shortage of what money would buy.” This statement was made at the beginning of August. In the two months of August and September the bank’s advances to the Government, other than for the Marketing Department, increased by no less than £3,500,000. If, in spite of this undertaking to moderate its demands, the Government has been drawing on the bank for £1,750,000 a month, at what rate may it be expected to issue money when all restrictions are lifted? The Government may gain a temporary respite from its difficulties —until they recur in a much more violent form —but it will be a respite for which the people of New Zealand will pay dearly. Wageearners should not be gulled into believing that the unlimited issue of credit, however attractive it may be made to sound, will operate for their benefit. “Inflation,” writes the eminent Labour economist quoted above, “causes a redistribution of income in favour of business men, who secure large windfall profits, at the expense of wage-earners and, still more, at the expense of the recipients of fixed money incomes ....

The comparative acquiescence of public opinion in taxation by inflation is a measure of public ignorance of economic principles

and of the inability of wageearners, and still more of the recipients of fixed money incomes, to safeguard their economic interests.” ' Prices have risen markedly in the last two years. From now on, if the Government follows the policy to which this Bill commits it, the rise will be steeper and more rapid than the Dominion has ever known. And the experiment will end, as every other experiment in inflation has ended, in financial disaster.