The Daily News THURSDAY, MAY 8, 1930. THE ECONOMIC SITUATION.

Taranaki Daily News, 8 May 1930, Page 10

The Daily News THURSDAY, MAY 8, 1930. THE ECONOMIC SITUATION.

The question that' occurred to most of those who are interested in the rise and fall of the money market when the Bank of England recently made a further reduction in the discount rate was to what extent that move would encourage the advent of cheaper money. It was generally considered that the action of the bank indicated that the flow of gold to London had resulted in a sufficient surplus of funds to justify the freer lending of capital. There were, however, other circumstances that affected the financial and economic situation. Signs were not wanting that the fall in the general level of wholesale commodity prices, which had amounted to 12 per cent, during the past twelve months,, was slowing down, and that greater stability,- if not a rise/ was in prospect for producers. One reason given for anticipating a. firinor tendency, in the Old County- was that eooperative efforts ‘ to curtail.Ure

production of commodities lately in excess supply had begun. to bear fruit. It is, of course, generally known that the natural effect of a fall in price levels is to cheek production, since the less efficient feel the pressure of the price factor fairly soon and are forced to curtail their outgoings. 'That it would be useless to expect the general price fall to be checked or the general price level to be stabilised by international action is . obvious from the nature of the problem. The world is divided into agricultural and industrial countries, and as long as there is competition between them the price factor must operate, values falling in times of plenty and rising in times of scarcity. Since April, 1925, the decline in prices in the Motherland has amounted to about'2s per cent., of which about 24 per cent, occurred in the last year—obviously due to excess of supply over demand. According to one school of thought monetary causes are mainly, if not entirely, responsible for . this state of affairs, which is thought to be an unrelieved economic nuisance that has brought no advantage except to the speculator. Supporters of this theory point out that just as an arbitrary increase in the volume of a country’s currency has a tendency t'o raise prices, so likewise a decrease tends to produce a fall. The present generation, it is contended, has good reason to believe in this theory, for, according to Professor Cassel, it has seen prices m some countries advance to astronomical figures through the liberal misuse of the printing press for the manufacture of currency,. • Prices- rose persistently because purchasing power was manufactured much more quickly than purchasable things. Throughout the ages many have wrestled with the problem of fluctuations in the price level, but none has succeeded. Art a matter of fact it is by no means certain that the world really desires a stable level of prices, as in that case there would be the danger of stagnation. Opinions differ as to whether the return to the gold standard affected the movement in prices. Unfortunately since the return to. the gold standard its working has not been, so smooth as it might have been. America, with less than one tenth of the wood’s population, has had the exclusive use. of one half of flie world’s stock of gold, and, being unused to conceptions of international finance, has used that gold largely for its . own domestic benefit. Other countries had, therefore, to struggle .along with less gold than they really needed for the smooth working of their economy. If, however, there had been no increase in " commodities there would have been no increase in the value of gold, since the wherewithal to buy the gold at its higher commodity value would have been lacking. The consequenefe is that the increase in the supply of commodities is rq--1 sponsible for the decline in tile..: general price level since the re-: turn to the gold standard. It is bard upon the people of New Zealand, especially the producers, that the Australian pound fell to such an exceptionally low level that the associated Australian banks in London made heavy alterations' in the buying, selling and cable transfer rates for drafts. This big movement afforded not only an indication- of the serious nature of the exchange situation, but'it naturally affected New Zea-/ land adversely. It may encourage foreign lending to the Commonwealth, but it is certain investors will meanwhile earn a higher rate, of interest on foreign moneys.lent to Australia. No other device but the price factor is capable of adjusting supply to demand or vice versa. The lowering of the Bank of England rate, should it result ;in a recurrence, of cheaper money, may be expected to prove a benefit to New Zealand,-but the great, economic factor must ever be kept in mind.