DANGERS OF INFLATION

Taranaki Daily News, 14 October 1930, Page 7

DANGERS OF INFLATION

HIGHER WAGES FALLACY. ARTIFICIAL PROSPERITY. , A proposal that wages should be increased rather than reduced m order to improve the purchasing power of the people and to ’ bring about a ' greater consumption of locally manufactured goods was submitted to the Government X few days ago by a deputation representing all sections of the Labour movement. No explanation was offered\as to the source from which, the increase in wages was to be drawn. Presumably, the intention was that all employers should obtain sufficient credit from the banks to pay the extra amount for the first few weeks, on the representation t.liat out of the expected expansion of trade and industry they would derive sufficient profits to repay the loan. In fact, the deputation asked for a small dose of' inflflation, with the implication that a single injection would be enough. “Advocates of inflation argue that the extension of credit would increase all spending power, thus creating a demand for goods, and causing an increase in the value of employment. It is essential that this argument should be carefully examined,” says Dr. D. B. Copland, Professor of Commerce in the University of Melbourne, in his recently published book on credit and currency controls. “An increase in credit certainly increases consumers’ outlay on goods. The increased credit is passed on from the producer, who employs more workers. There can be little doubt that the immediate effect is to expand employment, but the expansion of consumers’ outlay, measured in money, is more rapid than the expansion of production. Hence there is a rise in prices and costs, which prevents the expansion of production keeping pace with the expansion of credit.

“It is therefore a fallacy to assume that the inflation of credit will be accompanied by a corresponding increase in production. If this were so, no increase in prices would take place. Both experience and theory • show that the increase in prices is inevitable because production does not keep pace with the new credit created. “To maintain the volume of employment, fresh doses of credit are necessary, and each dose is followed by a rise in prices and costs. The credit created in production is transformed into spending power in the hands of producers and wage-earners. This provides a market for the sale of all kinds of goods, stimulating production in other branches of industry. There is then a further demand for credit, and the original increase in the supply of credit stimulates a. demand for further credit. So the process goes on in a vicious circle. The drug once taken must be consumed in ever-increasing quantities if vitality is to be sustained. “But the drug has an attenuating influence. Undue confidence is stimulated, attention is directed from the onerous task of reducing costs, management stagnates and all kinds of extravagances are encouraged. Stocks of some commodities accumulate capitalisation if industry is extended and additional borrowing/is necessary. The dbmand for currency increases as prices rise and more notes have to be printed. An inflation of the note issue is required to support the successive increases in credit. “As long as new supplies of credit can be issued, the process of inflation can be sustained. Eventually some producers are unable to meet their commitments and the first breach in the process occurs. Liquidation commences and rapidly spreads, bringing down all values and forcing a drastic restriction of credit. The collapse is far more serious than the disturbances that would have been associated with the reconstruction necessary to reduce costs at the outset.

“Inflation increases the money value of iueome, but lowers its real value. Its danger lies in the success with which it first obscures the loss of real income and creates the illusion of prosperity. Its failure is Apparent only when it has proceeded so far that it is almost impossible to check it without a financial crisis of the first magnitude. The longer it proceeds tin more reluctant the community to impose a check and the greater the ultimate disaster. The advocates of inflation emphasise the immediate effects. They ignore the attenuating influences that force a crisis of much° greater magnitude than that for whieh° they prescribe the medicine of credit expansion. The remedy is much more dangerous than the disease.”