CURRENCY INFLATION

Taranaki Daily News, 14 February 1931, Page 17 (Supplement)

CURRENCY INFLATION

MEANING OF THE TERM. DISASTROUS CONSEQUENCES. Necessity, it seems, imposes upon every calling, trade, or profession a language (or jargon) of its own. Very impressive at times is the effect of that language upon those unfamiliar with it. Examples are technical expressions used by nautical and medical men. How easily do they confound the ignorant. Finance also has a language of its own, and it can be very confusing to those who do not understand it. But existing economic conditions of Australia and New Zealand call for a far better acquaintance than formerly with the terminology much in use in discussion of those conditions. The' word repudiation, for instance, should be sufficiently explicit in itself, but it is not always certain that ■many who use it in regard to national affairs are sufficiently aware of its full significance —nor of its serious effects upon the financial mind when loosely used by those in high political places. There is much talk, just now, of inflation in Australia, and many in New Zealand may be wondering exactly what it means. A dictionary might suggest distension of something by air or gas, as a motor tyre or balloon, but that, is not the idea conveyed by the word to the mind of the financier or economist. Nevertheless the processes of inflating a tyre and inflating a currency at some points are identical. What is meant by inflation in Australia is the manufacture of money by the simple i method of printing it—an expedient for meeting temporary national impecuniosities. But inflation has always been followed by intense national impoverishment. It was tried in France in the 18th century with terrific results; it was in operation in Germany as late as 19’22 to the ruination of millions of people, who found themselves penniless as it were overnight. On the. face of every £1 bank note issued in New Zealand will be read the words, “We promise to pay the bearer here on demand one pound sterling.” The words mean exactly what they say. The banks could actually pay over their counter gold for every note presented j and then have some left over. There are 1 other valuables held against these notes, and for the time being bank notes [ are by law to be regarded as good as

gold. But the important fact is that these notes represent a tangible something for which they can be exchanged, and that-something is prized the world over,, and accepted everywhere in exchange for goods or services. Besides gold there are other tangibles which also secure bank notes, but there must be a suffiicency of something behind any issue of notes. With no such backing or insufficient backing as represented by these notes a continuance of issuing them amounts to inflation. A bank note is taken in payment on the understanding that there is always something valuable, tangible and exchangeable of equal value behind it, arid so it is passed from hand to hand without question; but without any backing the bank note is worth no more than its intrinsic value as paper. As the bulk of that something behind it dwindles, so the purchasing power of the note dwindles. Perhaps it will shrink, a shilling to-day or half-a-crown to-morrow, but its buying value will inevitably shrink, until it is possible, as happened in Germany, that a barrowload of bank notes would be necessary to pay for a loaf. Remove that gold, that something solid, behind the bank note or increase the printing of bank notes beyond the bulk of that something, and prices of everything go up. •* It is useless to pay a working man £lOOO a week in notes if £lOOO in notes will pay no more than half a week’s 'board. Money wages at £lOOO a week might allure the unthinking worker, but the real wages are those that have power to meet all necessary • outgoings —and leave something over—no matter whether they are £2 10s, £5 or £lO per week. All depends upon their purchasing power. Once again, printed paper in itself is valueless without something of substance and of value, such as gold, behind it. This the German people very soon discovered when thousands of millions of bank notes were issued daily, and even then could not keep pace with the demand for currency. The mark was depreciated from its former twenty to the English pound to 2% millions and more as the equivalent of £1 sterling. The working people had no means of getting their capital (if any) out of Germany. Indeed, very few other people had that opportunity; they had nothing coming to them from outside their own I country; and so they were compelled to ; take the paper money. Quigley and I Clark, in their illuminating work, “Republican Germany,” described inflation in practice as a period that meant pros-

perity for industry, but it was “wholly artificial, dependent ofi exhaustion of the capital and financial resources of the country, and when the position be-< came critical and the bottom of the sack appeared, the profit-earning capacity of industry swiftly declined.” That was inflation in practice. Its only method of cure is the keeping of expenditure within income; or, as Sir Otto Niemeyer put it, “Balance your /budgets.” There is no other way.