FEDERAL CABINET RECAST.

Timaru Herald, Volume CXXXIV, Issue 18817, 4 March 1931, Page 9

FEDERAL CABINET RECAST.

Little Change in Personnel. IJOJG SUPPORTERS DROPPED. UnitvU Pres* Association—By Electric Telegraph—Copyright (Received March 3, 7.30 p.m,) CANBERRA, March 3. The Prime Minister announced the reallocation of Federal portfolios today. Those Ministers who survived the ballot yesterday, occupy their original posts, and the new Ministers hold either minor or assistant Ministerial positions. Mr McNeill succeeds Mr F. Anstey as Minister of Health, and Mr Chifley is Minister of Defence in succession to Senator Daley. The New Ministry. The new Ministry is as follows: Prime Minister and Minister of External Affairs, and Minister of Industry—Mr J. H. Scullin. Federal Treasurer—Mr E. G. Theodore. Vice-president of the Executive Council and Leader of the Government in the Senate —Senator John Barnes. Minister of Trade and Customs.—Mr F. M. Forde. Attorney-General.—Mr F. Brennan. Postmaster-General and Minister of Works and Railways—Mr A. E. Green. Minister of Home Affairs—Mr A. Blakeley. Minister of Health and Repatriation— Mr John McNeill. Minister of Defence —Mr J. B. Ch’fley. Minister of Markets and Transportr— Mr Parker Maloney. Assistant Minister of Works and Railways—Senator Dooley. Assistant Minister of Industry—Mr F. J. Holloway. Assistant Minister of Transport.—Mr C. E. Culley. NEW MINISTRY CHALLENGED. NO-CONFIDENCE MOTION PROPOSED. United Press Association—By Electric Tel egraph—Copyright (Received March 4, 1.25 a.m.) CANBERRA, March 3. A meeting of Nationalist members of Parliament to-day decided to launch a no-confidence motion on Friday. The House of Representatives reassembles to-morrow. SIGNIFICANCE OF VOTING. 6CULLIN-THEODORE TRIUMPH. United Press Association—By Electric Telegraph—Copyright CANBERRA, March 3. The result of the ballot for portfolios is a victory for the ScullinTheodore section of the party, and an overwhelming defeat of the faction which favoured the repudiation policy of Mr Lang. Mr Beasley was nominated for the leadership of the Party, but received only five votes. The caucus re-elected Mr Makin as Speaker of the House of Representatives. The caucus agreed “that as a first step to give effect to the Government’s financial proposals, a Bill should be introduced for the purpose of creating a fiduciary note issue of £18,000,000.” This resolution signifies the endorsement of Mr Theodore’s financial proposals. Mr Scullin, who was re-elected leader of the party, will allot the portfolios to-day. “The Daily Telegraph,” commenting on the new Federal Cabinet, says: “It represents a choice between two evils, favouring Mr Theodore’s inflation as against Mr Lang’s suggestion to default. The ballot also means the repudiation of the Lang, Graves and Garden factions in the attempt to secure the domination of the Federal Labour Party by the State Australian Labour Party. The new Government also represents the caucus’s considered rejection of the Lyons plans, the Melbourne agreement, the three years plan, and all other devices designed for rehabilitation based upon economy, balancing of the Budgets and other sane measures for the restoration of prosperity and the elimination of unemployment. The country, however, will be unwilling to accept the inflation key plank of Mr Scullin’s second Ministry, which is doomed to be short lived.” MR SCULUN’S FINANCIAL POLICY. CRITICAL EXAMINATION BY ACTUARY. An interesting article on the financial policy of the Commonwealth Government was recently published in the “Sydney Morning Herald” from the pen of Mr A. T. Traversi, F.1.A., F.C.A.S., formerly Government Actuary in New Zealand. Mr Traversi wrote as follows: In his recent speech at Ashfield Mr Bcullin was reported as having said: “Many suggestions have been made in the present situation. My answer is that neither deflation nor inflation is the remedy. The remedy in my judgment as I see it is to aim at restoration and stabilisation. . . . Let us examine this gospel of reduction. . . . Fixed income would benefit but property would decline. So property owners would suffer, while bondholders would benefit. Wage-earners on full-time would benefit by lower prices.” Mr Scullin proceeded to criticise Inflation. It seems from other evidence that

Mr Scullin means by “restoration and. stabilisation” the raising of internal prices to, and maintaining them, at some past level, and it is to be inferred that he is actually under the impression that a process of internal deflation is now going on in Australia. This inference is borne out by the speeches of others, notably Mr Theodore. As the matter is of such great importance to Australia, and as Mr Scullin himself has invited suggestions, it may be worth while to indicate, purely from the economic point oi view, some facts not mentioned by him, namely: (1) Australia is inflating, not deflating, as Mr Scullin seems to infer. Her gold reserves are falling relatively and absolutely, and her exchanges rising. These are the two most universally recognised symptoms, or rather proofs, of inflation. (2) The growing inflation in Australia is the result of an external deflation which is absolutely beyond our power to remedj*. The position can be illustrated by the mechanical case of a balloon comfortably filled with gas, which tends to burst if the air outside is sufficiently reduced in pressure, i.e., external deflation produces internal inflation. Further inflation is no remedv (3) It seems to be quite as common as it is superficial, to assume that a fall in internal prices necessarily means internal deflation. This is quite erroneous. A fall in internal prices may coexist with a rapid internal inflation; and this is actually the case now in Australia. (4) The position may be illustrated by some banking figures. Without desiring to limit the term “credit,” it has been taken for the purpose of this article that the amount of bank deposits, plus the note issue, gives a sufficient indication of the movement in the credit superstructure. Accordingly it is found that at December, 1923, the Australian position was: Credit £405,000,000, gold £48,643,000, or £8,33 credit for every sovereign held; whereas at September, 1930, the position was: Credit £347,800,000, gold £20,176,900, or £17.23 credit per sovereign held. In other words, bank deposits and notes, forming the principal credit superstructure or principal liability of the banks, have practically doubled relatively to gold, and this despite the fact that the gold is only retained here by the penalty of a high exchange rate against Australia. At the present moment the position seems . to be even worse. Credit Already Inflated. ~ (5) The facts in (4) show that the Australian internal credit superstructure has progressed from what might be termed a normal position to a high degree of inflation, and yet Mr Scullin is proposing to cure “deflation.” (6) For the special benefit of those who object to the gold standard, the matter might be put in another form by regarding all internal prices as being based upon our income from exports, relegating gold to the position of a mere insurance against a shortage in such income. In this it is also cletu that if our export income has fallen faster than our internal prices, we are in a state of increased inflation; and that is actually the case. (7) The seeming paradox of internal inflation accompanied by a fall in internal prices is due to the fact that inflation can occur through contraction in the basis quite as well as through an expansion in the credit superstructure. In the former case it can easily be accompanied by falling prices. How erroneous then to regard falling internal prices as necessary evidence of internal deflation. (8) Harking back to the figures in illustration (4) above, it will be noted that when the position fell from (a) Ci edit £405,000,000, gold £48,643,000, to (b) credit £347,800,000, gold £20,176,900, accompanied by a fall in prices, the proposal of Mr Scullin “restoration and stabilisation” would involve increasing the basis. This might be restoration of internal prices but it would be a disastrous acceleration of the already increasing inflation. As all economists know, the additional bad money, by Gresham's law, would drive out the good, so that the basis of gold would completely vanish; or else the exchanges would go disastrously against us. What Check? (9) In short, “restoration” of prices would mean an increase in the credit superstructure at a time when the basis was reduced; a procedure against all reason and all experience. (10) “Stabilisation” would apparently mean the issue of further paper if prices fell, and the recall of paper if prices rose. The two things, “restoration” and “stabilisation,” would together mean an initial voluntary inflation, which, added to the progressing inflation of the moment, would create a movement as of a stone rolling down hill, so that recall would be impossible.

If, for example, prices rose sufficiently to call for reduction of currency, how would such reduction be effected? Inflation is easy; but in France it took all the courage, ability, and wonderful reputation and trustworthiness of a Poincare, aided by war indemnities and the faith and industry of the French, to stop the inflationary movement, and achieve exchange stabilisation. It would be much more difficult here to achieve price stabilisation. In Germany it was found impossible to check the inflation. (11) Stabilisation of prices is at best a dream for a sunny day. Everything has its proper time. When a country’s very financial pivot has settled down to a lower level through uncontrollable external forces it is idle to experiment with a super-refinement which would start off blinking the one essential fact, that the fall in the basis is beyond our control. It is no time to install a bump stabiliser when the aeroplane is developing a tail spin. (12) Even if we could restore and stabilise prices it would mean constructing for Australia a little financial lake at a higher level of price, but a lower level of honesty and manhood than the rest of the world. And if the world deflation proved permanent, this position could only be maintained by repeated waves of inflation in Australia. Stabilising Exchange.

(13) If Mr Scullin means restoration and stabilisation of the exchanges, all economic criticism would fall to the ground. That, however, is what he apparently calls deflation; but it is in reality merely a preserving of the same relative neutral position as before the slump. If he is really against both inflation and deflation, this is the end for which he should strive.

(14) The great and signal omission of his remarks is this: He failed to point out that restoration of the exchanges, or, as he erroneously terms it, deflation would (a) maintain the real wage level; (b) keep Australia in an honourable position in the world; (c) avoid repudiation; (d) constitute a real assertion of manhood; (e) create a new margin of credit whereupon capital would flow towards Australia at low rates of interest; and (f) represent the only sound way of attaining economic recovery.

The so-called price stabilisation would present Australia to the world as a moral coward, afraid to face facts, and, like an incipient lunatic, seeking for a childish means of overcoming difficulties, apparently insuperable, but needing only to be attacked. Moreover, it would actually defraud the working man, because it is clear that if the present increasing Australian inflation is beyond the courage of the people to stem, the acceleration produced by further doses would send us hurtling along. And as every one knows, the workers* wages never catch up, once real inflation gets going. As pointed out above, our increased inflation is due to reduction in the pressure outside, and everyone can surely see that further inflation, whether described as “restoration ’ or “stabilisation,” or otherwise, is no cure, but that the only real remedy is to attack the facts frontally and thus acquire the merit that comes from valour in the face of difficulty. (15) Finally, in the two simple fractional expressions above, we have a fair touchstone; and all the brilliant schemes, and royal roads that have so far come under our notice, amount to the proposition that the way to correct a shrinkage in the denominator (or basis), is to increase the numerator (or superstructure). Truly we have yet to learn that two and two make four.