Thames Star SATURDAY, SEPT. 15, 1934. OUR MONETARY SYSTEM.

Thames Star, Volume LXV, Issue 19209, 15 September 1934, Page 2

Thames Star

SATURDAY, SEPT. 15, 1934. OUR MONETARY SYSTEM.

"W'rth mattes tawamla none; wrth ohanhy for all-} with firowaaa to tha rigfatt aa ©O4! fiivw ua to 099 the rigfettt'~~fctaao!a.

The report of the Monetary Committee, presented to Parliament yes- ■ terday, gives a detailed and reasoned analysis of all the topics reviewed. The present monetary system is clearly explained. It is shown that New Zealand, even before the War, was not on the gold standard, but on the sterling exchange standard, gold being unnecessary. Credit in the main has been based on production. .Free deposits and their , rate of turnover are shown to be the indicator of business conditions. Fixed deposits have been increasing absolutely and relatively, and thus less money has been used by the , business world. There is plenty of credit available; the difficulty is that there is little expectation of profits ; while farm returns remain low. Hitherto the trading, banks, the majority being controlled by outside interests, have had no conscious monetary policy, but these defects in the banking structure , should be remedied by the operation of the Reserve Bank which, with the acquisition of sterling funds, will be in a strong position. In a discussion of the relation of the State to the banking system, the Committee remark that the State appointees on the directorate of the Bank of New Zealand have not acted for the Government but for the shareholders. The report discloses that the original internal debt conversion scheme was a voluntary one but was rejected by the,banks'. The Committee consider that the banks could have co-operated more and that for the future the Bank of New Zealand, while subordinating the'profit-- ' motive, should be used to give a lead to the commercial banks. The nonmonetary factors in the depression are used to show the main underlying causes of maladjustment as far as New Zealand is concerned, the conclusion being that a monetary solution is not sufficient. Banking and credit is discussed, and it is shown that the volume of credit depends on the value of production, the real fault of the price.and production system being that it is out of balance. The concept of a stable internal price-level, the difficulties of index numbers are . also examined. It is shown that if the internal price policies advocated in many schemes are pursued, a rigidly controlled economy would be necessary to avoid inflation. The quantity theory of money is examined in relation to the difficulty of controlling inflation; currency inflation as a method of taxation and its effects on various economic classes are also discussed. The extreme' difficulties of controlling the monetary situation are stated clearly, it being shown that inflation can exist even with a stable price level. In a discussion as to why the exchange rate has been comparatively stable, the gold standard explanation being rejected, the purchasing power parity theory and the "demand and supply of sterling funds" theory are examined. The conclusion is that the banks have always pegged the exchange rate and that the term "natural" is inapplicable. The banks have always kept "an exchange insurance fund" in London. Demand and supply of London funds have not determined the rate of exchange in the short rtln. The high exchange rate is fully discussed, the conclusion being that, compared with other countries, New Zealand has been extremely conservative as far as depreciated currencies are concerned. After examining the Danish situation, it is shown that ' Denmark did not depreciate her ex- ! change as a competitive move ' against New Zealand. The evidence ' also makes clear that the high exchange rate has had no material adverse effect on the prices of our ' primary products—that is, it has ' been a net gain and incidentally has ' saved the fruit industry from bank- i ruptcy and benefited the manufac- ] tttrers. The London funds are dis- l cussed and it is disclosed that pre- ( viously here have been large accn- ( mulations. A strong case is made out for devaluing the currency at * 1925 and using the exchange rate as £ an instrument of control. I