THE PROBLEM OF FINANCE.

Star (Christchurch), Issue 16307, 23 December 1920, Page 2

THE PROBLEM OF FINANCE.

BRUSSELS CONFERENCE. FULL TEXT OF RESOLUTIONS ADOPTED. A special number of “ Lloyds Bank Monthly Financial Report” is fo band by the latest, mail from Loudon. It comprises the full text of the tesolulions proposed by tbo various Commissions at the recent International Financial Conference at Brussels, which resolutions were unanimously adopted by the Conference. In view of their great importance, wo are reproducing these resolutions unabridged. Yesterday we printed the resolutions of the Commission on Public Finance. To-day wo give the resolutions of the Commission on Currency and Exchange, and those of the . Commission on International Trade. The third and concluding instalment will comprise the resolutions of the Commission on International Credits, and the Annex. The currency o' a country, in the sense of the immediate purchasing power of the community, includes (a.) the actual legal tender money in existence, and (b) any promises to pay legal tender, e.g., as Bank balances—which are Available for ordinary daily transactions. The currencies of all belligerent;, and of ..many other countries, though in greatly varying degrees, have since the noginning of the war been expanded artificially, regardless of the usual) restraints upon such expansion (to which we refer later) and without any corresponding increase in the real wealth upon which (heir purchasing power was based ; indeed in most cases m spite of a serious reduction in such wealth. It should be clearly understood that this artificial and unrestrained expansion. or “ inflation ” as it is called. of the currency or of the titles to ivnmediaie purchasing power', does not and cannot add to the total real purchasing power in existence, so that its effect must lie to reduce the purchasing power of each unit of the currency. It is, in fact, a form of debasing the currency. The effect of it has been to intensify in terms of the inflated currencies,, the general rise in prices, so that a greater amount of such currency is needed to procure the accustomed supply of goods and services. Where this additional currency was procured by further ‘'inflation” (i.e., by printing more paper money or creating fresh credit) there arose what has been called a ".vicious spiral ” of constantly rising prices and wages and constantly increasing inflation, with the resulting disorganisation of all business, dislocation of the exchanges, a. progressive increase in the cost of living, and consequent labour unrest. I. Therefore: It is of the utmost importance that the growth of inflation should be stopped, and this, although no doubt very difficult to do immediately in some countries, could quickly be accomplished by (1) abstaining from increasmg the currency (in its broadest sense as defined above), and (2) by increasing the real 1 wealth upon which such currency is based. The cessation of increase in the currency shCukhriot be. achieved merely V restricting the issue of letral tender, cnicli a step, if unaccompanied bv otlmr measures, would be ant to aggravate tiie. situation by causing a raonetaw crisis. Ibis necessary fo attack Iho causes_ which lead to the necessity for Additional currency. 4.1 cause in most countries is that the Governments, finding themselves nimble to meet their expen. curates out of revenue, hare been tempted to resort to the artificial creation ot fresh purchasing power. ww y i lho direct issl,c of additional iega.l tender -money, nr more frequently bv obtaining—especially from the Banks or issue, which m some cases are unable and in others unwilling to refuse theni—credos winch must themselves he satisfied in legal tender money. We say, therefore, that— IT. Governments must limit their expenditure to their revenue. (We. are not considering hero the finance of reconstructing devastated areas.) 111. Banka, and especially Banks of Issue, should be freed from political pressure and should he conducted solely on the lines ot prudent finance. But the Governments are not the only_ offenders in this respect; other parties, and especially in.. some countries the municipalities and other local authorities, have raised excessive credits wliich in tbo same way- multiply the. titles to purchasing power. Nor will it be sufficient, for the propose of checking further inflation, that additional issues of legal tender or the granting of additional credits should cease; since the floating debts of Govornment and other authorities constitute in themselves a form of notential currency.-in that, except in so' far as they arc constantly renewed, their amount will conic to swell the total currency in existence; consequently— IV. The creation of additional credit should cease and Governments apd municipalities should not onlv not increase their floating debts, but should begin to repay or fund them by degrees. In normal times the natural“ and most effective regulator of the volume and distribution of credit is the rate of interest which the central Banks of Issue, are compelled, in self-preserva-tion and in duty to the community, to raise when credit is unduly expanding. It is true that high money rates would be expensive to Governments which have large floating debts, but we see no reason why the oommiipitv in its collective capacity (i.e.. the ’Government) should be less subject to the normal measure tor restricting credit than the individual members of the community' In some countries, however, the financial machinery has become so abnormal that it may be difftnilt for such correct ive measure to be immediately applied. We recommend, therefore, that— V. Until credit can be controlled merely |>y the normal influence of the rate of interest, it should only be granted for real economic needs, It is umpnssiblo to lay down any rule as to the “proper rates” of dis'onnt or interest for different countncs. These rates will depend not only on the supply and demand at different times hut also on other factors often of o. psychological nature. It, mav. ,' n . deed, confidently be said that ’when once the arbitrary increase of inflation ceases and when tbo Banks of Issue arc able successfully to perform tbeir normal functions, rates will find ffi e j r own proper level. The complementary steps for arresting thd increase of ‘ inflation by increasing the wealth on widen the currency is based, may bo sunimed up in the words: increisdrl production and decreased consumpfcioii. The most intensive production possible is requmod in order to make good the waste of war and arrest inflation and thus to reduce the cost of living | yet we are witnessing in many countries production below the normal, together with those frequent strikes which aggravate instead of help to cure the present shortage and dearness of commodities. When diminution in the' Governments’ demands frees more credits for trade and for the recuperation of the world, when inflation has ceased and prices cease to rise, and when the general uiisettloment caused by the war subsides, it. is probable that great improvement will bo seen in productive activity. Vet, in our opinion, the production of wealth is in many countries suffering from a cause which

it is more directly in the power of Governments to remove, viz., the control in vario-jg foiuns which was often imposed by them as a war measure and has not yet been completely relaxed, in some cases, business has even been taken by Governments out of the hands of the private trader, whose enterprise and experience arc a far more potent instrument for the recuperation of the country. Another urgent need is the freest possible international exchange of commodities. With this another Commission will deal, but we feed (bat our recommendations hero on inflation Mould not be complete without addin* that—- ° VI. Commerce should as soon as possible be freed from control, and . impediments to international trade removed. Equally urgent is the necessity for decreased consumption in au impoverished world where so much .has been destroyed and where productive power has been impaired. It in, therefore, specially important, a.t present that, both on public ’and private account, and not onlv’in impoverished countries, but in every part of the world—- * VII. All superfluous expenditure should be avoided. To attain this end, the enlightenment of public, opinion is the most powerful lover. If the wise control of credit brings dear money, this result will in itself help to promote, economy. We pass now from inflation and its remedies to the other points submitted to us. Without entering into the question whether gold is or is not tho ideal common standard .of value, we consider it most important that tho tvorld should have some common standard, and that, as gold is to-day the nominal standard of the civilised world— Mil. It is highly desirable that the countries which have lapsed from an effective gold standard should return thereto. It is impossible to say how or when all the older countries would be able to icturn to their former measure of effective gold standard, or how long it would take tho newly-formed countries to establish such a standard. But m our opinion— IX. It is useless to, attempt to fix the ratio of existing fiduciary currencies to their nominal gold value; as, unless tho condition of the country concerned wore sufficiently favourable to make the fixing ofi such ratio unnecessary, it could not be maintained. The reversion to, or establishment of, an effective gold standard would m many cases demand enormous deflation and it is certain that such— X. Deflation, ii and when undertaken, must, be carried out gradually and with great caution; otherwise the disturb, anco to trade and credit might prove disastrous. XI. We cannot recommend, any attempt to stabilise the value of gold and we gravely doubt whether such attempt could succeed; but this question might -well be submitted to the committee to which 5 we refer later, if it should be appointed. XIIWe believe that neither an International Currency ndr an International Unit of Account would serve any useful purpose or remove any of the difficulties from which International Exchange suffers to-day. xiii. V V e can find no iustification for supporting the idea that foreign holders of hank notes or bank balances should bo treated differently from native ‘ holders. XIV. In countries where there is no central Bank of Issue, one should ho established, and if tho assistance of foreign capital were required for the promotion of such a bank, some form of international control might be required. XV. Attempts to limit fluctuations in exchange by imposing artificial control PU exchange operations are futile and mischievous. In so far as they are effective they falsify tho market, tend to remove natural correctives to such fluctuations and interfere with free dealings in forward exchange which arc so necessary to enable traders to eliminate from their calculations a margin to cover risk of exchange, which would otherwise contribute to the rise in prices. -.Moreover, all Government interteren.ee with trade, including exchange, tends to impede that improvement of the economic conditions of'a country by which alone a healthy and stable exchange.can bo secured. We support tho suggestion that—xvr. A committee should be set up both for continuing the collection of the valuable financial statistics that have been furnished for this conference and also the further investigation of currency policy. RESOLUTIONS PROPOSED BY THE COMMISSION ON INTER- 4 NATIONAL TRADE. I. The International Financial Conference affirms that the first condition for the resumption of international trade is the restoration of real peace, the conclusion of the wars which arc still being waged, and the assured maintenance of peace for the future. The continuance of the atmosphere of war and of preparations for war is fatal to the development of that mutual trust which is essential to the resumption of norrnalTrading relations. The security of internal conditions is scarcely less important, as foreign trade cannot prosper in a country whoso internal conditiqns do not inspire confidence. The conference trusts that the League of Nations will lose no opportunity to secure the full restoration and continued maintenance of peace. 11. Tho International Financial Conference affirms that the improvement of the financial position largely depends on the general restoration as soon as possible of good-will between the various nations; and in particular it endorses the declaration of the Supreme Council on March 8 last “that tbo States which have been, created or enlarged as a result of the war should at once re-establish full and friendly co-operation, and arrange for the un restricted interchange of commodities in order that the essential unity of European economic life may not bo impaired by the erection of artificial economic barriers. ” 111 The conference recommend? that, within such limits and at such time as may appear possible, each country Should aim at the pr6gre.ss.iro restoration of that, freedom of commerce which prevailed before the war, including the withdrawal of artificial restrictions on, and discriminations cf price against! external trade. IT. The International Financial Conference expresses its conviction that the instability of the exchanges constitutes a great hindrance to the resumption of normal international trade. y. The International Financial Conference Mould welcome any action which cau*bo taken by the League of Nations to enable the .countries, ’ which under .present conditions cannot purchase the necessary supplies for their rcconslruc- i lion, temporarily to obtain commercial

credits ou an approved basis for this purpose. ' YI. The International Financial Conference expresses the conviction that the repair, improvement and economical use of the transport systems of the world, and particularly of countries affected by the war, .are. of vital importance to tho restoration of international trade. The third and concluding instalment of these, resolutions will appear in the “Star” to-morrow.