The Wanganui Chronicle. WEDNESDAY, NOVEMBER 2, 1932. MONETARY FACTORS AND PRICE LEVELS.

Wanganui Chronicle, Volume 75, Issue 259, 2 November 1932, Page 6

The Wanganui Chronicle. WEDNESDAY, NOVEMBER 2, 1932. MONETARY FACTORS AND PRICE LEVELS.

JT IS only natural that enquiry should be asked for in times like the present to see whether any rearrangement of currency and credit arrangements could be made to lessen the full in price levels. The difficulties in the way of achieving an uprise in prices through credit inflation are considerable and are not to be minimised. A credit inflation policy does not always achieve that end because there is no instrument available which can compel people to spend their money in desired directions. The two major methods of cushioning the rise and fall of prices by monetary means are referred to by Professor T. E. Gregory in his recently-published “Introduction io Finance.” He puts the matter in the following way:—

“The question thus naturally arises: can anything be done by conscious human effort to reduce the risks which are involved (in rising and falling prices) ? There are two main ways of possible escape.

“The first lies in devising contractual forms which take account of possible price changes and allow for them in the contract itself. Thus it can be agreed upon between debtor and creditor that if prices rise, the nominal amount to be paid by the debtor shall go up, so as to give to the creditor the purchasing power which he actually lent, not an amount of money which is really less than this. Or, if prices fall, the creditor is to receive a small amount in terms of money than he originally agreed to receive, so as not to force the debtor to pay over an amount of purchasing power greater than the amount he contracted to pay. The introduction of contracts such as these would involve agreement as to how changes in the price level should be measured, and a condition of success would be a widespread adoption of the principle involved. For a debtor agreeing to pay more to his creditor in money would be in a difficult position unless he, in his turn, were covered, e.g., insurance companies, agreeing to make out their policies in terms of a fixed amount of purchasing power (not a fixed amount of money), could not possibly do so unless their investments in turn covered them against the risks involved.

“The alternative is to attack the problem frontally and attempt to stabilise the value of money itself. But to achieve this, even partially, requires an instrument of stabilisation, and the vital issue of the moment is whether it Is possible to utilise the powers of the Central Ranks for this purpose. In the modern world, the ultimate basis of the monetary system, gold, no longer circulates as coin, but is kept in the vaults of the Central Banks as part cover of the actual circulating medium, whether notes or deposits. Subject to the requirements of the law, it is possible for the banks to hold more or less gold against a given volume of purchasing power; or what is the same thing, with a given amount of gold at their command, they can vary the amount of purchasing power issued against it. They can increase the amount of purchasing power outstanding either by lending more freely, or buying securities more freely, or both lending and buying more simultaneously. The problem of stabilising the purchasing power of money is, then, the problem of so varying the quantity of purchasing power issued directly, or indirectly, by the banking system so as to keep its value approximately constant in terms of an index number of prices: increasing the volume if the index number falls, decreasing the volume as the index number rises. To carry out this policy even approximately, however, requires a considerable degree of co-operation, at least between the Central Banks of the more important money market: and as no attempt has been made to carry out such a policy, it is impossible to say what success would attend an effort to do so. The probability is that by means of it a much larger degree of stability could be imparted to prices, even if absolute stability were to remain a scientific ideal, impossible of practical realisation.” This authoritative statement indicates the immensity of the task involved in any effort to control, or even influence, price levels. It is unfortunate, perhaps, that nearly all advocates of schemes for controlling prices by monetary means base their theories on a self-contained community. To-day no civilised community is self-contained, and therefore, any assumptions Io the contrary are resting on a false basis.