BANKING & CURRENCY.

Waikato Times, Volume 109, Issue 18283, 21 March 1931, Page 10

BANKING & CURRENCY.

IMPORTANT SPEECHES. SUPPOSED MAGIC OF MONEY. (By Harold Cox, in Sunday Times). Last week two important speeches were delivered by leading bankers dealing with the problems of banking and currency and trade. The first was by Mr F. C. Goodenough, chairman of Barclays Bank, and the second by Mr Reginald McKenna, chairman of the Midland Bank. It is best to begin with the second speech, for Mr McKenna lias long held views which differ from those held by other leading members of his profession. For many years he has been more or less in favour of inflation, though, like many other inflationists, he dislikes the word. He still evidently leans In the same direction, but apparently sees the difficulties more clearly than he did seven or eight years ago. In his speeoh last week he laid special stress on the desirability of stabilising prices, but at the same time admitted the difficulties in the way. What he apparently wants to do is to persuade the bankers, if necessary with Government assistance, so to control currency that prices will remain stable. Hie wants money to be “plentiful and cheap." His theory is that low prices, alleged to be due to a deficiency of credit and currency, are the cause of bad trade. That, of course, is the basic theory of ail inflationists. Their doctrine is that if currency is expanded -prices will rise and trade will flourish. Widespread Over-Production. Mr Gondenough takes a view which is happily more consistent with the traditions of English banking and the practical experience of the world. To quote one of his sentences: “It is a mistake to feel that any change in our currency and credit policy will produce prosperity." Instead of trying to elaborate new currency schemes In the hope of curing bad trade, we have to begin by recognising solid facts, which show that variations in the prices of commodities are primarily duo to a lack of balance between production and consumption. One cause of our present troubles is that directly after the war there was a burst of industrial activity to make good the destruction and the deficiencies due to the war. That stage has passed, but the industrial equipment still remains, and is now seeking employment. In the case of wheat the culprit is the weather. A succession of good harvests has produced large crops of wheat in most of the wheat-growing countries of the world. As soon as prices began to falL farmers took alarm and appealed to their respective governments to do something to save them from ruin. The Governments off Canada aiid the United States both responded to this appeal, and public money was spent in assisting the formation of w'heat pools to hold up the wheat until prices became better. This necessarily stimulated the farmers to go on producing more wheat, for they felt that they were safe once the Government had taken them under its wing. Prices fell still further, and the Governments both of Canada and the United States are still holding large stooks of ’ wheat. The Australian Government has also just launched a scheme for giving special aid to wheat producers. Other Illustrations could be given of the fall in the price of commodities due to excess production. For example, in the last five or six years the world production of lead has shown an average annual excess of about 50,000 tons over consumption. Is there any reason to look for any other cause for the fall in the price of lead? This fall in the price of some commodities necessarily also affects other commodities. If the farmer’s purchasing power Is reduced by a decline in the price of wheat, he cannot afford to buy so many manufactured goods as before. Government Interference.

That in brief seems the commonsense explanation of the present economic depression throughout the world, and in his speech last week Mr F. C. Goodenough strongly supported this view of the situation, lie also emphasised the fact that the various governments in attempting to assist producers have made the situation worse. When producers cannot sell their products the sound remedy for them to adopt is to reduce their prices so as to stimulate demand. Instead of doing this many of them clamour for government assistance In keeping up prices or form rings for that purpose, with the result that the goods are not sold. Tile idea that we can remedy the situation by expanding currency is disposed of by past experience. After the war Europe had visible evidence of the results of currency inflation. The fatal defect of the inflationary policy is that it ceases to effect the purpose intended unless it is progressive. It is not the absolute price that matters so much to the producer as an improving price. He wants to sell at a higher scale of prices than that at which he bought his raw material and paid wages to his workpeople. Then lie is assured of a profit. Consequently once a government starts on a policy of inflation in order to 1 raise paper prices for the benefit of producers, it lias to continue Inflating until the value of a piece of paper that used to be worth, say, a shilling is reduced to an infinitesimal fraction of a farthing. This happened in Germany and Austria less than ten years ago, and both countries have returned to the gold standard. _ , No Shortage of Gold.

To-day there is no evidence whatever of any real shortage in the supply of gold or of bank credil for the purpose of trade. The low bank rate at present maintained by the Bank of England is a sufficient proof that, in England at any rate, there is more credit available than borrowers are asking for. There has also been an appreciable increase in the world s supply of gold, and it has to be remembered that five millions in gold will provide something like a hundred millions in credit.

Many people, however, are saying that gold is badly distributed. The United States is said to have in its banks about £000,000,000, against £150,000,000 in 'the Bank of England. But, as Mr McKenna himself admitted, the United States has not escaped the wave of depression which has spread over the world. On the contrary, unemployment there is propably at least as serious as in Great Britain. Even in France, where there is also a surplus of gold, unemployment is beginning to be seriously felt. Happily, too, it is not accurate to say that all our industries in Great Britain are depressed. Some of the newer industries are doing fairly well, and it is interesting to note 'that a movement has just been started in Lancashire to establish new industries there, because everything seems to point to a permanent decline in the Lancashire cotton trade. This move

in Lancashire Is an Indication of the lines of self-help we have to work upon to met our troubles. At any rate, let us get rid of the Idea that trade depends on currency. Money is the servant, not the master of trade. The same point has been well expressed by a writer on flnanoe in the words: “Currenoy and credit a.re not substitutes for work and wealth.