WORLD CRISIS.

Waikato Times, Volume 112, Issue 18805, 29 November 1932, Page 10

WORLD CRISIS.

CAUSES OUTLINED.

ADDRESS by DR. H. BELBHAW.

CONTRIBUTING FACTORS. Part 1. The repercussions of the world crisis have created an unprecedented Interest in economic problems m New Zealand, more especially in problems relating to banking and credit, said Dr. H. Belshaw in an address to tne Dominion executive of the New Zealand Farmers 1 ' Union. As is to be expected, there is a diversity of opinion as to the causes of the crisis and even more as to appropriate remedies Some appear to take the view that ' New Zealand is so dependent on overseas conditions that little, if can be done in New Zealand to pm matters right. Others think it possible to bring about a return to prosperity by appropriate action . withm New "Zealand. The truth is between the two; New Zealand is not operating in a closed system and so cannot free herself from world influences. Nevertheless, it would be possible by appropriate action to materially facilitate improvement. The problem in New Zealand would be largely solved, of course, by an Improvement in world prices to, say, the 1928 level, or indeed less than this, since some readjustments have already taken place; but the difllcullies in the way of a rise in world prices are very great, and it would be foolish to delay such action as was deemed appropriate in New Zealand in anticipation of a rise in world prices. The world crisis may be considered as essentially one of dislocation. While economists would place a different emphasis on different elements in the situation, yet they are very generally agreed as to the main factors responsible. The major causes of the world depression and crisis may be briefly summarised as follows: — The Major Causes. 1. A rapid but uneven expansion in production, especially after 1923, which resulted in a lack of economic balance and relative overproduction in some directions. 2. A rls e in world tariffs which impeded trade and increased surplus productive capacity. 3. Political insecurity leading to financial and monetary insecurity and disturbance. 4. The burden of reparations and war debts, and disturbances to international finance and exchange arising from the problems of transferring the amounts due. 5. The consequential maldistribution of gold, leading to credit restriction in the countries from which the gold was withdrawn. The movement of gold was closely related to tariff and lending policy—e.g., U.S.A., which was the world’s main ■ creditor country—prevented the payment of interest in goods by the imposition of high, tariffs. The Influx of gold could only be avoided if an equivalent amount of foreign lending took place. When foreign lending was reduced gold flowed into the United States. 6. The inorease in debts for reconstruction and development purposes. The burden of such debts w r as enormously increased by failing prices, and in order to maintain adequate exchange funds to make payments it was necessary to drastically reduce imports into debtor countries when export prices fell. 7. Largely as the result of political insecurity much long-term lending was replaced by short-term lending on the world's money markets. The short-term funds tended .to be transmitted from market to market with changes in confldenee or interest rates, and this had disturbing effects. The danger of gold movements which it occasioned caused Central Banks to hold additional gold reserves, so that gold was not so economically used as a basis for credit. Hence, this was a factor in encouraging prices to move downwards. 8. Different countries stabilised their currencies under different conditions in the post-war period, and this led to some redistribution of international trade. Thus France stabilised her ourreucy under such conditions that internal prices were lower than external, while Great Britain returned to the gold standard with internal prices higher than external. In France export trade was thereby encouraged, w’hile in Great Britain export industries were laced with special difficulty owing to tiie high level of internal costs. 9. Adjustment to changing conditions was hampered by the exceptional rigidity of the post-war world. The crisis was actually precipitated by a speculative boom on Wall Street. High paper profits encouraged the movement of funds from abroad to New York and diverted American funds from overseas lending to Wall Street. The result was an import, of gold which forced other countries to rostrict credit. Further attempts to check speculation by dear money ami restricted credit checked induslrial and commercial development and led to business recession in the United States, which, of course, reacted upon business conditions in other countries. The combined effeels were to initiate tiie world depression. On this a ilnancial crisis was superimposed by the revelation of the insolvency of a large Austrian bank in the early summer of 19.i1. The shock to confidence in Austria soon spread to the rest of the world, and eventually forced Great Britain off tiie gold standard. Tho combined effect or tliesc conditions was tiie catastrophic fall in world prices. Taking as a base the average prices for 1927 equalling 100, British wholesale prices had fallen lo OS in September, 1931. There was some recovery on the abandonment of the gold standard, but in September, 1932, British prices were only 7 per cent, higher than in September, 1931. Gold prices, however, were 3 per cent, lower, so that. Hie depreciation of British exchange had avoided a price fall of, say, 12 to 13 per cent.

Measures Necessary for Recovory. If permanent prosperity is to tie brought to the world the- basic factors responsible for dislocation must he removed. These would include t. The cancellation or drastic reduction of war debts. 2. A .reduction of tariffs and the removal of other hindrances to trade. A reduction of armaments and the removal of causes of political insecurity amt friction. i. Kconomy in the use of gold and International action to stabilise prices at a higher level. 1 regard it as unfortunate that discussion of war debts and tariffs ap-

pears to be removed from the agenda of the forthcoming World Economic Conference, and, to bring the matter nearer home, that the Empire did not take more positive action at Ottawa in the dirtetion of tariff reductions by indicating the willingness of Empire countries to make reciprocal tariff concessions with foreign countries. The Empire would gain more from this than from inter-imperial preferences and quotas. In the removal of causes of international friction New Zealand can, perhaps, do little save by engendering a public opinion positively interested in world peace and • supporting, through its Government and representatives at Geneva, any movements to that end. in economising in tiie use of gold also New Zealand can do very little, hut 1 still believe, as 1 did two years ago, that the gold now held by New Zealand banks , could be more effectively used by the Bank of England and that the transfer of gold into interest-bearing securities, would make possible a reduction of interest- rates by changing a dead into an interestbearing asset. Uf more direct and immediate concern, however, is the raising of world prices. It seems to me that the first condition essential to any substantia! rise is a long period of low, shortterm and long-term interest rates. In the- main financial centres tiie policy of cheap short-term money has already been inaugurated, while recent conversion operations at- low rates suggest., that long-term rates arc also likely to be lowered. The policy declared aL Ottawa w’as in sympathy with an attempt lo raise prices by cheap credit, but' little seems lo have been done to implement the Empire .declaration on monetary policy in the respective Dominions. It seems to me important that in New Zealand, as well as in other Empire countries, further attempts should he made to cheapen credit. Cheap Credit. I am doubtful, however, if cheap credit will of itself operate quickly enough or go far enough. Cheap short-term credit in tiie main financial centres of recent months appears to have been met with reluctance , to borrow because ol' lack ol' confidence as to the future. Two suggestions have been madfi to overcome this. The first is that the , main financial centres should, declare their intention to maintain cheap credit until prices rise by a stated amount, thereby promoting confidence in the permanence of cheap credit. The second suggestion is that international tending should be resumed on a large scale. This would ease credit in the borrowing countries and at the same time increase tiie demand for goods in lending countries. The increased demand would encourage manufacturers and traders to borrow, and this would encourage an upward movement in prices. Tiie main difficulty is tack of confidence among lenders. Sir Arthur Salter suggests that this would he removed by the individual or collective guarantee of lending countries as was done for Austria in 1923. Elsewhere I have made the suggestion that tho Empire might facilitate a large Imperial reconstruction loan of, say, £100,000,000, each Dominion and the United Kingdom guaranteeing more than its proportion. There are considerable difficulties in the way of such a policy, but I believe that it would have a very important influence in stimulating world trade and encouraging am ' upward.- movement of prices, and I suggest that it. might be appropriate for the New Zealand delegates at the World Economic Conference to at least raise the question for disoussion. This is not inconsistent with a normal policy of tapering off borrowing and should have substantial effects in augmenting purchasing power and promoting a return to confidence. Although the immediate effect would be to increase the debt of the borrowing countries, the real burden of debt would' be reduced if the policy were successful in causing prices to rise.