WORLD CRISIS.

Waikato Times, Volume 112, Issue 18806, 30 November 1932, Page 3

WORLD CRISIS.

DOMINION’S POSITION.

THE PROBLEM OF RECOVERY. QUESTION OF COSTS. Part 2. (By Dr. H. Belshaw in an address to the Dominion executive of the New Zealand Farmers’ Union.) The main purpose of the first part was to show how deep-rooted the causes of the crisis really are and how difficult the problem of recovery. I turn now to the more intimately domestic aspects of the problems of currency and credit policy in New Zealand. If we take the average prices for 1928 as a base we notice that the averages of prices for 1931 were lower by the following percentages : Export prices .... 43 per cent less. Wholesale prices 10 ~ ~ Retail prices ..11 „ „ Money wages .. 12 „ „ Wholesale prices (imported items) 3 „ „ Farm expenditure 10 „ „ (Note. —The fall in imported items would have been greater but for an increase in the tariff and a rise in the exchange.) The disastrous effects which we have been experiencing are due to the failure of different sets of prices to move together. Two kinds of economic loss have thereby been occasioned which for convenience we may classify as the external loss and Lhe internal loss. The external loss was due to the two main conditions—(a) Import prices fell to a smaller extent than export prices, hence more exports had to he sent away for a given quantity of imports. Allowing for tariff increases and the rise in exchange, it is probable that at least 50 per cent, more exports had to be sent away to purchase a given ■ quantity of imports. (b) Sinc-e export prices have fallen and the money value of overseas debt obligations has remained the same, more exports must be sent away to meet external debt obligations. The Economic Committee estimated that the real burden of overseas debt payments had increased by 80 per cent.

Reduction of Loss. The net effect of these two conditions is that if the volume of goods and services remains the same in New Zealand the eimmunity as a whole is able to consume .less than formerly. This probably means a loss of real income of, say, 15 per cent., since 1928. The loss may be reduced by a rise in the sterling prices of exports, an increase in the volume of exports | at existing prices, or a fall in import i prices relative to export prices. It is | important to emphasise that no policy jwe may adopt in New Zealand will 1 have a direct effect on this loss, j The second loss is due to the failure ! of different prices within New Zealand, i including interest, wages and taxes, as 1 well as prices of finished commodities, to fall as rapidly, and as far as export prices. The most serious disparity is between farm costs and farm selling prices. If all such prices had moved together we should have escaped with the external loss lo which 1 have referred. The crisis is sometimes described as being due lo a shortage of purchasing power, which means that people cannot afford lo buy all the goods produced at the money cost of | producing them. This is true, but it comes to much the same Lliing as explaining the crisis in terms of price disparities. The problem will have to l he solved either by reducing money | costs so that people can buy more with a given income or by increasing money incomes so that people can buy more at existing levels of money costs. Our dillleuties have arisen because profit margins have been drastically reduced or have disappeared. In a society in which profits are the mainspring of enterprise it is essential lo cause profits lo re-emerge before recovery can take place, and in New Zealand the crux of the matter is tq promote a recovery in farmers’ profits, i Policy must be directed primarily to increasing the farmers’ receipts in such a way that costs do not rise equally, or to reducing his costs. The problem may also lie solved if output can be increased in such a way I as to increase gross receipts substantially more than gross expenses, ! but in the face of the present price | situation this is a difficult matter. ! Fall In Prices. The general effects of the above | conditions have been a shrinkage in | the value of production, a shrinkage j in money incomes, an unprecedented | 'volume, of unemployment, serious ! budget, deficits, credit stringency; and the freezing of mortgage sreiiriliim. Since t SKI I I Imre lia \v been cert mi important ilexebu.uwiJ..,. Tim National i

Expenditure Adjustment Act has effected some reduction in fixed oharges and some economies in Government expenditure, and there lias been an attack on wages following on amendments to the Industrial Conciliation and Arbitration Act. Some weeks I ago there was an improvement in export prices, but the more recent tendency appears to have been downwards, and the present prospects of an increase are not very bright. The rise in export prices was valuable psychologically as aiTordin'g some indication that the “rot" had stopped and as a foretaste of prosperity to I come, but the recent recession in ; prices is likely to have the reverse I effect. The seriousness of the situa- ! lion will be realised when it is remem--1 bered that the prices of most exports are lower than they were a ' year ago. If we compare the average of prices for January to August, 1932, j with the average for 1931 the followI ing results appear:— Export prices .. 10 per cent less. Wages ... .. 8 „ Wholesale prices 5 „ „ Retail prices ..10 ~ „ (The farm expenditure index is not yet available, hut it is doubtful if it has fallen by more than 10 to 12 per cent.) It will be apparent from the above figures that the present price situation is not materially different from that in 1931. Some further recovery in prices is possible and costs are likely to fall somewhat, but there is still a very substantial gap to be bridged if the farmers are to meet all obligations and have anything like a reasonable return. The “novel” influences on the British price level which Professor T. E. Gregory offered early this year as a reason for not following the example of depreciating our exchange have not yet helped us very much. Even allowing for internal re-adjustments already made we should still require a rise of 50 per cent, or more in export prices to put our price situation right. If we put i~ at 40 per cent, the gap is still larger than is likely to he bridged quickly by a rise in sterling prices.

Meeting the Situation. What should he done in fact! of such a situation? I ana doubtful of the wisdom of further direct legislative action to reduce costs except by way of promoting increased elllcienoy or by a reduction of tariffs, which may bo hazardous for the time being because of the uncertainly of its effects on public revenue. 1 think, however, that it should be possible for the Government and the banks acting jointly to effect a substantial reduction in interest rates. This is not to say, however, that further action might not be justifiably taken if the situation becomes worse, or to remove anomalies. The problem is to increase the money receipts of Che farmer and as far as possible avoid a further shrinkage of the national money income and taxable oapacily. 1 would still maintain that the raising of the exchange is in the best interests of New Zealand and that most of the arguments against it misunderstand the nature of the problem. I would point out that the’depreciation of exchange in New Zealand and the holding of it at a higher rate is consistent with the same policy in the United Kingdom, yet, strangely enough, some of the very people who support such a policy in the United Kingdom argue against it in New Zealand, it is also extraordinary, as lias been pointed out by Professor D. B. Copland in a recent article, that Professor Gregory uses arguments in his published writings (e.g., "The Foreign Exchange Before, During and After the War,” and “Tne Gold Standard and Its Future” November, 1931), which ' are strangely inconsistent with those which lie used in respect of the New Zealand situation at the request of the chairman of the Associated Banks.

in view of the important inlluence which Professor Gregory's statement ! had on public opinion in New Zealand it is reasonable to draw attention lo this inconsistency. Tlius in his book on foreign exchange Professor Gregory writes: ‘‘lf the price- level in one country is higher than the price levels in other countries then the conditions for export from that country lo the others are that the rate of exchange between its currency and that of the others should be such that the fail in the exchange should compensate for the rise in I lie internal price level.” A substantial price disparity is precisely the situation in New Zealand, and according lo Professor Gregory’s own arguments should justify a rise in exchange. i do not, however, entertain any hope that the exchange will lie raised in the immediate future. For the lime being at least the supporters of high exchange, who include the majority of economists in New Zealand, must confess themselves defeated by the majority of the hanks, the Treasury, and I tic Bank of England. A more immediate danger lo be faced is pressure Lo lower Ibe rate in an allemul to get back lo parily, mid it is imperitive llial there should be a declaration to I lie effort Ilia t no a I! nmp| will be J made lo reluni lo parity until rondi- j Eons stabilise and Inierii H and e\ler- | nal prie s are in rqmm>;'iii:u. 1

or a rapid rise in prices we in New Zealand can do very little more than to hold the situation and prevent it from getting worse. It is going to he very difficult to promote even a gradual recovery, and the budgetary situation in particular is likely to cause trouble. Apart from avoiding internal deflation by a rise in exchange it is extraordinarily difficult to suggest constructive remedies, and what I have to say is not very satisfying. Interest Rates and Credit. I believe that something could be done to improve the situation by a lowering of the interest rates and, within limits, an easing of credits. Despite a reduction in overdraft rates from 7 per cent, to 6 per cent, during the past year, and also in deposit rates, 1 believe that such rates are still too high. During the period 1908 to 1912 minimum overdraft rates on best accounts varied between 5 and 5J per cent. Between 190 G and 1912 maximum rates on deposits varied from 3 to 4 per cent. At the preseut time minimum overdraft rates are 6 per cent, and the maximum deposit rates 4 per oent. That is to say, by and large, rates are higher than before the war. They also appear to be higher than in Australia. The following is a comparison of interest rates in New Zealand with those of the Bank of New South Wales in Australia : New Zealand. Australia Bank N.S.NV. Overdraft rates 6 percent. 51 per cent. Deposit rates: 2 years 4 „ ~ 31 „ „ 12 months 31 ~ ~ 3 „ „ (Note. —Since the above figures were obtained there lias been a further reduction in bank interest in Australia.)

I suggest that the problem at the present time is not to encourage capital accumulation, but to encourage the more active use of resources. It is significant also that during the - past two or three years there lias been a substantial accumulation of funds on fixed deposit, and I suggest,that there is no reason why overdraft rates should not be reduced to 5 per cent, and maximum deposit rales to, say, 3 per cent., provided that .the rates of savings banks and oilier competitive institutions and the rates offered by the Government are correspondingly reduced. I may say incidentally that the policy of the Government in controlling the rates offered by other institutions is essential if banking policy in the direction of cheaper credit is to be effective. Not only would cheaper credit directly lower costs, but also it would permit the more active use of funds by making fixed deposits relatively less attractive.