The Waikato Times FRIDAY, MARCH 1, 1940 CREDITS AND EXCHANGE

Waikato Times, Volume 126, Issue 21051, 1 March 1940, Page 6

The Waikato Times FRIDAY, MARCH 1, 1940 CREDITS AND EXCHANGE

New Zealand’s use of “public credit,” combined with the control of exchange, was the subject of an unusually informative statement by Professor A. H. Tocker before the New Zealand Society of Accountants. The statement gives in concise form an explanation of the position that should be studied carefully, for complete understanding of the difficulty is the first step towards a satisfactory remedy. No political partnership can dispose of the few cardinal facts given by Mr Tocker to account for the shortage of overseas exchange. Nor can it be denied that the remedy he suggests is, in the present circumstances, a sound and sensible remedy, unless the Dominion can auickly and substantially increase its exportable production. It seems that the exchange difficulty arose primarily because of a miscalculation by the Government. Believing New Zealand production. under the encouragement of the new political policy, would expand rapidly, the Government felt .safe in issuing large amounts of credit and spending public money accordingly. Would it not promptly have the goods to back the credit ? Would not production continue to expand at least as rapidly as in the past 30 or 40 years ? Unfortunately it did not. Consequently there was a country flooded with purchasing power, and naturally the money was spent on imported goods because New Zealand itself could not supply the demand. Thus heavy demands were made on overseas funds and exports were insufficient to maintain those funds. When a dam in the shape of imports control was placed across the stream of outgoing funds, naturally the enhanced purchasing power was ponded up in New Zealand. The result was a tendency towards increased prices and a decrease in the purchasing power of New Zealand money. “The method of finance adopted,” Mr Tocker says, “is responsible for many of the Dominion’s present difficulties. It has involved an excess of expenditure over income, and that excess has been covered only by expansion of bank credit. Bank credit should be extended only for short periods and against saleable goods. An unduly large proportion of Reserve Bank assets is frozen in Government advances.” The most practical way out of the difficulty, Professor Tocker says, is for the bank to decrease its frozen assets and its liabilities without impairing its liquid assets. If it could sell at least £10.000.000 of its assets to the public its sterling exchange would then be sufficient to meet all likely demands, and the rationing of exchange would quickly become unnecessary. The present position is simply a result of expenditure exceeding income. Had sufficient goods been produced to back the additional credit. New Zealand would have been no w r orse off than before. As it is. it has incurred a debt which must be repaid before the former position can be restored. Mr Tocker puts it thus : “The Dominion should now. in order to restore its reserves, save and repay much of the excess expenditure of the past two years. This means that we must not only cease to expand credit and live within our earned income, but we must save from it to meet past expenditure as well.” The alternative to plain “saving” is to so increase production that the effect will be the same. Future production is to some extent “mortgaged” already, but nevertheless production is a remedy, accompanied by a close rein upon the issuance of further credit until further credit is justified by an increased backing of goods. New Zealand’s currency will remain inflated until it is fully supported by production.