8.—3.

for nothing. We make no profit. We pay no rates and taxes. We deposit the title deeds of the factory with the bank as collateral security for an overdraft of, say, £1,000. Now, we start operating and we distribute the whole of that £1,000 as wages during the financial period of one year. At the end of the year, what is the minimum charge, The minimum financial cost of the product of that bank ? —What are you hitting at, bank interest ? No. I will exclude interest altogether. Let me put it this way : The minimum charge must include the total wages that are paid out, £1,000, but the bank says this is a wasting asset, they insist upon the business being carried on on business principles, and they insist on a depreciation fund of 10 per cent. — that is to say, that £100 has to be paid back to the bank, so that the minimum charge that can be made is £1,100 and you have only distributed £1,000 ?—But the depreciation itself gets distributed. Depreciation is a fact which is going on all the time, and factories are wearing out and being replaced all the time, and, except in an odd case where you have a sudden increase in capital expenditure so that the amount being set aside for depreciation is for the time being less than is being spent in replacement of assets, the thing balances all right. lam not saying it is wrong, but that is the procedure. If that is true, and I cannot see any fallacy in it myself (I have been thinking over it for some four years)—if that is true, then it is also true that that kind of thing applies to every industry, and no industry is apparently able to purchase the whole of its own output, that it only succeeds in doing so by a variety of circumstances which are more or less incidental. For instance, the flotation of a loan by a Government and the construction of a road or a railway or a bridge. That distributes purchasing-power and the purchasing-power is able to purchase the surplus product of that factory. In turn that loan-money has to be recovered in toto by means of taxation to form a sinking fund, and so on. The suggestion is that industries and nations can only carry on under the present system by getting deeper and deeper into debt ?—There has been a considerable increase in debts, but Ido not think it is a case of cause and efiect at all. Fundamentally, it is not necessary. At the present time there has been a tapering-off of national debts in particular, and private debts for that matter too, and the result of that cessation, or, as McKenna says, " the failure to inject increasingly large sums of money into the community, has caused the whole of our fabric to start falling in like a house of cards." That is the theory ?; —In regard to this point that you mention here, I think the analysis of that made in that book of Cole's on " Money " is sound. There was a most interesting controversy between Cole and Douglas on this very subject. It ran for some months in Time and Tide and one or two other London papers. I followed that controversy with a great deal of interest, and Cole shut up in the end ?—I went through that analysis very carefully and it seeemed to me to be quite sound. I draw attention to it purely because you take it as a particular question here, that the additional production does automatically follow. 1 suggest that that cannot be regarded as certain by any means. It is worthy of further investigation anyhow ?—That is a matter of opinion. lam satisfied on the point, and hence the statement. We have had such a painful experience here. Mr. Massey can tell you that our production of butter has gone up tremendously, but it has not called forth the extra purchasing-power, has it ? —No. But that is due to an external causeIt is not automatic then ? —I am speaking there of local production. But does it do it in local production. I think it is open to question even there. You have goods here being produced in the country that cannot be sold ? —You are referring to the case where, to meet the market, we have to sell goods below cost. That is practically what the farmers are being compelled to do at the moment in many cases. They are being compelled to sell butter below cost. That is not because the people have all the butter they require. It is because they cannot afford to buy more ? —And the reason they cannot afford to buy more is due to a great many causes. Page 12, the fourth paragraph: " We will have a New Zealand board of directors exercising a deliberate and conscious control of our monetary system in the best interests of the Dominion as a whole." The fact that that control is on sterling balances and sterling policy is controlled by the Bank of England, is that quite justified ?—I do not get the point of your question. We decided some little time ago that the monetary policy of this country is tied up with — linked—to sterling policy, and that sterling policy is controlled by the Bank of England ?—Yes ; in its reactions to prices. Under those circumstances I suggest that it is not clear that it is quite justifiable to insert that sentence ? —The point of that statement is this : That up till now we have not had any deliberate or conscious policy in our monetary affairs at all. In future we are going to have it, and the Board has been so constituted —as far as it can be —that we have removed all other incentives from them as far as possible in order to leave them to base their decisions solely on the welfare of the countrv in general. But the proof of the pudding will be in the eating ? —Yes ; the human element is there, of course. A bit more than the human element. You have the legal restrictions that, the Reserve Bank must operate on ? —Yes. Though at the present moment it is quite open. They are not tied at the present time at all. That is true, of course, and you have the further point that that Act can be amended or repealed. I call attention to the fact that I think those words are not quite justified. The same thing applies to the last paragraph of the whole thing. That is really, as I read it, a condemnation of the existing banking system. It is a negative condemnation, in that this is reckoned to be an improvement. It means that the existing banking system is not flexible enough—that it did not provide, on a sound basis, ample credit resources ?—Yes and no. That is true in this aspect, that while they had the

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