EXCHANGE RATES

Evening Post, Volume CXIII, Issue 2, 4 January 1932, Page 10

EXCHANGE RATES

NEW ZEALAND POLICY

AN AUSTRALIAN CRITIC

Criticism o£ New Zealand's exchange policy, with particular reference to Government control, is voiced by "Touch- j stone," a contributor to the financial I columns of the "Sydney Morning Herald." He expresses the view that serious fault can be found with any plan of exchange j-ate fixation, which he believes is tlie underlying principle cf the new scheme. The writer considers that New Zealand's exchange policy should aim deliberately at increasing the volume of exports. Unable any longer to borrow abroad, the New Zealand C4ovcrnmcnt, in order to avoid default, is under the necessity of buying sufiicient exchange on London from New Zealand exporters to meet its external obligations (writes "Touchstone"). A similar position faced the Australian Governments. The Australian trading banks came to the assistance of the Australian Governments by arranging to mobilise Australian-London exchange in order that all Government exchange requirements might be met. The terms of this undertaking, which is a ''gentleman's agreement," have not been fully disclosed, but, it is known that, the banks supply all the exchange needed by the Governments at a price 2s (3d per cent, less than the carded selling rate from time.to time. So far this simply devised mobilisation undertaking has worked satisfactorily; Australian Governments have obtained their full requirements of London Exchange, and the exchange rate has moved upward roughly in conformity with falling export prices. The higher rate, while appearing at first blush an extra budgetary charge, has increased the taxable capacity not only of exporters, but also of those from which exporters have been enabled to make additional purchases. On balance the extra cost of the high rate to the Budget has probably, been fully offset by increased revenue from"'taxation, and by a lessening of expenditure on unemployment. By comparison with the exchange mobilisation plan in operation in Australia, the scheme recently launched in New Zealand, devised partly to attain the same end, falls far short of an ideal arrangement. The Dominion'plan is aimed, firstly, at obtaining a prior claim by the Government on London exchange, and, secondly, by the.(elimination of exchange operations outside the-banks, the control by the Government of the exchange rate. It is this latter objective which is so economically unsound. There can be no objection to' any arrangement whereby' the Government is assured that all the London exchange it requires will be forthcoming; but serious fault can be found with any plan of exchange rate fixation. Although it is not definitely stated, in the Order-in-Council, which provides for a most elaborate set of regulations for the control o£ exports, that fixation of the rate is intended, it is difficult to place any other construction upon the scheme. It is provided that all exporters' bills must be negotiated through the banks, except in the case of those drawn by some exporter; who in the past have handled their own exchange business. This means elimination of outside exchange operations, and gives a monopoly of exchange to the banks. But the banks are not free to determine the exchange rate from time to time, sincu it is also provided that the Government shall fix the rate "after consultation with the banks." INCREASING THE TASK. With an eye mainly on the immediate effect on the budgetary position, the New Zealand' Government is scarcely likely to sanction an increase on existing rates. The ultimate gain arising from an increase in taxable* capacity is a long-sighted view that most politicians, especially those representing city interests, cannot be expected to .take, since they are not all paragons of economic virtue. It would appear then, that New Zealand has taken a false step,, which unless shortly remedied as a result of protests that are certain to be made by primary producers, will make thfe task of economic recovery more protracted and exceedingly more, difficult. It seems to have been overlooked that the position calls for some measure calculated to increase the volume of ex- ! ports. Now that the Government is to take over a large portion of the London ' funds, as they become available, importers will find it difficult to obtain sufficient ' of these funds to maintain the present volume of imports. Importations may ' therefore be expected to decrease at a ' still further rate. Total New Zealand im- ' ports . for the twelve months ended October, 1931, amounted 'to £27,000,000, as against £45,000,000 for the previous! year. It is a moot point how much fur-1 ther" import's 'can fall.without disrupting! entirely the importing industry. Owing to ■ the:'-small population the development of ! large-scale secondary industries has ■ scri- ! ous.'limitations.: It is doubtful, therefore, : whether after thft Government has taken its "whack" of exchange, the balance of available London funds will prove adequate to meet the cost of essential importations. Of this we may be certain, imports, some of them from Australia, will . decrease,-unless prices-improve -or the volume of exports increases. ENCOURAGING EXPORTS. Over export prices the Dominion has no control, .-but it has it in its power to increase the volume of exports. Its ex- ■ change policy, therefore, should deliberately aim_ to .encourage exports. Maintenance'of existing exchange rates will.not achieve this objective. Aided by a 10 per cent, exchange premium, the New Zealand export producer, whose production co.'-ts are only slightly lower than those of the Australian primary producer, is forced to tell in a world market. The exporter from Australia.is assisted-by an exchange premium of 25 per cent. The disparity between these premiums is not by any moans ;i measure of the difference in costs of primary production in New Zealand und Australia. At present export prices the Australian primary producer, despite the 25 per cent, exchange assistantl, which some would deny him, is not ii an enviable: position. How much worse off must be the New Zealand primary producer*' Under existing conditions, with the New Zealand London exchange at ,-CUO, can it be said ' that exportation from New Zealand is being encouraged? The exchange policy.of the New Zealand Government would have been much sounder if at the same time as its exchange requirements were provided for, the exchange rate had been raised, ' or at least had not been definitely linked to a weak budgetary position, for that is •what the licensing of exports and Government fixing of the rate means.