A HIGHER EXCHANGE

Evening Post, Volume CXIII, Issue 30, 5 February 1932, Page 6

A HIGHER EXCHANGE

FAEMEKS' CLAIMS

EFFECT ON NATIONAL INCOME

The Tanners' Exchange Committee makes the following additional state-

ments:—

- The critics of the proposal that the exchange position should be moved and

the exchange rate allowed to rise have

argued that' the rise .in exchange is not likely to benefit the" farmer, and that if it does this can only'be at the

expense of the rest of the community. It may be of advantage to state briefly the main objections which have been made to the proposal:— 1. While.farmers will receive directly an increase in gross receipts by the amount of the increase in . export values measured in New Zealand currency, this will be offset because of the rise in price of 'imported goods and eventually of locally produced goods. 2. The exchange premium, through its effects on-import prices, will discourage •impdrts and occasion, loss to importers, and act as a tariff in favour of local manufactures. . '. •

3. The reduction' in imports will reduce the Customs revenue, while the increase in the exchange-premium will increase the cost' of , transmitting Government and local ' body interest. Hence there will be an additional strain on- the Budget of tho 'National Government and of local bodies, which "will necessitate increased taxation.

4. The real income of' the country is unaffected, hence the -increased receipts of farmers can only be obtained from the rest of the community through increased taxation and higher prices. , We believe,this to be a fair statement of the major arguments advanced against a higher exchange. These arguments take no account of the consequences if no action is taken. We have already emphasised the precarious position of the .farming industries. Unless the disparity between farming costs and the price of farm products is removed, nothing can prevent a oonaiderable reduction in farm production and avert ;the danger of economic collapse. The deflation of costs through direct action jis too slow a process to meet the situation. In such circumstances the consequences to the. rest of the community will be immeasurably more serious than those alleged against a rise in exchange. The demand for commodities will fall and debtors will find it increasingly difficult to mee.t their obligations; money incomes will shrink and taxable capacity he enormously curtailed; unemployment figures will rise; imports will be severely reduced, and with them import. revenues. Under such circumstances Budget deficits, both national and local, will in-crease-appreciably.' . ' ' ADVANTAGES OF HIGHER EXCHANGE. .'■■"•■- - Against these disadvantages there are no counter-balance advantages. This picture is by no means overdrawn. In the evenf of no constructive action, the economic prospects are desperate. It is not enough for critics of a Txigher' exchange to point' to possible dangers —it is their'bounden" duty to suggest alternative remedies. ■ So far, "no satisfactory alternatives' have:'been forthcoming, and we'doubt'if they can be found. ThevFarmera'- Exchange Committee does not claim'that the raising of the exchange i possesses no disadvantages; it does claim that these are substantially over-balanced by the advantages, and that they are very much less sorious than the consequences which will follow if no action is taken. It is not possible to make a precise estimate of the fall in the national income directly attributable to the fall in export prices, but it is probably of the .order c* 20 per cent. No currency policy can, avoid this direct loss, but in addition has occurred a further substantial loss which can. be largely, avoided by. appropriate action in New Zealand. The exchange policy of this committee is directed to this . end and to the reduction of, the direct loss by means of the stimulation of exports. The indirect loss has been brought: about through the uneven distribution of the burden, resulting from the fall in, export prices. By far the greater part of the direct loss has fallen on the.,primary producer through the disappearance of his profits, and, indeed, the emergence' of losses, and this in turn has damaged the rest of the community and imposed an additional burden on them. • The inequality of this spread in costs ■ has taken place.through.the failure of different prices—includinganterest, wages, transport, and other charges—to fall in conformity with export, prices, thereby resulting in a widespread diminution in business profits and. a curtailment in employment and taxable capacity. So has been set in motion a vicious circle which can only be broken by immediate action which will again liberate the purchasing power iof - farmers. . FARMERS' RECEIPTS. How may a Tise in exchange be expected to operate? A rise in exchange of, say, 20 'per cent, would mean *a further increase in the gross receipts of farmers of six or seven millions sterling •; on' the basis of present exports, plus an increase "in receipts from sales for local consumption. This is justir fled because farmers have reduced the price for their services to city consumers, whereas there'has beenno corresponding reduction in the price of city services to the farm. It is true that a rise'in the price of imports would follow, and that this would increase so»ewhat farmers' costs, but even if ajl the materials used by the farmer were increased in price 20 per cent., this would only represent a 5 per cent.' increase in these total costs. In the long run some rise in other costs might follow, but the great proportion are fixed or move very slowly. Hen,ce a substantial advantage would occur, either permanently or for a long, period, during which a breathing space would be' provided to enable readjustment 'to be made. The immediate consequence is, therefore, an increase in the capacity of farmers' to buy goods, employ labour, and meet interest payments, so* that purchasing power begins to circulate with beneficial results to employment, business profits, .and business confidence. Money incomes are thereby increased and taxable capacity is also 'increased. . . COST OF TRANSMITTING 'FUNDS. Much has been made of the additional cost of transmitting Government funds to' London, and of the embarrassment' which this will occasion to the Budget." Such a view is short-sighted and takes no account of increases in taxable capacity to meet it or of the'drastic curtailment of taxable capacity if thealternative of deflation is adopted; nor is it legitimate, to regard the curtailment of import revenue as an additional factor straining the Budget, for if imports are not reduced through an increase in exchange,. they will bo reduced through a curtailment of purchasing power. -There is no case for assuming that Government finance will be prejudiced by the committee's proposals; on the contrary, there are substantial grounds for believing that the budgetary position would be, improved. The committee agrees that importers will be prejudiced through the restriction of imports and' that some additional protection is given to local manufacture; but, again, importers are not entitled to regard this as an additional disadvantage, since the alternative of

deflation will reduce imports in any case, without, any corresponding advantage in the stimulation of local industry. ■ ' , ..■.'-.

Tho committee cannot agree with the contention1 that the national income would be unaffected, and that the effect of the .exchange proposal is merely to shift the burden on to the rest of the community. Wo are definitely .of tho opinion that a raising of the exchange by removing indirect impediments to production will increase the national income, and that, far from suffering a loss, the community as a whole 'will benefit, '