POLITICAL CONTROL

Evening Post, Volume CXIV, Issue 120, 17 November 1932, Page 12

POLITICAL CONTROL

PROBABLE CONSEQUENCES

NEED 'FOR : CENTRAL BANK

, The contention that any move by ihe Government "to peg the exchange ■would make the introduction of central Reserve bank legislation more difficult was. expressed, by a financial authority to-day. He added, however, that any 9.tteinpt to control 'the exchange rate politically would increase the necessity for such legislation, as any move, by the Government, to interfere with the natural level of international transactions would Yencler it imperative that such ■ transactions should .be governed by an independent authority working in the national, and not sectional, interests.

. It was contended that the comparison "with.Australia was not an apt one, as the Commonwealth's international ■balances had been on a different footing from/that of New Zealand. Australia's high exchange was the • result an adverse, balance of trade. In Gther words the Commonwealth Bank ■was compelled to push up the; rate in $Tder to rectify a serious trading situation. On the other hand the Dominion's trading position has not warranted Such drastic steps, and owing to the improvement which has taken' place, it is held that the 10 per cent, at present ruling is too high. With a rise in the exchange rate to 25, per cent. the-. Government and local body debt service, abroad would be increased by. about £2,500,000, and in addition to that the Government would Jiave to face .a considerable shrinkage

in Customs revenue and a fall in the taxable capacity of those affected by decreased business through a premium on imports.

Naturally as the trading position did not warrant a rise in the exchange rate, the banks would not agree to carry out such a policy, jjnd the initiative would have to come from the Government. In the event of political action being taken the banks, as trading concerns with obligations to shareholders, could not accept the responsibility for the surpluses which would accrue iv London as the result of the shrinkage in imports. The result would be that the Government would have to buy up these surpluses, and the premium to be paid would have to be met out of taxation. If, for example, there was an exchange surplus in London of £5,000,000, and the exchange stood at 25 per cent., the Budget would have to meet a charge of £1,250,000. . There could be no doubt the effect of aii artificially high exchange would have a' disastrous effect on the whole of the credit structure of the Dominion, and a policy of .deliberate exchange depreciation would, act detrimentally on New Zealand's financial relationships abroad. It had been stated that Australia's high exchange had not adversely affected her,credit overseas, but it had to be remembered that in the ease of the Commonwealth the fixing of the exchange rate had not been deliberate but had been guided by economic circumstances.