HIGH RATE ADVOCACY

Evening Post, Volume CXIV, Issue 125, 23 November 1932, Page 8

HIGH RATE ADVOCACY

CONFUSION OF THOUGHT

AUSTRALIAN EXPERIENCE

The raising of the exchange rate New Zealand on London has been revived in the Dominion, to the. point of incandescence. The Government says it leaves the banks free to act; the banks, with one exception, have maintained that the existing Tate of 10 per cent, is a fair rate. Trade returns indicate .plainly enough.. that even tho 10 per cent, rate is too high, with a credit balance to the Dominion in New Zealand currency exceeding £12,000,000. Nevertheless, in order that primary producers may receive in New Zealand currency, say, ,£123 for £100 worth, of produce sold in London, there are stout farmer advocates, also a Parliamentary phalanx of advocates for a higher exchange rate. All this is well known, but it will serve as an introduction to the observations made by the National Bank of Australasia on a movement now in progress in Australia to have the rate of 25 per cent, current- there raised still further. Before proceeding. to quote from the National Bank's comments on the attempts to boost the Australian rate still higher, it may be well to mention a few facts that are- likely to be lost sight of in the dust Taised by the present exchange turmoil in New Zealand. "When exchange went up to 30 per cent, in Australia there was a heavy external trade debit balance against Australia. New Zealand then, had a credit balance. It has a -credit balance of £12,000,000 to-day. Advocates for raising the rate, of exchange in New Zealand pointing to Australia as an example of prosperity achieved by inflation have not proved that the unsubsidised farmer, worker, manufacturer, and business man of Australia are now better off than they were before the rate was raised. There were other sharp differences between the position of, Australia ■ and ■ that of New Zealand. The conditions of the two countries/were notj and are not, identical. - ' ■'; The National Bank notes that for the period July-September, 1932, the favourable balance between exports and imports was reduced to £3,600,000, as compared with £7,600,000 for the corTesponding period of last year. Imports, have increased, exports have decreased. This reduction, the bank thinks, "may lead to the revival of earlier demands for an increase in the exchange premium on, London." But it suggests that it is only reasonable to ■ await publication o.f returns for later months, when the export season will be more advanced, before making deductions-with regard to the year's ■balance of payments and probable movements in exchange rates. WHAT OF REACTIONS? "Proponents of a higher rate on sterling bills," states the National Bank, "are more likely to place emphasis upon certain immediate results expected from an. arbitrary increase in the rate,, and upon "the rise in the local prices of our export pro- ' ducts which should follow such an increase, than upon various unfavourable reactions, consideration of which should not be avoided. The effects of the latter may not be immediately visible, but they may be sufficiently weighty to more than offset the advantages claimed for the suggested higher exchange rates.

"Some confusion of thought is, no doubt, unavoidable* Primary and secondary effects of changes differ in various sections of industry and finance, while our local experience of a depreciated exchange is too recent and ■too limited to provide information sufficient for the formulation, by the. inexpert, ■of a sound opinion on. the subject. , Also, reactions in other countries to charges in Australia are difficult to trace, 2s they reflect the sum of a number of . movements, among which our exchange is of relatively minor importance.

"While Australian experience is limited; that of certain other countries is wide, and the evidence available there has been carefully examined and the deduetions'recorded. For example: .The American Commission on International Exchange stated in its report •issued in 1903 that .'the ability to rei dtfce gold prices afforded by a depreciated standard, whether of silver or ; paper, tended everywhere to impoverish •Lthe economic forces of : the countries shaving _such: a standard in-their relations with the countries having a more ■stable standard.' " ...

.»•. Conant, in his "Principles of Money . and Banking," is also quoted to show ithat' "the problem is not as simple as 'it appears upon superficial examination. j'A rise in Australian exchange premium ton British bills, which is the same f thing as a depreciation in the exchange • value of Australian currency, would, f doubtless, induce a prompt increase in ilcoal prices of export commodities. -The [position of the. primary producers [would be improved relative to. other Sections of the community. But there kwould be no addition to the amount of LBritis-h currency we would receive for four currency. Australia' would be no S-better off in ita relation to the rest of 'Jhe world.. , ; REDUCTION OF REAL WAGES. "In fact,a rise in.the exchange pre.imium would set in-motion various disi.turbing reactions - here, affecting all of community effort. In' par,ticular, it would reduce the real value jpf each pound paid in wages, rent, and .interest. Beyond these shores it would shave some tendency—varying accord- ; ing to the. conditions—toward reducing price levels in general. ' "With world finance and commerce in their present disturbed condition, it .would be unwise to do anything likely .to further depress the price levels of Australian export commodities. Though the action may be relatively small, the result cannot be determined in advance. .The depreciation in the' exchange value ■of the currencies of great nations which are off the gold standard has been accompanied by a marked decline in wholesale prices." Though other'forces have been depressing prices during the past year, the association of exchange depreciation and lower price levels, indicated above, should be-given : due consideration when the effects, of changes in the Australian, exchange rate are under discussion. DEPRECIATION EVILS. "The rate of exchange between Australia and London has been stable at 25 per cent, premium on sterling since December last. Thy rate 'is determined by tho Commonwealth Bank and is maintained by, its willingness to buy 'or sell at the quoted figures. Propaganda designed to have the premium on sterling increased has. died down, following an announcement made by the Prime Minister that- the Commonwealth Bank Board Would jiot be'influenced by political forces in its task of fixing the rate. Proponents of 'higher premiums on sterling, and consequently on other currencies,, should not overlook the increase in the local premiums on the U.S.A. dollar and other gold currencies over the past six months. At the old .parity 100 sovereigns would buy 486 p.S.A. dollars. To buy that number

here on 7th May required £165 10s 7d in' Australian currency, and on 9th November £183 16s 3d.

"A heavy Australian export season is in close prospect, while an increase in imports, is fairly confidently expected in some quarters, and such an increase should naturally accompany the improvement in trading conditions noted during recent months. A pronounced change in the balance of trade may result and may prompt a renewal of outside attempts to influence a change in the current exchange premium on sterling.

"Any such agitation should be severely deprecated, as temporary trade movements provide an insufficient indication to the real position. In fact, such movements may be more than offset by invisible items.

"Further, while the.accumulation of a substantial amount of Australian funds in London is a desirable objective, it is not likely .that, while £100 sterling continues to equal £125 in Australian currency, such accumulation will be permitted to become excessive, j If changes become necessary, they could bo deferred for only a short period of time. The exchange market is much more sensitive than it used to be, and traders are watching changes in conditions more closely than in the past. They prefer exchange stability, and this can best be assured by leaving the controlling authority to carry out its task free from carping and uninformed' criticism or the disturbing influence of political or Press propaganda. NATIONAL CREDIT PREJUDICED. _ "If, as a result of trading and financial operations, a rise in the premium on London should become necessary, the resultant movement would be very different from an arbitrary increase, designed to raise the local price level. The former would be a correcting measure, forced upon the, controlling authority by actual conditions, and any adverse reactions here and abroad would have to be borne. The second would carry a larger share of unfavourable effects, and, in a general way, could have little advantage, other than that of postponing the completion of necessary adjustments in our internal economy. "One important outcome of the strength of the Australian exchange rate, following the reduction in the exchange premium on sterling from 30 to 25 per cent, eleven months ago, has been its effect in adding to our national credit at a time when one of our overseas. loans was approaching maturity. There is good reason for saying that, had the exchange been allowed to depreciate, it would have been almost impossible for. the Australian Government to successfully convert the •£12,360,000 which matured in London on Ist November last."