AN UNTENABLE COMPARISON

Evening Post, Volume CXV, Issue 31, 7 February 1933, Page 6

AN UNTENABLE COMPARISON

If anything were required to reveal the unsoundness of the Government's high exchange policy it is supplied in the attempt by the Minister 'of Finance to prove that trie increase is not artificial.and that the New Zealand action resembles' the British departure from the gold standard. "New Zealand (says Mr. Coates) was forced off sterling, just as Great Britain was forced off gold. Only the details were different." What the Minister dismisses as "details" are basic facts. Britain was forced off gold hy the flight of capital. Had she not suspended the gold standard her reserves of gold would have been quickly depleted. She had been forced to borrow heavily from France and America in .the effort to remain on gold, and if a ruinous crash were to be avoided the depreciation of the currency was imperative.. This step was taken, not for the benefit of exporters (though they immediately gained from it) but to save the, financial status of the nation. Moreover, it was taken with the consent and on the advice of the banking and financial authorities, and with the practically unanimous approval of Parliament.

Here depreciation was undertaken against the advice of the Treasury, in face of a strong protest from' the banks (save one), with a trade bal.ance distinctly favourable to ,New Zealand, and with no flight of capital to check. It was made, for the benefit and under pressure from exporters, and it had to be whipped through Parliament. The only point of resemblance to, the British case is-that Britain has. gone off gold and New Zealand has gone off sterling. There the resemblance in causes ends, and the consequences may be expected to reveal differences just as great. To anyone .that' the forcing off gold by economic circumstances and the forcing, off sterling by the political agitation of producers are one and the same thing is absurd. Even to make this' claim indicates either blind disregard of facts and economic principles or a belief that the public mind can be blinded to such facts and principles.

The artificial nature of the increase is proved by one fact alone— that the hanks refused to sanction it except under protest and with a Government indemnity against loss. The position was briefly set out by the Secretary to the Treasury in his addendum to the report of the Economic Committee.

Artificially to raise the exchange rate above the level required to maintain equilibrium in external receipts and payments (states the addendum) amounts to designed depreciation of the currency.- To maintain such rate while it remains artificial it is sug"gested in the report that the accumulation of London funds- resulting, from the unnecessary restriction of imports could be used for redeeming aebt held abroad. : Apart from the fact that doing this wouia be very costly at a high rate of exchange, the operation would in my opinion be impracticable^ % atime Ufce the present, owing to the _difflculty of borrowing in New Zealand, the additional funds required for such redemptions. ... .

This consideration emphasises a further basic difference from the British position. Britain went off gold and immediately balanced her Budget, thus maintaining the principle which Mr. Downie Stewart stressed that depreciation must not accompany an unbalanced Budget. New Zealand leaves sterling and budgets fdr a deficit of £4,500,000, largely the cost of high exchange. The Dominion thus adds a heavy. burden to the floating debt. With such an addition to the floating debt it is-impossible to adopt the suggestion of the Economic Committee and use London surplus credits to redeem external debt, for the difficulty of borrowing in New Zealand to balance London redemptions would be even greater than the Secretary to the Treasury contemplated when

he wrote his addendum. Moreover, the existence of this floating debt; and the effort to borrow locally would put an insuperable obstacle in the way of another suggestion -of the Economic Committee—that an easy credit policy in New Zealand would stimulate importing and thus help to absorb the London credits. With the Government borrowing freely here, how would it be possible to ease credit at all? 'The natural reduction of interest charges would be highly improbable.

These objections and arguments cannot be easily disposed of, as the Minister of Finance appears to think, by a statement that the controversy sh6uld be dropped and that •the agitation is "in no small part artificial." The Government's determination to maintain its unwise "policy wilL not force the public to accept it as right. Mr. Coates declares that an early fall in the rate "is not in i any degree likely, and will' not be likely unless and until prices at the other end of the world show^ a substantial recovery or unless" other circumstances clearly warrant it." This must increase uneasiness by indicating that the Government is bent on a long-term depreciation which may even come to be the permanent depreciation against which the Treasury Secretary gave such emphatic warning.

Changing an established basis of currency is a serious step (he said), as any impression that the existing basis at any time is not permanent would be fatal to the essential element of confidence in the currency. Other countries have devalued their* currencies, but, so far as I am aware, only in recognition of an existing depreciation. It is

quite another matter to fix intentionally in advance a point to which the currency is to be depreciated, even assuming the depreciation could bo controlled and stopped at' the point decided upon. I may add that the history of the other countries is against such an .assumption. • (

The danger of this manipulation is doubly great when it is practised ■with a Budget seriously out of equilibrium.