A HIGH EXCHANGE FALLACY

Evening Post, Volume CXV, Issue 36, 13 February 1933, Page 6

A HIGH EXCHANGE FALLACY

One of the objections to ihe high exchange rate is that it will check Ihe downward movement of costs and lend to increase the cost of living. Supporters of the high rate are answering this objection With the argument that in practice it has not done so in Australia. • "It seemed to be generally accepted as a fact (said Mr. Masters in the -Legislative Council) that the cost of living would increase automatically with the increase in the exchange .rate. Theoretically that idea might be sound, but the Australian experience was that in practice the reverse had been the case." The Prime Minister made similar statements 'when replying to a Labour deputation on Friday," It is evident that these and other exchange supporters have not examined the facts, for their argument is wholly fallacious. The cost of living has certainly fallen in Australia under a 25-30 per cent, exchange rate; and so.it has in New Zealand under alO per cent. rate. Even the high exchange does not put a complete check upon the downward movement, which is being forced by other influences. Australia and New Zealand have both had substantial wage reductions. There have also been reductions in interest and rent. Further, wholesale prices abroad have fallen, and it is some time before the effect of this fall is shown in retail prices. What economists term the time lag must be taken into account. r .

Australia and New Zealand price statistics cannot be compared with each other unless the bases are' exactly the same and the weighting of various items in the price-groups- is on the same system. But we can obtain _ valuable informationv by measuring- the movement of prices over similar periods. Such measurements are decidedly against the high exchange argument. In Australia the all-groups retail price index, between the fourth quarter of 1930 (the latest period of £8 15s exchange) and the second' quarter of 1932 (after 18 months of the 25-30 per cent, rate) fell from 1352 to 1218, a drop of 134 points. In New Zealand in the nearest similar period for which figures' are readily .available (from November, 1930, to August, 1932) the index fell from 1554 to 1307—a drop of 247 points. The fall in New Zealand under 10 per cent, exchange ; was at least 75 per cent, more rapid than in Australia under high exchange. There are other factors in Australia which would tend to offset the effect of exchange on living costs. The Commonwealth, for example, has an extensive market in which' secondary industries (under the protection afforded by exchange) could attain a higher degree of efficiency by increasing the scale of production. There are not equal possibilities in New Zealand. But even if no allowance be made for these factors the comparative price movement definitely contradicts the assertion that theory.and practice do not agree in the effect of high exchange on living costs. They do agree—except when advocates of the high rate misread the facts and fail to understand the operation of economic Jaws. Even when they do this there is no excuse for their ignoring tlie evidence that is before their very eyes of prices quite definitely advanced because of the exchange. .......