“DANGEROUS EXPERIMENT”

Evening Star, Issue 21752, 21 June 1934, Page 8

“DANGEROUS EXPERIMENT”

IMPORTERS REVIEW CONTROLLED EXCHANGE FEAR OF PERMANENTLY DEPRECIATED CURRENCY The following statement has been issued by the executive of the New Zealand Importers’ Federation : Controlled exchange at the artificial rate of 25 per cent, has been operating for seventeen months, since January, 1933. and, from the Government’s recently published audited accounts covering the twelve months ended March 31, 1934, much is revealed regarding the staggering cost of this dangerous experiment with the dominion’s financial stability. It is time the public realised the dangers of the position. The depreciated rate continues to operate and there is no real reason to suppose that the cost to be faced for the current twelve months will be any less than it was for the year ended March 31 last. Consider the following approximate figures dealing with the cost of the exchange during one ,year alone : Direct Costs. £ Twenty-five per cent, extra on Government overseas debt payments 1,797,000 Twenty-five per cent, premium on surplus fundi-’ iakep over from banks Difference between interest paid 10 banks on Treasury bills and interest received by Government on London monty. (London interest averaged , at 1 per cent.; local interest at 5 per cent. Calculated at 4 per cent, difference on half of £20,094,000. Four per cent, on £10,000,000) ... 400,000 Twenty-live per cent, extra on oversea? debt payments by local bodies. (Interest payable to United Kingdom, .£8*0,772) 220,000 Total direct Indirect Costs. Twenty-five per cent, extra cost of imports (estimated by taking difference between sterling value and value in New Zealand currency as-.shown in Government Abstract of Statistics ... 4,658,000 Sales tax made necessary by exchange disruption o] Government finance. (From Abstract of Statistics) 1,847,000 Extra cost of stopping charges. Outward freights at 124 per cent, of £5,000,000 (Note: Total exports for the year were valued at £46,000,* 000 New Zealand currency, and freight approximates 10 per cent, of value. Though official exchange is 25 per cent, an agreement with shipping companies provides for surcharge of only 13 2-3 per cent, on butler and wool freights. Exchange on freights of other goods does not average lower, but 12-J per cent, has been used for conservative calculation, f Inward freights are covered by extra cost of imports—see item above — freight being added to the landed value.) ... ... 625.000 Total indirect costs ... 7,130,000 Total direct and indirect ... £14,570,000 There are other indirect costs in addition to those shown above. The Minister of Finance has already announced that the Central Bank will purchase all sterling held by the Government in London, but that any loss on this transaction will be borne by the Government. It would appear that the Government still cherishes the hope that there wilt shortly arise so great a demand for sterling to pay for imports from Great Britain that no ultimate loss will Have to be faced on these heavy holdings. The executive of the New Zealand Importers’ Federation expresses its firm belief that it is not possible our importations will be swelled .to such an extent that they will balance our exports for the next two years and also take care of the twenty millions in sterling which had accumulated by March last. In fact, so long as the present artificial rate of 25 per cent, is in existence so long will imports lag, and it will not be until the exchange is considerably reduced that the volume of imports will increase appreciably. The Central Bank, it is understood, will purchase all the excess sterling held by the Government in London by crediting the Government, in New Zealand, with an equivalent amount in New Zealand currency, and, with that, the Government will retire Treasury bills held by the Associated Banks. Such a transaction certainly suggests inflation, as when it is completed the local banks will hold additional, funds in New Zealand amounting to between twenty-five and thirty millions. It is well known that avenues for the employment of already existing capital are very difficult to find. It is possible that these transactions will have the effect of permanently depreciating our currency,;, and, if that takes place, the problem of pur dairy farmers will be rendered even more difficult when the Ottawa agreement expires. It is an axiom that everything in this world has to be paid for sooner or later, and this executive is convinced that any temporary benefits which the farming community may have seemed to secure from the depreciation of our currency will be more than counterbalanced by the future grave difficulties which face the marketing of our produce in Britain while New Zealand’s currency remains depreciated.

" INACCURATE ARITHMETIC M FINANCE MINISTER RIDICULES STATEMENT [Pus United Pkess Association.] WELLINGTON, June 20. “ My attention has been directed to a statement which is being published by the New Zealand Importers’ Federation and which contains fantastic miscalculations as to the allegedly enormous financial cost of the exchange rate adjustment,” stated the Minister of Finance (Mr Coates) to-night. “Regarded as a whole, the calculations in fact, so fantastic that they carry their own condemnation, and it is needless to comment generally. Some points of comparative detail may, however, be mentioned.. First, the sales tax is brought into account as ‘ an'indirect cost ’ of the exchange adjustment. It is no such thing, and the repeated false assertions to_ the contrary have never been substantiated. If the federation or any other persistent critic would take the trouble to ascertain the facts they would see that the former Minister of Finance (Mr Stewart), while not in Savour of the exchange rate adjustment, stated explicitly that the sales tax did not result from tl*s variation in the exchange rate. To quote his words from 1 Hansard,’ Mr Stewart said: ‘lt would be unfair of me not to say that, apart from the raising of the exchange, so far as I had an opportunity of looking at the position, either a sales tax or some heavy alternative taxation would have had to be imposed to cope with the deficit that was in prospect.’ “ The federation has also made an obvious blunder in simple arithmetic,” continued Mr Coates. “ The direct cost of the ■-transaction they allege (quite inaccurately) to bo £7,000,000 odd. and to this they proceed to add £1,800,000, being the proceeds of the

taxation which they argue to have been made necessary by the transaction. For what reason these figures have been added together it is impossible to conceive. Their own argument is that the direct cost has been £7,000,000, of which £1,800,000 has been met by new taxation, and these two sums are solemnly added together to show the inflated total described as ‘ direct and indirect loss.’ It is simple nonsense. It is on a par with arguing that the year’s public expenditure is £20 t OOO,OOO, the taxation is £20,000.000, and that the cost of government is therefore £40,000,000. “ The federation expresses the fear that inflation will result from the transaction to which, with such inaccurate arithmetic, they take exception. When this word is used it would at least bo interesting if tlio federation would say precisely what it means by iullatioil.”