EXCHANGE RATES.

Hokitika Guardian, 25 November 1924, Page 4

EXCHANGE RATES.

A I.nXDDNKISS YIKAVS, j An interesting letter on tilt* exchange problem 11:is beet] I'eeeiveil by Mr r. W. !*;» I in* 5 r. til' Wellington. frum .Mr F. I!. Ti'od'.vcn, of London. priiic-i----pal I.r till' old-extnl.lished linn of I'.illicit, .1. .Mi ('mil mid Co. Air Tredtven says tlint having many inquiries with regard to the exist ini' dilliculty of •'eltine i I'ediis opened lor .shipments of orodnee from .N’ew /ealund lie Consulted the Lest 1 tti 11kiiijz authorities, and as a result lie oilers the followin'? explanation : So lone as the amount of lulls which the hanks huy emails the amount of hills which they sell, it is ohviolls thaL no adjustment of funds is necessary, and under tlm>c conditions the ditieri nee hetween the rates ol ext-hango .-Larged lor buying and selling should he only so much as will cover interest, plus a reasoiiahle profit to the hanks. If the total of hills bought and sold does not roughly approximate, then the time will arrive when an adjustment ol funds hccoines necessary. I lie cost ot .‘Heeling this adjustment will lie an important factor when a revision of rates is effected. Before the war. such adjustments were simple, for the hanks were ahle to -hip sovereigns either to or I rum Australia. This facility meant that at a known cost (interest. freight and insurance) the hanks could at any time transfer funds either way. The lesuit ivas that exchange rates were kepi within reasoiiahle houlids. for example. if a man in Australia wauled to remit CllMi: , :t to London, and the hank risked, say, ‘Jits per cent, it was open to him to refuse the offer of the hank, and instead ship sovereigns at, a cost of. say fox per cent, (these figures are hypothetical only). Tims the hanks could not maintain a rate much higher than the cost of shippim? cold. TITK KXI STING TROUBLE:. The existin'? troiihle is primarily due to the fact that, apart from any Government restrictions, j?nld shipments are lad now /permit led, and il they were permitted, are not possible, owing to the premium on cold. \\ liilst in former times the lost ot shipment worked out at somethin'? about lilts per cent, the existing premium on cold would hriiu? the cost up to a li|?ure round about £lO per cent. Kxpart and import shipments arc. ol course, relic teil in the amount ol hills bought and sold by the hanks. When the amount of interest on loans which the Commonwealth and States Governments have to provide in London is taken into account (such remittances have the same effect on exchanee as imports), the net result oil balance should have been that the banks accumulated hinds in Australia. Rut I hey have not done so. The opposite is the ease. The present trouble i-- that a considerable surplus of funds is held by the hanks in London, with, in eoii'O(|ill'll'*-. 5 , a shortage in Australasia. There is. therefore some other factor which we have not yet considered above. It is the very heavy recent I.oii-owiug* in l.oiidon by the ( ommonwealtli. States and municipal governuiellts. When the proceeds "I sin-h loans have to he remitted to Australia, and come into compel il ion with the hanks in their urgent (Tlorts to buy drafts on Australasia in order to get rid of funds held here to replenish their resources so badly needed in Australasia. (Buying. in London, drafts on Australasia, and scllinj?. in Australasia, drafts on London are of course similar ill ell'ect). Assuniiiif? that it may not he possible to ship Miveivioiis for some years to come. Hie only source from which we can look for improved exchange imiditioos would appear to be a cessation of till' heavy borrowings in London by the colonial governments. Till-: I-'I.IT TUATIOXS. With regard to Hi? Ilucinalions in I lie rate- of excha ugc. thc-c of course follow the usual law of supply and demand. As the ri••-nil 111 pi esenl eondil ions, hills are heinj? "Il'ered lor sale lo til" bank-; ill \listralasia. lor very heavy amounts on the one hand "liilst on the other the demand by the public lor bills on London is probably only normal. Besult - rates in the one i a-e move against the public, i.e. hills arc now plirellil-ed by the hanks at higher rates of di-count than for many years, whilst on the other it is pox ihlc now fur lb.- p>ih! i. • lo o|f"<-l n-mittaip cs, Australia to London, at a suh-tanlm! profit. The above remarks cover onlv exchange opeiat ions oil the An-t rahi-ial siite. To consider "lie side ol il i prohid.lv simpler irian to endeavour ti ■ •rasp the situation from l.nth sides, The exchange operations in London ol

euur-e have till" opposite elici t oil the funds of the banks to those aflected in Australia. Pills on l.oudon bought b.v I lie banks in Australia deplete the tanks’ funds in An trala-ia. Pills on Australia sold by the hank- in l.midon have the same elleet. Pills oil l.oudon sold hv tin l hanks in Australia augment their funds in Australia. Pills Oil Australasia bought hv the hanks ill l.oudon have the same elleet. It will lie understood that under the present ahiiormai conditions it i- the hunk s Inlying rate in l.oudon which has moved in favour of llm public, whilst the selling rate. has. in sympathy, become less favourable.