EXCHANGE RATES

Hokitika Guardian, 10 June 1930, Page 8

EXCHANGE RATES

“AT HEELS OF AUSTRALIA”

BANKING OPERATIONS

NEW ZEALAND SUFFERS,

Holding tliat it was unfair that New Zealand sliouid be dragged at the heels of Australia in the fixing of exchange rates, Air IJ. G. Ashwin, IL Com., presented some interesting phases of the exchange question in the course of an address to the Economic Society.

The present rates of exchange with London, lie said, represented a temporary partial breakdown of the system of which the essence was the maintenance of even rates Of exchange with a swing either way not exceeding the cost of shipping gold to London. This cost he understood to be not more than oOs per cent. For a short while in 1921 the published rate for telegraphic transfers on London went to a premium of 3 per cent., and the' present rate was a premium of 5 per cent., a fact that naturally perturbed the importing section of the commercial community.

'"'■■RON BALANCES EXHAUSTED ?

As a whole the system was governed by the rise and fall in the London balances of the banks, with a traditional bias toward keeping rates of exchange stable, and using the volume oi internal credit as the fluctuating factor to preserve the equilibrium of the system, (he only logical explanation of the pro sent exchange position was that, the •Roresaid London balances have come down to dangerously near the point o 1 exhaustion.

Incidentally, if this Dominion had actually returned to the gold standard

' riC ?o, as was stated as the time, th exchange rate would not have gone to .5 per cent, when the cost of shipriim gold to London was not more than l 1 ppr cent.

FACTORS OF CONSEQUENCE

“The only factors of any consequence that could have resulted in such a heavy drain on the London balances are an adverse trade balance and of a sudden cessation of borrowing abroad,” he said. “As far as New Zealand is concerned, borrowing abroad has continued without any marked changes in practice, while for the last financial year exports practically balanced imports. Under these circumstances there may have been a net drain on the London balances of the banks of from £2,500,000 to £5,000,000, being the probable extent to which interest and dividends, repayments of Oiv'T and investments abroad exceeded fresh borrowing abroad, and other investments of outside capital in New

• land, but against that must be set off the considerable increase in the T -»idon balances, which must have resisted from the favourable trade balance df £22,000,000 for the two previous years.

It would thus appear that the Lon- ' ■’ funds were ample to tide over the less prosperous * period since experienced. There is nothing in New Zealand economic conditions to justify an exchange rate of 5 per cent., and we -'Mist look across the Tasman Sea for the real cause of the trouble.”

TWO COUNTRIES AS ONE

Four of tlVe six banks carrying on business in New Zealand, from, the point of view of their operations, were primarily Australian institutions, Mr Asliwin continued. The London balances to finance the trade of both countries. so far a« these four banks were concerned, really formed one fund, and tin' six bulks in association bad been in the habit of fixing practically uniform rates df exchange for both Australia and New Zealand. This country was much more affected hr Australian conditions than Australia was bv New Zealand conditions, and the practical result was that the rates of o'ehauge New Zealand on. London and vice versa were governed to a preponderating extent by Australian enrnlit- : 'Mis. This was the real explanation of He present 5 per cent rate. Australia was suffering from a heavy adverse trade balance, accentuated by a cessation, or at any rate severe re-

striction, of London borrowing, and

from the fact that exchange on London was definitely and openly being rationed in Australia, it was clear that the London balances of the Australian hanks, including the four operating in New Zealand, were practically exhausted. Thus the London credit balance built up h.v these hanks from the good trading years of New Zealand had apparently been used to support the Australian exchange. This arrangement worked out quite fairly to the people of New Zealand, and at a time like the present it was clearly seen to he prejudicial to the interest of the country.

REMEDY SUGGESTED

The remedy was simply to give due recognition to the fact that New Zealand and Australia were seperate ecconomic units, and to fix seperate exchange rates for each country accord- ! inp to its trade position and outlook. When London balances were failing instead of penalising both countries i alike, the”banks should ascertain which country was at fault economically, abd adjust the respective exchanges rates accordingly, thus, in effect, giving a preferential claim on the remaining funds to the country dvhose balance of international payments [had not caused the drain on the funds. Tn this connection it might he noted that during the recent rise in the rates, though the New Zealand rate m'actioally kept pace pvith the Australian rate up to 5 per cent., the Australian rate had higher' still. It almost appeared as though the associated hanks had come to the conclusion Unite there were limits to which New Zealand could he dragged along at the heels of Australia in this matter of exchange on London. Tt should he recognised, however, that if there were to he separate rates of exchange on London for Australia and New Zealand, the present practically nominal rates of exchange between these two countries could not be maintained. In fact, the Australia, and New Zealand exchange rate would have to he the difference between the respective rates on London. This might at times he detrimental to our Australian trade, hut that trade was relatively small compared with our trade with the rest.of the world, nil of which was settled through London.