NATIONAL FINANCE

Hokitika Guardian, 22 December 1931, Page 3

NATIONAL FINANCE

(By Scrutator in N.Z. Financial Times). THE EXCHANGES. It has been a fact brought home to every business, man in the last year or so that remittances to Britain by draft cost premium, while drafts Payable in London can bo sold in the Dominion for considerably more than face value. In ordinary normal circumisttanceisi this was not so. In former times, when both 'Britain and New Zealand were on the gold standard, their currencies were of equivalent value, a New Zealand pound being worth an English pound ; so that the cost of remittances in either direction was strictly limited. With both pounds at par, the cost of remitting to Britain was limited by the charges incurred in sending gold, including interest in transit, and this may be taken as not exceeding 30s per £IOO. The exchange .premium, in other words, could not and did not normally exceed this figure, and while gold did not usually move in and out of the Dominion in response to moving balances, it always could have done, because gold could then be got in exchange for notes. In practice goid' movements were negligible, and confined to export in the normal course of trade, and imports of coin for circulation purposes, the exchanges being adjusted by movements of the London balances of our banks. LONDON BALANCES. London balances are built up out of the proceeds of exports sold in the 'British market, and loans raised there on .account of the Dominion. They are depleted by payments for imports, by interest on oversea debt, and by loans repayments. For many years our balances were kept at such levels by these long standing factors that the banks were always in a position to provide money in the Dominion in exchange for Ivondon drafts, and to provide credits hi London in exchange for local currency.. The abnormal 1 trading situation in the last year or so, due to sharp and sudden contraction in export prices, in conjunction with a reduction of the amount of borrowing, ■ has apparently so affected London bal ances'that exchange has not been freely available within the points represented by the cost oi importing or exporting specie; and while there is much goid in the custody of the banks in the Dominion, it has not- be'en made available for private export, because, out note issue being inconvertible, there is no means of obtaining gold lor remittance on pri-| •vato: account: The adjusting' link of convertibility into gold hiding disappeared, primarily in respect of our own money and bitterly in respect of sterling as well, the problem of exchange determination has become somewhat complicated \jn theory and uncertain in practice. With the complex theoretical considerations determining mutual rates of exchange between paper currencies inconvertible 'into gold it is not proposed here to deal. What we are concerned to do is to point out how the exchanges have moved, 'what the effects of those movements have been, and what are the probable trends of the future. OUR DEPENDANGE. There is no country in the world to which exchange movements are,of greater importance, because of our extreme dependance on foreign trade and external finance. We owe large sums abroad, both for principal and interest, the bulk of which are payable in sterling in London ; while at the. same time,

owing to our relatively immature in-dustrial-.development, we must-in all import somewhat heavily. ■These facts make the rate at which we can buy drafts, to settle our British debt a matter of considerable importance both to the Government,, the local bodies, and .importers and 'their clients. On tile other hand, we build up considerable credits by .sale of primary produce abroad, so that the exchange movements are also of vital importance to our primary producers, and to the banks, .stock and station agents, and other or- . ganisations that finance our large and heavily mortgaged body of primary producers. As it happens, owing ito a .slower rate of price deflation in the Dominion ,and depleted London balances, it now costs somewhere about £llO New Zealand pounds to purchase £IOO sterling in London, Persons having to make remittances, therefore, (the Government included, must pay £llO or thereabouts where previously they .paid only £IOO. On the other hand a primary producer or his banker or financier, having sold produce to the value of £IOO in London can dispose of this claim for approximately £llO in the Dominion. It is obvious therefore that our exporters and the Government, priina facie at least, lose by it. The depreciation of the currency, in other words, benefits our farmers at a time when, such a benefit is very welcome, while ft discourages imports at a time when.rectification of our trade balance in that direction is desirable. THE CONFLICT OE INTERESTS. 15 .It is thus .plain; that there is a balance of conflicting special interests, respectively benefited and damaged by the depreciation .of our currency in terms, of sterling ; and, uow,that sterling itself has fallen in comparison with gold, by its greater depreciation in terms of gold values. This has. already gone a long way. When our currency was at par with sterling, and sterling was iequivaient to gold, a £ New Zealand was worth in gold values 4.86 dollars. It is now worth somewhere between 3.45 and 3.65 dollars, a tremendous discount and drop in value. As a general principle few’ would contest 'the assertion that, especially for a country deeply involved, directly or indirectly, in world commerce, depreciated currency is a bad thing, even though it confers incidental advantages. In a heavily importing country it raises the cost of j imports and (the cost of living. It acts | as an informal bounty to some industri-s | which, getting under weigh with such | artificial protection, may be unable to keep going when the advantage is with- j drawn, and will clamour for a tariff, anti while in the first instance it benefits primary producers, part though adnot all of this benefit will be cancelled out in rising costs of imparts, and rising Wages, or "wages higher than they otherwise would have been, as a result, of the relative inflation of the cost of living, .and also increased taxation and debt interest. Brill, we think, there is a balance of advantage to the farming industries that is likely to be, if not permanent, at all events of very long duration. 'I bis bounty is paid by the 'rest of the community, in so far a-s it is not cancelled out by higher costs of various kinds to the farmer •himself. THE DANGER OF INFLATION. The .trouble with this type of inflation is that, like all inflation, it is not easy to arrest. Our exchange has not only depreciated. 10 per cent, or thereabouts | i .sterling!, but it. still stands at the same- ratio to sterling- now that that currency depreciated about 20 per cent, in terms of gold itself, so that the deterioration' in the international vaiUe of our money has thus been very marked. A plausible ease can be made out that exchange depreciation, to the extent that it has gone, has not on the whole inflicted net loss on the community, and its effect in helping the farmer at a difficult time is certainly opportune. ■lt can only however be a palliative,., dearly purchased at the cost of an uncertainty and added cost introduced into our essential import- industries. It is wrong in principle that any section of the community should be injured, and any benefited, by the insidious and concealed device of money depreciation. If a little exchange inflation is good, why not a bit more, and where stop?' When regarded v from this angle the case for exchange depreciation has the fatal defect of proving too much. DETERMINING EXCHANGE RATES. t In the 'Dominion the exchange depreciation was not, as far as we can see, originally brought about by design .to accomplish any indirect purpose. It seems primarily due to the state oi •the .London balances, arising out of the export price situation and the diminution in borrowing, and is connected with our general balance of accounts. The maintenance or pegging of the rate, however, is probably much more within power of deliberate control by bankers than is generally admitted. Theoretically,, bankers merely declare the rates, which are determined by supply and demand, and if they stray beyond these limits private outside transactions will correct the balance. We doubt, however, whether in ithis country there is a sufficient potential free exchange market to oust the influence of the bankers in exchange fixation, at ail events over a relatively short period. In ruling conditions .it is probable that the banks are “pegging” the rate, with a view to restricting imports. A 'DISQUIETING COMPLICATION. There is, however, another complication, and that of a somewhat disquieting -har’acter. It is well known in business circles that there has been a deliberate* agitation in some* quarters to allow exchange depreciation to go still further,

ostensibly because of its beneficial influence on the primary industries., Without imputing indirect motives, however, it is significant to point out that the main protagonists of this policy ,lmve been gentlemen prominently associated with and deeply involved in the stock and station business, as werl as certain others reputedly speaking for at least one .of the large institutions. The reason is not far to seek, since these institutions, having on their books the accounts of many farmers in a somewhat dubious and shaky position, are anxious to see these accounts improve, in the interests not only of their farmer clients, but also of themselves. Suppose, for example, that X.Y.Z. has sheep farmer clients with large and doubtful. overdrafts, and suppose these men sell their wool in Britain for, say, £IOO,OOO .sterling. If exchange is at par,, their overdrafts are lightened by £IOO,OOO, but if the exchange, depreciates about. 10 per cent., they get i£lTo,ooo in New Zealand currency, and if the exchange were, as advocated, dropped 30 per cent., the gratified farmers, and the bank, would, benefit to the tune oi £130,000 or thereabouts, at the expense, as regards the £30,000, of the general community. Exchange depreciation may thus be employed to stabilise doubtful accounts at the general -cost. In such circumstances it is inevitable that the demand for further depreciation will be made, and it is equally desirable that 'the position in simple outlines’should be understood so that the request should not be acceded to.

It would .seem from these considerations that the case for a reserve bank on the Niemeyer lines receives considerable strengthening. It is obviously undesirable that banks, .standing to benefit by exchange depreciation in the manner indicated, should have the power to bring about that depreciation under the cloak of national advantage. In cuil'ericy matters, as in other matters, indirect expedients and remedies are ot less , advantage' in the long -run than the straight and narrow path of financial rectitude, hard, though that path is to-day; and the communiity as a whole is-deeply interested ‘‘in the long run, even if individual' interests l in tUe. short fun” lie the other way.

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