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Hokitika Guardian, 30 January 1933, Page 4

Giving an explanation of wliat is meant by the rate of exchange and what causes it to rise and fall a northern writer says that money has to he sent for (instance from New Zealand to England, to pay for merchandise, interest, shipping fares and freights, etc. As our banknotes are not legal tender in England, it is necessary for merchants, the Government and others to obtain ,pounds sterling in exchange for New Zealand money. Payments are also due to New Zealand for exports' to England. For the convenience of all parties, the hanks buy and sell exchange—the money involved in transactions between different countries. An Auckland hank sells to an importer a sterling draft for £IOOO which ho sends to London to nay for drapery. The hank buys from an exoovter lull for £IOOO worth of butter shipped to London. A. London bank collects £IOOO from the buyer of tho butter and th e English soft goods merchant takes the Auckland draft to a hank and gets £IOOO for ])is good?. When uich transactions exactly balance the rate of exchange would be at par, less a fractional change for the bank’s services. Tf payment? due by New Zealand become greater than receipt, the excess be provided by the banks drawi-'g upon other funds held hv them in London, but to restore •equilibrium they would check imports hv raising the rate of exchange, charging more for .sterling drafts and pay-

ing more for sterling bills. Under prewar conditions, the variation of rati s was strictly limbed to 1J per cent, above or below par, because that was approximately 11i t . tost cl height, insurance and interest for the period of the voyage of shipping gold, ihe only international currency. An excess of imports would cause the price ol sterling to fall until it became cheaper to ship gold fiom London to New Zealand. As the gold corrective is not available, exchange rates may vary much further from parity. When the slump developed, the total proceeds of exports fell much faster than the amount of imports and other payments due abroad. The demand in New Zealand for sterling being in excess of the supply, the price of drafts rose to 10 per cent, premium. This and other influences checked imports, ar,<l an excess of exports was created. In the- -absence of political interference the banks cannot fix exchange rates at 'their own discretion.. If they offer 10 per cent, premium for sterling hills, and that price is too low in relation to actual .suppijy and demand, the exporter may sell his exchange at a higher rata to an importer. An “outside” market develops l and the banks are forced to raise their rates. That happened in Australia in 1931 when the rate was rapidly raised to 30 per cent, largely by ‘the influence of transactions outside the- banks. The raising of exchange rates to an artificial level by political interference is an entirely new device and can be made effective only by creating an artificial demand. Hence the Government has undertaken to pay to the hanks any losses they incur in respect of sterling funds that the banks cannot isel-1 in the normal way.