“RATES OF EXCHANGE.”

Manawatu Herald, Volume LI, Issue 4480, 19 July 1930, Page 2

“RATES OF EXCHANGE.”

A SIMPLE EXPLANATION’. This is an attempt to explain in a simple way the rales of exchange between different countries, e.g., between New Zealand and Britain, or between Britain and U.'S.A. It should be nderslood that where the term “money” is used here, it is intended to cover also the various substitutes for actual money, such ns cheques, bank drafts and bills of exchange.

'Suppose the rate of exchange between Britain and. U.'S.A. at some particular time is: “£1 equals $4.5.” This means that if an Englishman has to pay a debt in America lie can buy dollars —in other words, he can obtain American dollars in exchange for English .pounds, at the price quoted. 'Similarly an America n who wishes to pay a debt iu England can buy English money at the price of $4.5 for every £1 required.

There are certain persons iu England who have imported goods from America and now have to pay tor them. They therefore need American money with which to pay tlieir debts; that is, these English merchants need to obtain a certain amount of American money in exchange for English money. At the same time in America there are certain merchants who have imported goods from England; and to pav for these goods they need to obtain English money in exchange for American.

The hanks and brokers act as a "go-between” for these two parties —those in America who want English money and are prepared to give American money in exheange, and those in England who want American money and will give English money in exchange. But how is the “rale of exchange” determined? It is not fixed arbitrarily by the banks. The

“par” rate (£1 - $4.87) depends upon the amounts of gold represented by the pound and the dollar respectively: and variations from par depend, like all other prices, upon (lie relation of supply and demand. If the amount of English money required by Americans to settle their English debts is exactly ■ 111 a Ito the a mount of American money required by English people to settfc their American debts, then I hey can mahe a straight-out exchange at par. But if there, is a greater demand by English people for American moneyi than by Americans for English money, then the rate of exchange will go up in favour of the Americans.

There is not much danger of confusion when the two countries have different names for their respective kinds of money: e.g.

•‘pounds" in one country and “dollars” in the other. But there is some danger of confusion in the public mind when both countries use the same names for their money. To avoid this, when considering exchanges between England and New Zealand, we should .he careful to spen'k always of “English pounds” or “N.Z. pounds” as the case may be.

When our exports are sold in London, Ibis means that the buyers in England have to obtain a certain amount of New Zealand money with which to pay us for our exports. At the same time New Zealand merchants are trying to obtain English money to pay for our imports from England, and they -are willing lo give New Zealand money in ox-

. Image for it. But we’owe -England and other v oimtries more than the price of our imports. We owe them the inlcrest payable on our State and local body loans which have been laised overseas. Wo owe English shipping companies for freights. Some New Zealand companies have In pay dividends (in English money) to their English shareholders. And so on. Altogether, we in New Zealand owe people in Britain and u(her countries about £9,000,000 a yi ar apart from, in addition to, the price of our imports. To keep os straight, then, our exports should he equal in value to our imporls plus 'itbout £9,000,000 per annum (see footnote). Now we return lo the rate of exchange. For the sake of simplicity we can speak as though the whole of our overseas trade wore confined to Great Britain. Suppose oni exports sold at £50,000,000 and our imports for that year cost £41,000,000. Then there would he people in Britain wanting £50,000,000 N.Z. money with winch to pay us for our exports. At the same time the merchants in New Zealand would he wanting £41,000,000 English money to pay for our imports; and the State and other bodies would waul £9,000,000 English money to pay interest, etc. That is: there would he people in England wanting £50,000,000 New Zealand money in exchange for English money; and there, would be people in New Zealand 'wanting £50,000,000 English money in exchange for N.Z. money. Supply and demand on both sides would be equal; and the- exchange would he made at par (one English pound for one N.Z. pound on telegraphic transfer). But suppose our exports realise less than the price, of our imports (plus the £9,000,000). Suppose, for instance, our exports realise only £45,000,000 while our imports for .(bat year cost £40,000,000. This will mean that England wants only £45,000,000 N.Z. money to pay her debts to us, while we must obtain £49,000,000 English money to settle mir debts to England. How can this excess English money be obtained ? Possibly the New Zealand banks have balances on hand in London, and these can

then lie used. Failing this, Hew Zealand may raise a loan in London, borrowing the money required to meet the deficiency until the position c-an be rectified next year. Or again, .part of the annual N.Z'. loan raised in London may in fact be used to pay interest to English holders of previous loan stock —a most unsound, but not uncommon, way out of the difficulty. Or failing this 100, New Zealand may ship gold to London. But unless and until some such arrangement is made, it is evident that there will be a shortage of English money offered in exchange for N.Z. money; and the rate of exchange .will therefore lie unfavourable lo New Zealand. An unfavourable exchange results from the simple fact that we owe them more than they owe us lo square the year’s accounts. This is clearly not a matter that can be altered by Act of Parliament. It is not 'a matter for which the banks can he held responsible. It is not a matter which can he affected by Labour Party propagandists iriu'kung emotional speeches and cheap appeals to the gallery. If is simply an economic lad. Nothing can alter the fact that if our overseas trading accounts shows a loss on the year’s operations, then we must expect to meet that loss; and in practice we have to meet it by paying a higher price (price plus exchange) for our imports the following vear. (A.E.M.)I ’

NOTE: —In the foregoing explanation, for the sake of simplicity, no reference has been made to the effect of raising ordinary overseas loans.