EXCHANGE RATE

Ashburton Guardian, Volume 53, Issue 86, 21 January 1933, Page 3

EXCHANGE RATE

VIEWS ON INCREASE. OPINIONS FOR AND AGAINST. IN RELATION TO PRODUCE. BENEFICIAL EFFECT ON PRICES. ADVANCED RATE WELCOMED. (Special to tfce "Guardian.") CHRISTCHURCH, This Day. The advance in the rate of exchange as it will affect the primary producer was widely discussed yesterday and tfiose prominently associated with marketing of produce or with production made interesting comment upon the certain or probable results and their advantages. Mr David Jones, chairman of the New Zealand Meat Producers' Board said that he was delighted at the rise. He added that when he first raised the question in the House of Representatives on July 1," 1931, his views, were strongly assailed throughout the Dominion, but he had never had any doubt that the policy he advocated was the right one, and that it was inevitable ultimately unless there was a material rise in prices.

Control of Currency. " I disagree with those who say that the rate is now an artificial one," he continued. "It has been artificially low for a long time, and it was kept at' that level a year ago through borrowing in London. The problem may be set out very simply. The farmer is selling on an index number of 769 and buying on levels, ranging from 1213 to 1490. It could hot be done, and the country was drifting to a general default. The Government's plain duty was to take action. It is stupid to imagine that our pound was worth 18s when in reality the figure was nearer 12s. "Most of the countries in the world are managing their currencies, and there is no greater example of the practice than that of Great Britain/' Mr Jones added. "She has a liquid fund of £167,000,000 to keep the value of sterling at a fixed point as desired. Just as Great Britain has considered her position, so must New Zealand, and the increase in the rate of exchange will result in immediate benefit to the farmers. Next Wednesday at the wool sale in Christchurjm. about £200,000 worth of wool will be sold basing calculations of late rates, and the result of the exchange rise will be an additional return in proportion to the adjustment for the alteration. Similarly with all exports, and the result will be that the whole of the export will be on a sounder and more equitable basis."

Statement for Canterbury SheepOwners.

For the Canterbury Sheep Owners' Union, an official statement was made "by its president (Mr H. D. Acland). "It is gratifying that the necessity for lifting the rate of exchange has been recognised as valuable to the bulk of the people, and that trading institutions are not expected to carry a risk of loss to their shareholders," he stated. "It is not surprising that finajiicial [institutions were reluctant to assume the riski of loss through being forced to follow a policy which was purely one of political economy as it affected the community. The Government apparently recognised the necessity of assuming a responsibility for possible loss for that portion of the year when funds may be in excess of demand in London, but is of the opinion that over the greater part of the year the people will benefit. The greater bulk of capital circulating within New Zealand has been considered to be a factor which outweighs heavily any detrimental effect on an individual section.

"The injustice was in pegging the exchange low against the exporter. That was deliberately done in December, 1931, under pressure from the financial institutions, ( ivhen the Government commandeered the farmers' exchange in 'London, and kept exchange down by borrowing money and transferring reserves. Thus was created an entirely fictitious credit balance on behalf of New Zealand in London.

"The suggestion that raw materials will be unduly costly under the new order can be discounted in most cases because of the comparatively small percentage of value' represented by raw material in the finished article made in New Zealand.

Adjustments Necessary in England. "Speaking of the objection of certain sections 06 importers, we suggest that there is much room for adjustment at the source of supply," the statement concludes. "It has to be remembered by critics that the index price level for Great Britain's exports is still approximately 35 per cent, above 1914, wljile the index number for imports of raw materials into Great Britain is approximately 24 per cent, below the 1914 level. It appears that there is room for adjustments of these figures by English principals from whom New Zealand importers obtain supplies, while still leaving a degree of margin for the maintenance at a profit of British industry. Providing equity prevails between overseas buyers and the New Zealand producers, there can lie no question that the Government's action will benefit the farmers, and through them the general community.'" There is apt to be some confusion concerning the butter position. It is stated authoritatively that the rise of one penny per lb announced in Christchurch yesterday would have occurred without any movement in the rate of exchange. The rise in the rate, it. is stated, will certainly result in a 'slightly higher price to producers, and the benefit of the extra 15 per cent.

in the rate will most probably be secured entirely by the producers.

The manager of one of the largest dairy factories in the South Island stated yesterday that London opinion expressed immediately prior to the rise in the rate of exchange was that it was expected butter would run into the 90's in six weeks. In Christchurch in response to the firmness in the market, there were indications of a rise to 9id per lb for export, but he was of the opinion that the exchange would probably result in further slight advance.

Naturally the local price was governed by export parity. In the summer local values were in line with export quotations, and in the winter the only difference in procedure was that charges were added. Asked his opinion as to where the benefit of the extra 15 per cent, was likely to be received, the official stated emphatically that the whole of it, if possible, would be handed on by the factories to the primary producer. The present price was 7d, however, and 15 per cent on that figure did not amount to an additional gain Avhich would warrant the general waving of flags. Even without the rise in exchange butter would have advanced in price, he explained, and the difference made by the Government's action was that whereas butter at 80s per ewt in London was worth 8d per lb, f.0.b., at the 80s mark now it was worth about 9£d f.o.b. with the advantage of exchange. Wheat Surplus May Be Involved.

According to statement made by Mr W. W. Mulholland, a member of the newly-set-up "Wheat Purchase Board, that body did not take into account the r possibility of a rise in the rate of exchange when making its calculations for the advance on the season's crop. He added that the advance would be_in no way affected by the Government's action. However, with the possibility of an exportable surplus it was possible that the exchange rate might be of value to growers in slightly increasing the final payment. increase in Wool Cheques. The increase in the rate of exchange will have a definite effect in adding to the wool cheque for the sales still to be held this season. For the Christchurch auction on Wednesday next it is estimated that the growers will receive approximately £25,000 more for the wool. That is without any allowance for a natural advance in values as compared with the first sale of this season.

Interviewed yesterday, a broker explained that the exchange rate benefit would be handed on to the grower automatically. Buyers received their limits from England or the particular country of their principals, and upon that worked out allowances for expenses, and secured a value limit on a clean scoured basis. With the rise in the rate of exchange that would have to be taken into account as would any other factor, and would therefore be reflected in an advance in price. To the fruitgrowers the rise in the rate of exchange will be an advantage because there will be an increase for the season’s crop value and most probably a corresponding increase* in local prices on the largest classes sent overseas. Small fruit would be little affected.

MEAT, WOOL, BUTTER.

INCREASE ABOUT 13i PER CENT

MR. MA CHIN'S VIEW OF FOSITION

CHRISTCHURCH, This Day

There should be an increase of about per cent, in the prices for wool, sheep, lambs and butter from the rise in the exchange rate, according to Mr W. "Machin. Mr Machin, who is general manager of the New Zealand Farmers' Co-operative Association of Canterbury, Ltd., and immediate pastpresident of the Associated Chambers of Commerce, gave in an interview the effects of the increased rate as he saw them.

"The rise in the exchange to 25 per cent, discount as against sterling is an accomplished fact," began Mr Machin. "It is a little belated because a certain amount of New Zealand produce has already been disposed of and the benefit to the seller of primary produce will be lost to those people who have already sold. But a very large amount of this new season's produce has still to be sold and the sellers of this produce will get an increased price in New Zealand currency. For instance, at the Auckland wool sale to-day the rise in the exchange is sure to be reflected in the price at which the wool will be sold, and I imagine that it is the imminence of the Auckland wool sale which determined the Government to make the announcement at this moment instead of waiting.till Parliament meets, so that the sellers will benefit.

Rise at Local Wool Sale. "The "same ihing will happen at the Christchurch wool sale next Wednesday, and the result will be that the farmers who sell their produce from now until the end of the present seasou—say, until next August—will receive this premium in New Zealand currency. Therefore, there is very little likelihood of any alteration in the exchange before that time. The net result should be an increase in prices for wool, sheep, lambs and butter by about 13J per cent. That is, the 15 per cent, required to make up the exchange rate will work out at about 13£ per cent, on the present prices, which are inflated by the previous rise of 10 per cent. "All money which has To be transmitted from' London to New Zealand to-day will carry this exchange premium. The increase in the price of wool will not be very much in terms of money. It will -be about Id a pound. On butter it will be a shade more and the increase on lamb should be about 2d a pound. But this will mean a comparatively large difference to the farmer and to his mortgagee and all the other people to whom he has to make payments.

"Contrary to what is said in some

quarters, it is not likely to be of much benefit to the stock agenls because in a very large number of cases the stock agent is already pledged to disburse to the farmer's creditors generally the net returns for his produce tor this season. But, of course, the stock agents' commission will bo increased a little. For instance, the average price of lambs sold on the feet will go up by about 2s and the stock agents will get commission on this extra amount. But this is very small against the commission they have lost on the drop in lambs of more than 165."

The price of meat in the butchers' shops may rise a little. The price of butter has already risen by about a penny. Generally speaking, if the experience Of Australia and Great Britain is repeated the rise in the cost of living will be very small. There will certainly be some diminution in imports, but this will probably "be of benefit to the community generally in the meantime, as with the increased spending power of the farmer it will almost certainly mean a marked increase in the demand for local manufactures. The individual importer will suffer to some extent and this is regrettable, but if this proves to be one of the steps which will bring aboutbetter business the importer will ultimately increase his business again and benefit with the rest of the community.

Price of Petrol. "The price of petrol has not yet been raised. 1 think it is unlikely that it will rise,, as the effect of 15 per cent, on the cost is so small—only about £d a gallon—that probably it wiiFhave to be absorbed and not passed on to the customer. It is unlikely that general drapery, boots and ordinary, commodities will show much rise. The troubles of the Treasury will not immediately worry the average person, but Uiese will be increased in the mean rime, though it should be remembered tl at with the increase in the national income in terms of New Zealand currency there is sure to be a better return in taxation. In days gone by every expansion of the national income has been accompanied by an increase in taxation returns. This is obvious because in terms of our products we shall pay not more to our overseas creditors. To-day, with the exchange at 25 per cent., it tones exactly the same number of boxes of butter, carcases of lamb and bales of wool to pav our overseas creditors as it would if our exchange bad gone down to par and no more. 1 '

GAVE WAY UNDER PRESSURE.

STATEMENT BY A BROKER.

STILL OPPOSES MANIPULATION

WELLINGTON, January 20

Referring to the Government's action in raising the exchange rate, Mr J. T. Grose (general manager of the National Bank of New Zealand) said:— "The National Bank has been one of the banks most firnily opposed to the raising of the rate of exchange, but wo bad to give way under pressure of other banks, and we are compelled to follow. . "The views of the National Bank on the exchange question are well known. These have, undergone no change. Since the beginning of the movement for raising the rate I have been against such steps being taken, and I have nttt altered my convictions to that effect. "I believe that a very grave mistake has been made by.the Government in forcing the banks , into their present position."

EMPHATIC PROTEST. ECONOMIC PRINCIPLES VIOLATED. WELLINGTON, January 20. The president of the Wellington Chamber of Commerce (Mr J. P. Luke) was emphatic in his protest. He said the imposition of an artificially high rate of exchange by the action of the Government was a direct violation of economic principles, and in addition was a direct contradiction of the undertaking by the Prime Minister that the Government would not in any way interfere with the exchange position. Palliatives of such a nature did not even commence to touch the real problem. Until the country recognised the necessity for drastically reducing all costs, the economic position would drift from bad to worse. The fact that a section of tho community, by extremely debatable methods, could impose their will 011 every other section was in direct conflict with political and economic principles. There could not be any doubt that the financial position of'the country would not be improved, and there would be a dislocation of trade and commerce. This would inevitably bring in its train far greater evils than the artificial pegging exchange attempt to remedy it. It was high time, he said, that the commercial and industrial community took drastic action in the only possible way available to it to see that the whole country was adequately and fairly represented in the political arena.

BREACH OF CONFIDENCE.

WELLINGTON! BUSINESS VIEW

WELLINGTON, January 20. Mr Salmond, president of the Importers' Federation, said the effect of the increase-in exchange on the importer will be to increase his costs. The importer will have to increase his selling prices by that increased cost, plus the usual proportion of profit on that cost. The retailer in turn will pass on the increased cost to the consumer. The effect of the, increased exchange rate will be that the public will have to pay the increase for the benefit of the financial institutions. Inevitably, tlie Government will be faced with increased service debt charges, estimated at round about £2.000,000 per annum, which amount they will no doubt endeavour to collect by an increase in income tax, which will come out of the pocket of trading and professional members of the communitv. It will

mean a decrease in the turnover __ of many businesses, with the result that staff's will have to bo reduced, thus creating further unemployment. This will probably mean a further addition to the unemployment tax. At a meeting of the Businessmen's Committee held this hiornnig, at which Mr Salmond presided, a resolution was carried unanimously which says the committee regards the Government's decision to impose political control of exchange as a deliberate and flagrant breach of confidence. It is recalled that last November Mr Forbes reiterated his previous declaration that exchange was a matter solely fur the banks, and he told a deputation that he thought it would have been in the proper place if it had waited upon them. It is this reversal of the Government's previous policy that is regarded as a flagrant breach of confidence and public trust, and the committee believes it can only have consequences of the gravest effect to the Dominion as a whole.

INTEREST BILL INCREASED.

OVERSEAS PAYMENTS. ADDITIONAL BURDEN OF £1,500,000. ■ s WELLINGTON, January 20. The rise in exchange means the immediate addition of £1,500,000 yearly to Government and local body payments in respect of interest overseas. This is the conclusion of a. prominent banker who was asked to make an estimate of tiie position. He assumed the Government's overseas pavments to be £8,000,000. To-day's increased exchange means an added charge of £1,200,000 in meeting this obligation. Local bodies pay nearly £2,000,000 in interest overseas. Their added obligation is £200,000, making a total of £1,500,000 as an extra burden due to the pegged' exchange. The same authority declared that there was bound to he a very heavy loss from falling imports and the consequent drop in Customs receipts. ,

"A PANIC MEASURE."

AUCKLAND COMMERCIAL VIEWS

AUCKLAND, January 20. Bepresentatives of local bodies- and the commercial community received the exchange announcement with consternation, the latter describing it as a panic measure. The 'Power Board and Transport Board are facing maturing loans and will have to meet greatly increased expenditure in London. Mr M. J. Savage, deputy Labour leader, said the decision was disastrous. He suggested that the remainder of the Ministry might profitably follow Mr Stewart's lead. The development was evidence of the disintegration of the Coalition. Criticising the decision, Mr E. C. Greagh, the president of the New Zealand Stock Exchange, predicted extra taxation and increased cost of living. The Government had followed the advice of unive/sity professors in preference to that of sound business men and bankers.

LABOUR LEADER'S VIEWS.

ACTION CRITICISED. WESTPORT, January 20. In a statement to the Press this evening, Mr H. E. Holland (Leader of the Opposition) said that ever since the Coalition had been in existence there had been within its ranks, moving in response to pressure'from without; an element that insistently called for artificial pegging-up of the rate of exchange. All the trading banks operating in New Zealand, with one exception, had been opposed to the proposal, and Mr Oliver Nicholson (chairman of the Bank of New Zealand) had emphatically declared that it was not the business of the banks to adjust exchange rates to meet vari-ations-in the prices of produce. MiNicholson had also said that a heavy depreciation of New Zealand currency would result from any considerable increase in buying rates on London, and that while it would pay tho bank well to see the rate on 'London increased to 25 per cent., the interests of the country must be paramount. The Prime Minister for a year and a half was adamant in his refusal to countenance the demand of the section favouring an artificial increase, said Mr Holland. On the special Economic Committee,- which sat in August and September of 1931, he allowed no one to mistake his attitude, and in June last year he was equally emphatic-. The Government had not interfered with the exchange rate and did not, intend to do so, Mr Forbes said. It was not the Government's function to fix the exchange rates, and the banks must continue to carry that responsibility. On November 10 and again on November 19, the Prime Minister was even more emphatic in declaring that the matter of exchange was entirely for the banks," continued Mr Holland. "Now they found .both the Prime Minister and the banks somersaulting with almost lightning speed from their former attitudes. What was the explanation? Since conditions were little different now from what they were two months ago, there could be only one explanation of 'this remarkable development. The Reform Party Adullamites within the Coalition had definitely intimated to Mr Forbes that they would bring about an overthrow of his Government, if their demands were not complied with, and to save his Government, the Prime Minister (haying counted the heads in the light of other possible developments) had capitulated and ordered the banks to peg up the exchange. The privately-controlled banks would appear to have surrendered to the Coalition rather than take the risk of losing Tory-controlled government, but only after having secured an indemnifying guarantee in respect of the purchase of London surpluses.

What the effect of the artificial increase would be remained to be seen ; but it was certain that any benefits could only be of a temporary character. There could be no question whatever

about the adverse position in which a huge majority of the farmers found thcmsolves, or the need for drastic action to assisti them; but not even the most ardent of the advocates of high exchange would content that the relief which it would*bring would he permanent. Indeed, the only exporting farmers who would reap a direct benefit would be those who were free from encumbrances, and it was not necessary to say that mortgage-free farmers were few and far between in New Zealand. The beneficiaries in the main would be the hanks and other financial institutions and stock and station agencies.

Tlie Labour Party's proposal for a guaranteed price to primary producers, said Mr Holland, appealed to him as a far better metiipd than the temporary expedient now being resorted to. It would constitute permanent benefit, and would not cost the country anything like the amount that would ultimately be involved in an artificial increase of the exchange rate and its resultant inflationary effect.

The banks had quite recently* made it clear that in the event of political action being taken to raise the exchange rate they as trading concerns with obligations to their shareholders would not accept the responsibility for the surpluses which would accrue in London as a result of the shrinkage in imports. They had pointed out that this would mean that the Government would have to buy up these surpluses, and the premium to be paid would have to be met out of taxation. If, for example, said Mr Holland, there was an exchange surplus in London oP £5,000,000 and exchange stood at 25 per cent., the Budgetj would have to meet -a charge of £1,250,000. It appeared that the Government had now pledged itself to the banks to budget for this additional £1,250,000 of expenditure or whatever other amount might be necessary to purchase the exchange surpluses. This in the end would mean additional imposts on the farmers and on all other taxpayers. »

Effect on the Budget. It should be remembered, continued Mi- Holland, that, according to the Treasury, the increase in the exchange rate would adversely affect the Budget to an extent of about £5,000,000. Likewise, interest charges on the overseas debts of, local governing bodies would be increased in proportion, and these bodies would have to choose between heavily increasing their rates and wholesale dismissals of their employees. He said he had no doubt whatever that the forcing up of the exchange rate would detrimentally affect nniny businesses, and increase the number of men and .women listed as unemployed, while at the same time substantially increasing the cost of living. Sir William Hunt, an ardent advocate of the policy now being adopted, had said that if the people should read; at breakfast time that 15 per,cent, was added to the exchange, by 9 a.m. prices would be up 15 per cent. Under the present legislation, there could be no appeal to the Arbitration Court unless witli the consent of the employers, and consequently and administrative change calculated to lower the workers' standard of living should be accompanied by a statutory provision for wage increases in proportion to increased living costs. Mr Downie Stewart's resignation was undoubtedly a serious matter for the Government party, for he was undoubtedly the most highly intellectual member of the Cabinet, which would be considerably weakened by his absence, said, Mr Holland. He concluded by saying that a meeting of the ' Opposition would be held on Thursday, and it would then be decided what action, if any, should he taken,in connection with the lifting of the rate of exchange.