HIGH EXCHANGE RATE.

Auckland Star, Volume LXIII, Issue 26, 1 February 1932, Page 3

HIGH EXCHANGE RATE.

DANGEROUS CONSEQUENCES,

MOVEMENT IN AUSTRALIA

POSITION OF EXPORT INDUSTRIES,

A warning of the danger of cirroney depreciation resulting f ro m a high exchange rate is given bv D. A. S. Campbell in an article in the "Australian Quarterly" of December 14. After pointing out that Australia was faced with the danger of currency depreciation if Mr. 1 hcodore s policy had been endorsed at the Federal election, lie said": "But Australia is also faced, though it does j not yet know it, with the same danger from another, and entirely unsuspected, quarter. the crisis in the exchange position '< between London and Australia has revealed the fact that an influential section of the Press and some prominent j bankers, supported by one or two economists of standing, are in favour of keeping the exchange rate at £130 Australian to £100 English, even if the trade position between England and Australia does not justify this rate. In other words, they arc prepared to peg the rate if necessary. Now the present rate, if it be an unnatural one, can only be kept up by sonis buyer coining into the exchange market and buying all the unwanted sterling bills at' the carded quotations, it h:is been suggested that the Common wealth Bank should undertake this task. If the Government has neither the revenue nor capital funds to provide for such an undertaking, and the present Government has certainly not either, the only way open is for the Commonwealth Bank to itself create credit for the purpose. It is the duty of a central bank to acquire foreign balances for the purpose of correcting and preventing minor fluctuations around a stabilised exchange position, but this is a very different thing from stabilising the rate itself at an arbitrary level by heavy buying of foreign funds, and the works of the authorities on central banking will be searched in vain for approval of such a function. The effect of its doing this would be to increase the deposits of the Australian banks in Australia with the Coirmonwealth Bank and to accumulate funds in the latter's London office. It may be said at once that there can be no objection to a high adverse exchange rate if it be the natural result of economic instability and/or political uncertainty. But when the object is to hold a rate permanently or at least for a considerable period above its true rate, totally different considerations arise. Whole Population Pays. "Much has been written about the advantages which a depreciated exchange confers on the country concerned, but the plain truth is that a high exchange rate, which signilies a depreciated currency, benefits a section of the community —the exporters —at the expense not of the banks and importers, except insofar as the trade of both is restricted, but of the wlyile population. As the exporters are both taxpayers and consumers, part of the benefit they receive is simply given to be taken away. But the cost to the community is even greater. As the export prices, in Australian currency, of raw products determines- (with the exception of one or two commodities, which enjoy the protection afforded by certain "schemes"') the price for home consumption, the cost to the Australian public of its bread, meat, and locally manufactured woollens, to mention three important items in every household budget, is increased not to the full 30 per cent, but to a very considerable extent varying with the relation of the cost of the raw product to the total cost of the retailed commodity. "The cumulative effects of a depreciated exchange on local money costs, especially labour costs, is generally j underestimated. In the case of Ausf tralia, where labour costs arc determined largely on a standardised cost of living, the effect of increased prices for practically everything are obviously considerable. The exporting industries are certainly having their returns inflated, but costs are sticking. Exporters cannot have it both ways. Those who preach high exchange rates as a positive policy in the same breath talk about reducing costs, which is equivalent to an endeavour to go in opposite directions at the saine time. If the export industries require help, it would be far better to subsidise them directly. The wheat grower to-day has the advantage both of a high exchange rate and a direct subsidy.

Interests of Banks. "It is rather a poor commentary on the methods of Some of our business and financial leaders to find them advocating aii exchange 'dope' to exporters instead of pursuing a consistent policy of reducing costs other than by currency depreciation, which in the case of Australia is certain to fail in its object. Moreover, some bankers may not be altogether trustworthy guides 011 this question. Banks which have either advanced large sums on the security of the exporting industries or which have bought exchange forward without covering their purchase by sales are obviously interested in keeping the rate as high as possible and inflating the returns of those industries with which they are closely connected; and if this inflation of returns to the primary producer by means of a high exchange rate, which, if not manipulated, is at once a sign and corrective of a lopsided external trade position, is to be regarded not a.s a natural result of unsound economic conditions/ but as a deliberate policj' supported by the operations of a Government bank, what answer in principle have the 'sound' thinkers to the inflationist policy of Mr. Theodore? Absolutely none. If- it is justifiable to depreciate the currency to keep the primary producers in business to pay oversea debts and buy imports, it is equally justifiable to depreciate the

currency to provide employment. It may be said, of course, that the unemployment problem would be solved by the exporting industries paying their way. So it would, provided they pay their way in real money and not in depreciated money. The present tendency to 'regard the depreciated currency as permanent is dangerous, because the effect of permanent depreciation is merely to raise the old difficulties to a higher money level. .It does not solve them, it merely shelves thc-m. Empire Considerations. "The future policy of Australia must, if it is to have enduring results, be based on a plan which will enable Australian costs to approximate to sterling costs. Empire and economic •considerations demand this at least from the Commonwealth. The position has been made easier by the depreciation of the English pound, and when this linds its natural level, which will be for some time at least 15 per cent below the old gold level, Australia should be able to trade with England at a reasonable basis, for we cannot expect the British public to pay too much in the form of preferences for the pleasure of consuming our products and keeping a spoilt member of the British Commonwealth. in luxury. "The Premiers' > Plan marked the commencement of a general plan to reduce costs by straightforward and effective methods. Part of the community have already played their part, it is clearly up to the rest to carry 011 the work begun in Melbourne. A rise in world prices may be hoped for, if not immediately expected. In the meantime adjustments should be made in ordT to get costs somewhere near a sterling basis. A return to the present gold basis of costs is practically impossible, but the position of the British Empire provides us with the half-way house of sterling, and if Australia can reach it she will be able to avoid the rampancy of inflation and the extremism cf j deflation." |