HIGH EXCHANGE RATES.

Auckland Star, Volume LXIII, Issue 135, 9 June 1932, Page 10

HIGH EXCHANGE RATES.

CASE AGAINST INCREASE. T7OULD IMPAIR CREDIT. .LEADING BANKER'S CONCLUSIONS. Several reasons for concluding that a high rate of exchange would have a disastrous cfi'ect upon New Zealand's credit are given by a leading banking authority who has analysed the case for and against increasing the present rate. "If a rate of £140 came into force as lias been recommended," he states, "the •exchange cost of the Government's annual debt service of £8,000,000 abroad would be increased from £800,000, at the present rate, to £3,200,000, while repayment of existing Government loans domiciled in London, approximately £150,000,000, would require £210,000,000 of New Zealand money, Instead of £105,000,000 at the present rate —an overwhelming increase in the debt burden, which would be attended by a disastrous loss of this country's credit. "Therefore, not only would repayment of maturing loans be much more burdensome, but such repayment would be much more likely to be insisted upon by our creditors. Moreover, Government securities, whether held abroad or in New Zealand, would show a decline in -value commensurate with the extent of exchange inflation." A Temporary Benefit. Any increase in the income of primary producers which would result from an increase in the rate, he states, would be secured almost entirely at the expense of the rest of the community. It might be argued that a redistribution of the national income was desirable, because the country's well-being depends on the prosperity of primary production; but this argument raises the question whether primary producers are genuinely entitled to part of the already much-reduced income which is now being received by the rest of the community. Alsoy. there is little likelihood that the rest of the community is in a position to carry an appreciably increased burden. The authority continues: — "Even if it were decided that the primary producers should benefit at the expense of the rest of the community, it is practically a certainty that the benefit secured by a higher rate would be merely temporary and ultimately harmful to the community as a whole, for the following reasons: Increased rate •would cause a measure of inflation; New Zealand prices would thus rise; and the part of the community directly penalised by the higher rate would thus be further penalised. Higher Costs of Production. "Since this pavt of the community employs much labour, difficulties and complications would arise as to the payment of wages and unemployment. Costs of production would rise, Cancelling part of tlie benefit received by primary producers, the burden of taxes would "have to be redistributed, and would be transferred to those who benefited by the rise in the exchange rates. The total taxes levied would have to be increased because each pound spent by the Government in the Dominion would go less far, and a greater total of New Zealand money would be required to meet the Government debt service' abroad.

"Thus, little, if any, of tlie benefit secured by primary producers could in the long run be retained. Further, the raising of the rate would, by prejudicing our credit, lessen our chances of renewing maturing loans abroad and raising new loans." As to the argument that primary producers would have increased spending power, this is dismissed as illusory, because the increase would be, secured at the expense of the rest of the community. The possible stimulus to primary production, it is stated, would not be at all general or permanent. Once the stimulation of high rates had spent itself the benefits would vanish. The high rate, might even have the effect of curtailing exports, since the banks might hesitate to swell their London funds by accepting exporters' bills, if the exchange rate so damaged the Dominion's import trade that the banks could not dispose of their funds to importing interests. Such a situation almost arose-in Australia. "Pegging" Denied. Dealing with the oft-repeated assertion that tho banks have "pegged" the exchange at an artificially low rate, the authority states that the present rate is ruling because the banks deem it the true rate on the balance of trade and London funds position. The banks avoid artificial exchange manipulation, which would dislocate 'the balance of trade with harmful results.

It is contended that in disordered times like these a wise control of all matters of finance —including exchange —is the country's best protection against financial and credit demoralisation.

A comparison of the trade position for .1931-32 with that of the previous year is cited as evidence that no increase in the exchange rate is warranted. On. the present rate there has been a favourable movement in the trade balance, due entirely to a heavy fall in imports. Any rise in the rate, it is stated, would further curtail imports and cause serious difficulties as to the disposal of London funds accumulated by surplus exports.