EXCHANGE RATES.

Auckland Star, Volume LXIII, Issue 285, 1 December 1932, Page 8

EXCHANGE RATES.

CASE FOR INCREASE. MR. JACKSON'S CRITICISM. REPLY BY ECONOMISTS. Professor Belshaw and Messrs. Rodwell, Holt, and Stevens, of the Auckland University College School of Commerce and Department of Economics, have sent the following reply to Mr. Gainor Jackson's criticism: — "The gist of the argument of Mr. Gainor Jackson's reply to our criticism is: Imports have fallen from £48,000,000 to £20,000,000. Exports have also fallen, therefore exports have fallen because imports have fallen. The exchange premium has been raised to 10 per cent, therefore the 10 per cent premium has caused the reduction in imports. Since the fall in export values is due to the fall in imports, and since the fall in imports is due to the 10 per cent exchange premium, tlii i premium is also responsible for the decline in export values. Hence, if the exchange is raised further, export values will further decline. "It might be appropriate to remind Mr. Jackson that export prices had already fallen substantially before the exchange was raised to 10 per cent. Mr. Jackson in effect argues that a fall in the world prices of our exports of 50 per cent has been brought about by a 10 per cent exchange rate in New Zealand. We can only conclude that Mr. Jackson did not perceive the implications of his argument. Mr. Jackson then argues on tho basis of a 40 per cent exchange (though the present controversy has centred around a 25 per cent rate), and assumes that imports would fall from about £20,000,000 to £10,000,000. After making allowance for tho transfer of interest overseas, Mr. Jackson then discovers £13,000,000 of eurplus which would be used to transfer overseas debt to New Zealand, and paints a gloomy picture of the effects on the Budget. Mr. Jackson's caeo then depends upon the assumption of a prodigious drop in imports, which he doee not justify by any supporting argument. General World Conditions. "Our argument is that the fall in imports is a consequence of declining export values, this decline being due to general world conditions. The decline in export values, and the internal deflation associated with this have reduced purchasing power and our capacity to import. Had the exchange been at parity the internal deflation would have been greater and our capacity to purchase imports would, to eay the leaet, not have increased. "It is our opinion that it would not be necessary for tho Government to transfer a part of the debt to New Zealand provided the banks were willing to hold tho rate. Reference to the economists' report, paragraph 61, will show that the banks were able to hold the rate at parity with sterling, despite enormous fluctuations, in the London balances between the years 1925 and 1931. We do not believe that the accumulation of funds in London, due to a rise in exchange to 25 per cent or 30 per cent, would be great enough to seriously embarrass the banks, and m any case, it would bo temporary and would paee as soon ae: importers realised that their fears were unfounded.

If Mr. Jackson had read the economic report at all carefully ihe would have seen the reply to the sort" of statements which he had been making. We would draw attention to the basic fact that the trouble iu New Zealand is due essentially to a disparity between internal prices (farmers' costs) and export prices. Before conditions can stabilise these two sets of prices must be brought much more closely into line. This can be done, either by internal deflation or by increasing the farmers' receipts, through exchange depreciation. Internal deflation will mean further reductions in wages, the non-payment of interest, and possibly some further legislative action to reduce interest, the continuance of (or an increase in) unemployment, and, inter alia, a further reduction in taxable capacity. Those 'who favour a high exchange are concerned, not simply with the position of the farmer, but also with the position of tho "business man, including the importer, the wage-earner, and the national budget. Money Income. "Our argument is that a rise in exchange, Iby sustaining the national money incomes, would prevent taxable capacity from falling and that, although there would 'bo some additional money cost in tho transference of interest overseas, this would be more than counterbalanced by the reduction in taxable capacity which will take place at the present rate of exchange. We argue further that, although the price of imports would be increased, the national money income would be so miicli greater than at a 10 per cent exchange that, when importers, had adjusted themselves to the new conditions, Customs revenue would not suffer. "The transfer of part of the national debt from England to New Zealand, if such indeed proved to be necessary, would increase the money value f>f the national de.bt by tho amount of the exchange rate, but the real burden of the debt, ae is pointed out in the economists' report, woilld not be greater because of tho fact that the 'higher exchange avoids internal deflation and therefore sustains money incomes and taxable capacity. "Tho figures which Mr. Gfainor Jackson quotes, showing the effects on the budget, aro based on the, assumption of a fall in imports to £10,000,000 as the result of a 40 per cent exchange- premium. We Oiayc suggested that this assumption is unwarranted because it ignores the effect of a higher exchange in sustaining national money income."