EXCHANGE RATE.

Auckland Star, Volume LXVIII, Issue 156, 3 July 1937, Page 14

EXCHANGE RATE.

OVERSEAS DEBT. COSTS AND PRICES. ! i POSITION IN DOMINION, j i . i CHOICE BEFORE GOVERNMENT j Ft Z.C.F. : 5 features of the ft ' . :.iy b<s briefly sumr I' Murpay's r v.- r. s expressed in my r ■" i!' »;i:'aanM pegged < - been unchanged . - .i ■• L .i h.t'.f y«ars. during the ' > . • ... .. ' r:.-. New Zealand has j . l - - .r- • :r. London. The • •••'.•: I-'-:: ion funds is about t ' y. :r* hy the trading --- a-- : and «.?■! exchange • " . i". made by > . ' " : i> •"• -i. ia- i h.iinran of " •< N>.-w /-aland. on -June 15. 1 "■ a trade position and an j •- simulation oi London funds which not ■ 'i.y do not justify a 125 rate, but which would in the ordinary course call for a rite not worse than par." That statement is as tru* to-day as it was then. Whatever the theoretical position may <», lor a:l practical purposes the exchange rate has been "pegged" at the present level since the day it was raised, a p.d the Reserve Bank now has effective • "ntrol. Are the London funds excessive? Pro!*•«or Murphy points to their recent rduction and says that, considering all • ;e possibilities, they are. not more than • ;e Dominion will require. Against this is the evidence of an a .normally large accumulation mainlined continuously for four years. Of <"Urse, the possibilities which Professor Murphy has in mind would be effective ;n reducing the total in time to a normal ligure, these possibilities being an increase in the total*value of imports or a reduction in the total value of exports, ■>r both. The abnormality which exists r-an not continue indefinitely. If the rate is held up against thft tendency to pnll it down the Dominion must adjust it°lf to that state of affairs, and this adjustment is now in progress. Devaluation and the Debt. Probably few people have considered the cost of devaluation to the Dominion. A major factor is that it would involve the writing-up of New Zealand's rational debt to Britain from £160,000,000 to £200,000.000, and debts of New Zealand local bodies to Britain from £16,000,000 to £20,000,000—a total increase of £44,000.000. Fnrther, it would involve £2.000,000 additional every year on the total interest charge. If the maturity of the debt were spread over 25 years, this would be a total addition of £50,000.000. Bringing together the two items, the addition to the cost of the debt becomes £94,000,000.

How would a reduction in the exchange rate affect New Zealand's general prosperity?

Professor Murphy suggests that it ■would reverse at least temporarily the present recovery. It is a truism that New Zealand's prosperity is bound up with that of Britain. Tf British prices are favourable for primary produce New Zealand's trade is profitable, and vice versa. Variations in the exchange rate cannot alter that fact. The most important effects of the exchange are seen in the distribution of incomes within the Dominion, particularly as between the farmer and other people. Dominion's Rising Costs. What is the present position of New Zealand's cost-price structure? Professor Murphy mentions the progress of adjustments to the present rate of exchange and says a reduction in the rate would start a reverse series of adjustments. When the exchange was raised it was argued that the increased rate would help to tide the farmer over low prices and enables necessary adjustments in his position to be postponed until prices improved. One of those adjustments, revision of mortgages, is now in hand. The general changes since 1931, when the exchange was at parity with sterling. are briefly: Prices for most farm products have fully recovered; production has increased; wages are restored, for a shorter week; interest rates are lower; taxation is higher; local body rates are slightly lower: rents are restricted, but newly-let properties are higher. This cost-price position is favourable for revising the exchange. If the rate be not revised, costs generally will advance beyond the pre-1932 position, and other changes will occur which will compel Xrw Zealand to rule out revision indefinitely, if not permanently. On this view, the present year offers the last opportunity of making the change. Failing action, the whole cost structure will be carried forward to new positions, from which it will be exceedingly difficult to retreat when the next fall in overseas prices makes a retreat necessary. The problem of rising costs should be tackled now, not when the fall in prices is upon us, and the most effective means of deoling with it is to restore the value of the pound. The Government's Pledge. There is still some momentum in the upward movement of overseas prices, and this would, at least partially, absorb the shock of reduction in the exchange. Actually, the price position is to some extent artificial, in that it is affccted by the armaments programme, and that is a potential danger to New Zealand, for while overseas prices are maintained at an unnatural level by a temporary stimulus the Dominion is liable to live in a kind of hothouse prosperity. For this reason it seems extremely inad\ i sable to allow the present trend of costs and prices within the Dominion to take its course. The Government stands pledged to r. (luce the exchange, but this, unfortunately, conflicts with its policv, which is inflationary. It could not, for political leu-on-i. quite apart from the econo- ».<• r.-asons already mentioned, act next year, on the eve of thp election, and if the inflation went on it could not act later. In short, the future of the exchange is bound up with the other features of the Government's policy. Therefore the question for the Government to decide is clear. It is whether Xew Zealand's interests, remembering the overseas debt and the large proportion of trade carried on with Britain, will be best served by 1, u\ing the exchange at its present level and continuing the inflarionnrv trend, or by taking the exchange in hand and adjusting the Government's i"!iey accordingly.