CONTROL OF EXCHANGE

Press, Volume LXXIV, Issue 22594, 27 December 1938, Page 4

CONTROL OF EXCHANGE

GOVERNMENT’S POLICY DISCUSSED

BULLETIN FROM CHAMBER OF COMMERCE

Commenting on the Government’s control of exchange funds, the latest economic bulletin prepared by the Canterbury Chamber of Commerce, in consultation with the Faculty of Economics at Canterbury University College, says that although there has been no in the exchange rate and no apparent depreciation of New Zealand currency, the suspension of convertibility with sterling is a serious step whigb will not improve New Zealand’s credit overseas.

“In almost every country where convertibility has been suspended,” the bulletin goes on, “the suspension has been due to causes associated with the depreciation of the currency concerned. New Zealand is no exception. This will be clearly understood overseas and it would be well therefore that the most essential safeguard against inflation and depreciation, the obligation for the Reserve Bank to exchange local currency and sterling freely at its quoted rate, should be restored as soon as possible. “It appears that there will be a limitation and a definite selection of imports and that the direction of import trade will also be controlled. If this is so, it means that New Zealand has moved a long step further in the regimentation of her economic affairs. Additional restrictions on trade are being imposed at a time when it is recognised almost everywhere that freer trade is essential for improvement in economic conditions, and the general effect of such restrictions is to reduce production and exports as well as imports. “Hitherto, trade in New Zealand has been conducted on a reasonable democratic basis, under which any consumer and purchaser of goods was able to buy almost any goods from almost any source that he pleased. Now the Government apparently intends to impose on consumers official limits as to what they shall buy arid where it shall come from. For New Zealand this is a new and decided limitation _ of the democratic liberty hitherto enjoyed. The Causes of Control

“The depletion of London funds and the necessity for exchange control arise directly from the policy pursued by the Government during the last three years. Many observers have stated that this policy would be tested only when "prices fell and the national income ceased to expand. It is a significant reflection on the new economic policy that a reduction of about 10 per cent, in export income, similar to reductions experienced many times in the past, should be followed by a situation serious enough to require the suspension of convertibility of the national currency. “It is not only the Government’s monetary policy that is at fault, but its general economic policy that has proved impracticable. In its effort to improve the conditions of labour, the aim of which was commendable, the Government has reduced working hours, increased wages, improved working conditions and. pursued an expensive public works policy which has absorbed some who would otherwise be unemployed and attracted others from their employment. This labour policy has increased labour costs to a point where normal productive industry is unable to absorb the full supply of labour. Consequently, many who were unemployed during the depression, but who might have found employment in expanding industry during the period of recovery, remained unemployed, or would have done so had they not been absorbed on public works. “In addition, the conditions provided both on public works and on unemployment relief works are more attractive than on farms, the rates of wages being higher and the hours gen* erally shorter. Consequently many workers have been attracted from the farms and have increased the number of public employees, while farm labour has become very scarce, and farm production is tending to decline. This movement has involved a transfer of workers from productive work on farms, where costs are met from production, to public works where costs are met from tax revenue or borrowed money. “While export prices were rising and national income expanding, in the period up to the end of 1937, the Goy- j ernment was able to finance its public , works policy without inflation, partly by using accumulated reserves and , partly by borrowing from the current | savings of the people. In 1938, export | prices fell, export income was reduced ' by about £7m., slight business con- ‘ traction' followed, and the Govern- . ment’s sources of finance tended to dry up. In order to continue its lavish ■ spending programme, the Government borrowed frpm the Reserve Bank, and . by the end of November its advances for purposes other than dairy marketing reached £B.sm. The increase in these advances conformed closely with j the reduction in the sterling funds of i the bank. In effect, these advances created»claims on the bank which were exercised in payment for imported . goods and consequently in depleting ‘ sterling exchange. 1 “At the same time, the Government’s ] general policy, involving high labour j cosf£, high taxation and restrictive 1 regulation, was such as to discourage * investment in- New Zealand and to ‘ drive capital abroad where conditions were more attractive to investors. The ! outward flow of capital involved a fur- : ther depletion of overseas funds. The _ reduction of these funds resulted largely from the export of capital and j the excess of imports due to the Gov- 1 ernment’s inflationary borrowing from the Reserve Bank. Bpth of these were ' abnormal movements and were the direct results of Government policy. “Other factors operating to decrease ■ London funds, the fall that occurred in export prices, and consequently in export receipts, and. ttie seasonal tinfavourable balance of trade in the second half of the’ year, are more normal and have occurred many times in the past. At the end of October, 1937, total overseas funds exceeded £2Bm. and were amply sufficient to meet normal fluctuations in the balance of trade and payments. It is the abnormal elements resulting from 'the Government’s policy that are the direct cause of the heavy decline in overseas funds and of the control scheme that has been imposed to conserve those funds. Some Effects of Control “The immediate effects of control must be unfavourable for internal as well as for external trade. Under the burdensome sales tax and the increasing volume of regulation, trade has been difficult enough in recent years. At the present time both exports and production for export appear to be declining. The difficulties of securing farm labour, combined with the high costs ruling, may cause this decline to continue. During the present year the trend of imports has been downward, though certain Government imports have increased substantially, and, under the controls imposed, imports are likely to decrease rapidly. In addition, if imports are to be selected, as is proposed, the range of imported goods on sale in New Zealand will be narrower, and more time and trouble must be spent in arranging to get the limited quantities made available. “It seems that insufficient attention has been given, here and elsewhere, to the fact that production depends on trade, and that, to increase production, the processes of trade should be made as simple, as easy, and as cheap as possible. The present trend of administration, and the inevitable result of the present regulation, is to increase the complexity, the cost, and the difficulty of all trade, and therefore to reduce the production and increase the cost of goods. The result must necessarily be restrictive both to trade and to the

production that depends on it, and harmful to the standards of living of the Dominion.

“The difficulties of the control scheme adopted will be greatest in its early stages, but even after these initial difficulties are overcome, if they can be overcome, and methods of control are reduced to a practical working basis, the restrictive effect must be considerable. All businessmen, including importers and manufacturers, must necessarily plan their activities for some time in advance, and they require the greatest practicable measure of security and stability as a basis for this planning. Now a new source of instability and uncertainty has been introduced which will make planning more difficult in the future.

“As yet the Government’s intentions are not clearly known, for divergent Ministerial statements make it doubtful whether the Government’s intention is that the plan should be merely a temporary scheme to meet emergency conditions or that it will be adopted as a permanent addition to Government policy. In the conditions, this doubt cannot be dispelled, for no one is sufficiently well-informed to be certain of future developments. The control scheme imposed is as yet untried and unproved and must be regarded as an experiment. As such it appears likely to be modified as conditions change, as the necessity for_ conserving funds passes, and as experience of its working reveals the measure of its success or failure. While local manufacturers have most to gain from the import control and may reap some advantage while import restriction remains, few are likely to venture on extensions of capital equipment before the scheme has been tried and proved, and a more stable basis for development exists.

“For the importers, the scheme means a period of doubt, uncertainty, and difficulty. Hitherto, the importer has been free to order whatever goods and from whatever source he thought his customers might desire, and to pay for them through channels worn smooth and familiar from long practice. Now he is no longer free to get what will satisfy his customers, but must try to limit and adapt their requirements to a new and cumbersome bureaucratic control which now orders his activities. In these conditions, there is room for an undesirable discrimination and imported goods are likely to be both scarcer and more costly, while the general effect of the restriction is likely to be a rising trend of prices and a fall in the standard of living. Future Policy “One effect of the control adopted is that overseas funds are now effectively conserved under Government supervision, and the way is clear for the Dominion to follow whatever policy is decided on. Here there are broadly two alternatives. The Government may continue to pursue its policy of the past. It may spend lavishly, borrow from the Reserve Bank, increase present inflation and take advantage of the barriers imposed by a pegged exchange and import control to inflate and depreciate the currency further. “This policy would involve rising prices, reduced production, further unemployment difficulties, and a falling standard of living and of welfare in the Dominion. Alternatively, the Government may revise its policy, float the internal loan which it has already announced, repay its loans from the Reserve Bank, limit its spending policy to what it can afford without inflation, and endeavour to restore eco-

nomic order and balance throughout the country. “Whatever the decision be, it should always be remembered that stability and gceurity, high production, full consumption and general welfare of the people all depend on the combined efforts and the enterprises of individuals working in co-operation. These efforts and enterprises are hampered rather than helped by rigid regulation, restriction, and control, and they may be discouraged and even destroyed by ill-advised experiments.”