N.Z. Warning On Convertibility Dangers

Press, Volume XCVII, Issue 28697, 22 September 1958, Page 11

N.Z. Warning On Convertibility Dangers

(Rec. 7 p.m.) MONTREAL, Sept. 20.

New Zealand today urged caution in any approach to the convertibility of sterling. The New Zealand Finance Minister, Mr Nordmeyer, in a press statement said any decision relating to convertibility of sterling must be that of the United Kingdom alone.

“There is still a need for caution in considering further moves towards convertibility,” he said. Mr Nordmeyer made his statement in response to a request by

a journalist for comment on the "pace with which full convert* ibility of sterling is being approached.” In urging caution Mr Nordmeyer took the exactly opposite view from that expressed at the Commonwealth Trade and Economic Conference earlier this week by the Canadian Finance Minister, Mr Donald Fleming. Mr Nordmeyer’s statement was the first formal comment by any Commonwealth Finance Minister on convertibility since Mr Fleming called for British action on the subject. “I would emphasise any decision relating to convertibility of sterling must be of the United Kingdom alone,” said Mr Nordmeyer. “Nevertheless the United Kingdom discusses with us all from time to time the existing position andfuture possibilities. “The United Kingdom has a

delicate task in balancing the need to maintain sterling as an international currency, and the need to expand production.

“There is still need for caution in considering further moves towards convertibility. Unless there is a substantial upturn in the United States economy, sterling area sales to the dollar area will continue to be restricted and its dollar supply limited indeed. “If the United Kingdom economy had not been kept under restraint in the l?st year or two the United Kingdom demand for dollars would have been higher and the sterling area reserves consequently lower at this time,” Mr Nordmeyer said. “In short, the United Kingdom’s ability to expand production is limited by its need to reduce pressure on its dollar supplies. “We must also remember that the inflow of hot money (shortterm money) into the United Kingdom can later be matched by an outflow not because of any lack of confidence in sterling but because of better . opportunities for profitable use elsewhere.

“If the United Kingdom has to take defensive action against such sudden outflows, the bank rate may go up and credit may have to be tightened. “The effect of higher interest rates and credit restrictions can well be a reduction in the rate of expansion of United Kingdom industry. This, in turn, slows up demand for . raw materials from abroad, such as wool .dr reduce

the demand for foodstuffs such as butter and cheese. “This could lead to a fall in New Zealand’s export income and a consequent reduction in her ability to import manufactured goods. “If the slowing-up of United Kingdom industry results in idle capacity there is a net loss in production for the United Kingdom itself, and some loss in ability to lend capital for development abroad.

“The bank rate in its turn also has the effect of influencing the rate for long-term lending and even although a borrowing country may have its own credit unimpaired and be an acceptable international risk, it may have to pay a substantially higher rate on its loans.

"This type of situation could arise if the sterling area found itself not- in a position to support an extended convertibility. “In short we are urging caution in the approach to convertibility because the defence of the forward position may involve slowing up of industrial expansion in the United Kingdom and also of development in countries which depend on the United Kingdom for markets for their goods and finance for their development,” Mr Nordmeyer concluded.