EMPIRE CURRENCY

Dominion, Volume 18, Issue 69, 15 December 1923, Page 8

EMPIRE CURRENCY

PROBLEM OF FUTURE LOANS !) GOVERNMENT AND LOCAL BORROWING IDEAL OF STABILISED EXCHANGE SIR GEORGE'ELLIOT STATES POSITION In his address to the half-yearly general meeting of shareholders of the Bank of New Zealand yesterday, the chairman (Sir George Elliot) dealt at some length with the financial problems associated with the present exchange, as between Great Britain and the Dominions. He emphatically refuted the charge that the high buying rates of exchange had been brought about by the banks combining for that purpose. The Bank of New (Zealand alone paid away over £600,000 in premiums to buyers from it of exchange on London. He asserts that it would be better for banks to work on a narrower margin of exchange rates, provided money on credits could be advantageously moved from and to London. Discussing the scheme of Empire Currency Bills that was before the Imperial Conference recently, the chairman discusses the project of the New Zealand Government borrowing locally and absorbing the surplus funds in London.

Sir Georgs Elliot said: “Tile exchange position between the. v Dominion and London and iho Dominion and Australia isestiil most unsatisfactory. With the largo surplus of exports over imports between New Zealand and the Mother Country, and a reverse position as far as Australia is concerned, the present rates of exchange are causing much dissatisfaction amongst exporters to Great Britain, and amongst importers from Australia. “If the banks could simultaneously sell exchange to the full amount of rheir purchases, tho margin between the buying and the selling rates would nt once be reduced to a trifling figure, but owing to the position being as it is, this is out of the question. 'The. surplus of exports to Great Britain as against imports has, during the last two years, caused this bank to accumulate very substantial funds in London. Inasmuch as the interest yield from this accumulation in London is loss than half of what could be earned if it were possible to have the money transferred and employed in Australia and New Zealand, it will bo seen that a large allowance for loss of interest must be made when fixing the margin between baying and selling rates of exchange. Ever since export of gold became impracticable, there has been no other ordinary method of transferring funds from London to New Zealand than by way of exchange. BANK INTEREST “Funds in London waiting transfer are, to a large extent, invested in short-dated loans and Treasury bills. The average interest earned by this bank on these short-dared loans for tho past half-year was under 2 per cent., and on Treasury bills 2| per cent. Out of these earnings British income tax has to be paid. Had these accumulated surpluses been utilised in New Zealand, they would have earned the higher rates ruling here. Of course, shert-dated loans are not expected to return a high rate of interest; but in pre-war times a bank could so conduct its business that only an amount sufficient for its requirements need be kept in London in such loans; tho balance could, if necessary, be transferred in gold to New Zealand. Conversely, if the balance of trade went against New Zealand, gold could be reshipped. As a consequence, the margin of exchange rates was relatively small, and it was stabilised “Tire price of gold is at present at such a high premium that no bank could* afford to* import the metal unless it added the premium cost on t-o the New Zealand buying rate of exchange ; but such a course would adversely affect our primary producers. “Tt is asserted in various quarters that the high buying rates of exchange have* been brought about by banks combining and forcing the rate to a high level with the object of making large profits. May I say emphatically that this is not the case; high exchange rates, either buying or selling, are not in the best interest of banking institutions. High rates cause the greatest dissatisfaction: they penalise business; they build barriers and dam that free flow of finance which keeps the wheels of industry revolving. For instance, at the present moment, tho cost of telegraphic transfers from London to New Zealand is 14 per cent. On the other hand, a stabilised exchange with a relatively small return for ' services rendered, is tho state most desired by bankers. It may interest you to know that this bank alone, during the year ended September 30 last, paid away upwards of £60.000 in premiums t-o buyers from us of exchange on London. VARIATION IN EXCHANGE “Exchange rates are fixed by tho hanks and are varied as circumstances and conditions necessitate. No doubt it is because the banks vary the rates from time to time that a certain amount of suspicion is raised in the public mind: we may trace here a psychologica l trait in the mentality of the human race. It must not be forgotten that there is a considerable exchange, business done outside the hanks altogether, but only at slightly better rates than tho banks I The outside exchange operator does _ not labour under tho same disabilities’ as a bank. He buys from “A” who exports, and sells to “B” who imports, tho difference between the buying and selling rate being his profit. If the rate rises or falls, or in any way becomes unsuitable-, tne outside operator need neither buy nor sell.* Banks in New Zealand, however, carry on their exchange business as thev carry on all their other activities. They transact, as a rule, all their customers’ exchange requirements, whether the particular purchase or sale suits, them or not at the moment. It is obvious that if, by force of circumstances, banks are compelled to employ an exceptionally large amount of money in London at a loss, that lossi is in some wav to be mado good, otherwise banks would be forced out of exchange business altogether. As this particuleloss is brougnt about entirely by the inability to transfer funds; it is reasonable to expect that exchange should bear the whole or the greater portion ©f that loss. NARROWER MARGIN “I repeat that it would bo more iatisfactory for banks to work on a

narrower margin of exchange rates, provided money or credits —which aro the same thing—could be advantageously moved fioni and to London and New Zealand, than to have a wider margin with large balances marooned in London, and earning a low rate of interest. . It may be asked:—lf a high rate of exchange against New Zealand exporters does not pay the banks, then whom does it pay? May I suggest that the fact that bankers are compelled by force of circumstances over which they have no control to accumulate large sums of money in London, , the rate of interest on these securities in which such funds are usually invested, must be affected. If then, interest rates are reduced—and owing to these accumulations thev must be reduced to some extent—then it follows that borrowers of short-dated loans in London are reaping where they have not sown. In the second place the New Zealand importers also benefits. In 1921-22. when the present position was completely reversed ana New Zealand imports were greater than its exports, the importer was paying up io 3 per cent, premium for telegraphic transfers to-day he is buying at a discount. “Thus while the exporter js blaming the banks, one sees the borrower in London of short-dated loans and the importer in New Zealand benefiting by the existing circumstances.

LONGER-DATED SECURITIES It might be asked :r-Why should these large amounts now stranded in London not be invested m longer dated securities yielding a higher rate of interest? “Tlie objection to this course lies obviously in the fact that the money in question is awating trana’fsir. to New Zealand. An opportunity _ might at any moment arise for effecting an exchange, and the bank, possibly requiring to realise those long dated securities on a fallen market, might bo involved' in a considerable loss. In any case, the employment of these particular funds' in other than the recognised channels must be regarded as 'a species of gambling. Many suggestions havo been made and many schemes propounded to overcome the present exchange difficulties which affect nearly the whole of the British Empire, hut none has met with general approval. That proposed by Mr. J. F. Darling—a London banker of high reputation—has received the most serious consideration. “The essential _ feature of his proposal is tho creation of a new instrument of credit which ho calls ‘Empire currency bills.l His idea is that these bills should be the main backing for note circulation; that they should be exchangeable between the various sections of the British Commonwealth of Nations; thus equilibrium would be maintained and the margin in selling and buying credits to both importers and exporters would be reduced to a minimum and stabilised. The Imperial Economic Conference, which met in •London in October and November last, considered Mr. Darling’s scheme and decided that it was neither necessary nor desirable to adopt his proposals. The Conference, however, expressed the opinion that bank chargee for buying and selling sterling appear to be unduly high in some cases and should be capable of reduction. “Mr. Darling himself states: ‘As a matter of fact, the solution of the exchange problem is beyond ihe power, as it is also outside the function of tho banks. It is the function of the Governments concerned to provide n. connecting link, and then, having done so, the finance of trade may be left to the banks to carry out.’ “It seems hard' to understand why the banks should be blamed for a position which they have not created and which it is the function of the States concerned and not the banks to reradey. While existing conditions with regard to the balance of trade and the premium on equilibrium can be restored only by tho Commonwealth and Dominion Governments raising the whole or a portion of their loan requirements in Australia and New Zealand instead of in London.

TRADE AND BALANCES “New Zealand trade operations for the 1921-22 season resulted in the accumulation of largo balances at our London office; and the season recently ended, with its large Surplus of exports over imports, coming on top of the previous excess, has added to the difficulties of adjusting our London balances. The position has also been substantially intensified by the raising of the Government loan of five millions in London hi April last. .Had that loan been issued in the Dominion or in Australia, the buying rate on London would have been reduced, because then the Government would have required to purchase from us something like five millions qf exchange on London in order to meet the Dominion’s disbursements,’ which include payment of interest, and purchases of material for public works, railways, etc. LOANS IN NEW ZEALAND “The raising of Government loans in New Zealand instead of in London

would solve the exchange problem for this country, but it must be remembered that the raising of loans locally would bo more expensive, and funds that might otherwise be available for local enterprises would be absorbed, while interest rates generally would, certainly harden. It is a question for the Government to consider, whether, as long as the balance of trade continues so largely in the Dominion’s favour, it might not be advisable to borrow locally and so absorb these surplus funds in London, and, at the samo time, reduce the buying rate of exchange considerably —what was lost in interest would be gained in exchange. In any case the country cannot nave it both ways. If New Zealand did borrow locally it would probably have to pay tho samo rates as New South' Wales and Victoria are paying for the loans they aro raising in their own territory. At present these Australian rates of interest on Government loans aro 5} per cent, and are free of all taxation. “Exchange conditions between America and London and the Continent and London are not comparable with those existing between Australia and New Zealand and London. The Australasian system has answered well over a long period, and it will continue to do so when conditions become normal. As the subject of exchange has for a considerable period been much in tho public mind, 1 have ventured to take up your time in an endeavour to explain some of the intricacies of an undoubtedly difficult subject. WEATHERING THE STORM “New Zealand is settling down to the even tenor of her way, and the difficulties of the past year or two that have been experienced by both the farming and the business communities, should, in the long inn, have a salutary effect. “In conclusion —two great distinctive facts stand out —one is this: the farmer who refrained from land speculation came through the time of depression with comparative ease. The other is this: the individuals, firms, or companies who wisely carried steadily on, refraining from tne temptation to take m< ney on deposit at call for the extension and development of their businesses, were the individuals, firms, and companies that most successfully weathered the financial storm.