FOR AN INCREASE

Dominion, Volume 26, Issue 49, 21 November 1932, Page 10

FOR AN INCREASE

Correspondent’s View REPLY TO OBJECTIONS National Solvency at Stake [A correspondent signing himself “Politecon” writes meeting objections to and putting the ease for a rise in the exchange rate.] The editorial in Saturday’s -‘Dominion” presents fairly and lucidly the objections to an increased exchange rate. There are undoubtedly considerations against an increase. The added cost of remitting interest and other payments abroad; the effect on imports; the bear ing of both of these on the Government’s finance, and of the first of them on local body finance also; the alleged infringement of the Ottawa agreement, or of “the spirit of Ottawa” ; the menace of political interference in banking: the inflationary tendency of an upward movement in exchange; and the fact that the balance of exports over imports is to-day in favour of New Zealand, so that the “natural” movement of the rate is downward. All these are points to weigh carefully and patiently. Yet I venture the opinion that the sum total of all the arguments falls far short of rebutting the one simple argument that, to avoid economic disaster of unexampled severity, New Zealand’s exchange rate on Loudon should be raised, substantially and urgently. A rate of 150 would not be too high; a rise within a matter of hours would not be too prompt. The Fannars’ Plight. We are at the beginning of the. export season. Farmers are dependent on the prices realised for their produce in the United Kingdom ; the outlook is follower prices, especially on dairy produce ; already sterling prices, even with the 10 per cent, exchange added, are below costs of production in New Zealand. These costs cannot be reduced without further general wage cuts (which nobody now supports), and without wholesale bankruptcy and liquidation; with existing laws, the necessary liquidation, through realisation of mortgaged assets, is not even possible. The farming industry is in a state ‘ of latent insolvency, from which there is no immediate escape except by way of higher receipts, measured in New Zealand money. That is the argument for action, for what may be bluntly and accurately enough labelled inflation. If increased prices, which all admit to be necessary, are inflation, why be terrorised by a label? The problem is to raise receipts above outgoings, and thus to restore solvency. An increased exchange rate, so that an inadequate number of counters (when measured in sterling) is translated into an adequate number of counters in New Zealand currency, will give instantaneous relief. No other expedient has been suggested which can do this. Payment of bounties on current exports, financed by borrowed capital, is unsound and impracticable. As a constructive attack on a state of general insolvency, the increased exchange rate wins by default. The problem is one affecting farmers to a special degree, and in a farming country this justifies action in the national interest. But it affects also every industry and every producer. Inflation, or reflation, or increased money receipts—call it what you will—are necessary to solvency; and an increased exchange rate is the only method in sight of giving the required result. It is not true that internal debtors will thus be relieved simply “at the expense of the creditor”; and creditors have good reason to welcome a move that will bring solvency to their debtors. If creditors were now being paid in full, and if an increased exchange rate would raise the cost of living to the extent of the increase, there would be substance in the argument; but neither contention is valid. And most atrociously illogical of all is the argument that the extra receipts would go “not into circulation ... but in liquidation of debts.” Surely payment of debts puts money into circulation? Public Finance. But what of the objections, which we have admitted to warrant careful attention? Foremost is the effect on public finance, for the cost of paying external interest will be increased, while Customs duties will contract temporarily. But the real burden of the country’s external debt charges is not affected. Measured in sterling, or in the quantity of goods required to be exported for their satisfaction, these charges will remain constant (until, indeed, hard facts compel a revision of the monetary expression of obligations which have completely altered their meaning—a revision which may presently be seen to be in the interest also of Britain as a manufacturer and exporter). Theoretically, the fear of budgetary consequences from an increased exchange rate, which means a higher level in the whole monetary and taxable income of the country, can be shown to Im? groundless. But take instead a couple of hard facts. Australia. with her exchange premium more than two and a half times New Zealand’s, has public finances in better fettle than our own. And Great Britain. after going off the gold standard (a process analogous to New Zealand’s going off sterling) balanced her Budget—and this despite the fact that her receipts from external investments, etc., were payable in depreciated sterling, while her commitments to America had to be met in gold. There are details and qualifications to add, such as the collection of eighteen months' income tax in a single financial year: but .the main facts are plain and convincing. As far as injury to the national credit is alleged to result from a high exchange rate, compare Australia’s 34 per cent, conversion with New Zealand’s experience. And if local bodies’ finance as a whole be considered, how will these bodies fare when the year’s rates are totted up, if present price levels to farmers and others are permitted to remain? Even if inconvenience to national and municipal budgets were proved—and it is not —which should sensibly take priority, general solvency within the country or the immediate balancing of Governmental Budgets? Is Ottawa Infringed? The immediate effect of a raised exchange rate is to embarrass imports. After the necessary adjustment. normal trading relations with the outside world are perfectly possible, whether the London to New Zealand rate be 100 to 110 or 100 to 210. Was normal trade impossible before the war between England and U.S.A, with a ratio between sterling and American dollars of 100 to 487? There is nothing in the Ottawa

agreement, nothing in “the spirit of the conference,” that dictates to any Dominion an enforced policy of insolvency. Of what use to the United Kingdom are our tariff-preferences if our buying power comes still nearer to vanishing point? In the interests of ourselves, and of the United Kingdom as an investor in, and an exporter to New Zealand, our paramount objective is plainly the recovery, first of solvency, then of prosperity. An increase in the exchange rate is the only instrument at hand that will turn us in that direction. The “Natural Rate”? “When all other argument fails” (advised Lord Birkenhead) “appeal to ‘Natural Law’ ”; and such is the final argument of the low-exchange advocate. Admittedly, New Zealand imports have collapsed in total value even more disastrously than exports (due not to the 110 exchange rate, but to failure of purchasing-power here) ; and a "favourable trade balance.” so-called, Is in evidence. Accept this as the criterion of the right and natural rate of exchange between English and New Zealand money, and the present conversion rate should be reduced, until the 110 is brought down to 100, then perhaps to 05 or lower. The test is a false one, and dangerously misleading. Apply it logically and we shall deflate below the present disastrous English pricelevel. The “trade balance” is irrelevant in the present context. Internally, we are in a state of insolvency. The rate fixed for conversion of English money into New Zealand money is the only feasible means of bringing solvency; and the “right rate” is that which achieves this end. Nothing else is “natural.” Banks or Government? The duty of the banks is to raise the London-New Zealand rate to at least parity with the London-Australia rate (even that is almost certainly too low) ; and to do so instantly, before we cut into the export-season and penalise some sections to the gain of trading interests. The banks may refuse to budge; and their refusal will bte due, not to any pecuniary interest as bankers, in a low or a high exchange-rate, but to conservatism and irrational horror of change even at a time when inaction brings the gravest perils of all. If the banks refuse to move, what then? The Government can remain idle only if consistency in a doctrinaire attitude of non-interference is more urgent than general solvency. And so far as Parliament is concerned, if hens, tomatoes, and cows’ horns are worthy of attention, why should tlie issue most, intimately connected at the moment with internal prosperity be taboo ? “The Dominion’s” leader fairly admits that although the disadvantages are MORE NUMEROUS, they may not OUTWEIGH the advantages of a high rate. That is the whole point. , The arguments are to be weighed and not simply counted. The objections, it is contended above, ean be seriously discounted. The one affirmative argument, that a higher level of money incomes is necessary to solvency, stands unimpaired. And the final, practical argument, the one which is responsible for the imminent change comes from the simple fact that opponents of the increased exchange have no answer to the query, “What alternative?” “ILLOGICAL ATTITUDE” t Farmer Leaders Criticised MANUFACTURERS’ OPINION Concern about the proposed higher exchange rates was expressed at the meeting of the New Zealand Manufacturers’ Federation on Saturday, at w’hich Mr. F. Campbell presided. The following statement was Issued at the close of the meeting:— “It is somewhat diflicult to understand how Mr. Polson and like leaders of the farmers can reconcile their present demands for inflation per medium of the exchange with their attitude in pre-Ot-tawa Conference days.

“It will be remembered that in those days their light was for a so-called free exchange. Now, after the Ottawa Conference and the concession by Britain of quota systems and preferential tariffs for our produce, our illogical farmer leaders, with a sad lack of ethics, demand a high pegged exchange. “Again, the farmers’ leaders submit that the tariff must be lowered to encourage British imports, so as to compensate British people for the concession of quotas and preference. How can the high exchange advocates balance the issue?

"Will they deny that by raising and pegging the exchange the tariff barrier will prove so prohibitive that they will debar New Zealanders from any possibility of buying British goods, or will they admit that they are —now that the quotas and preference have been approved by Britain—disinterested in providing our quid pro quo, and are therefore concerned only in bringing into operation a system that is designed only to safeguard New Zealand's major curse, inflated laud values? “Though our manufacturers recognise ‘any increase in exchange means an appreciable increase in tariff protection, they cannot be blinded to the graver dangers encompassed by any departure from the present exchange position, which if anything is on the liberal side.” IMPORTERS TO MEET An Assembly This Morning A meeting has been convened for 9.30 o’clock this morning at the Chamber of Commerce by the New Zealand Importers’ Federation to discuss the move for a high rate of exchange. The federation has invited the Mayor. Mr. T. C. A. Hislop, and representatives of interested bodies, such as the British Retail Manufacturers, the New Zealand Manufacturers’ Association, and New Zealand Harbour Boards’ Association, to take part in the discussion. TEMPORARY STIMULUS — y — The Result in Australia By Telegraph.—Press Association. Auckland, Nov. 19. Mr. W. P. Endcan, M.P., who early this week received an affirmative reply to an inquiry in Australia whether the high exchange had provide beneficial to the Commonwealth, sent another cable to a reliable authority in Sydney asking whether it would be advisable to fix a high rate of exchange similar to that in Australia. The reply received states that the effect of a high exchange is to stimulate primary exports temporarily, to increase internal costs, and also the burden of interest remittances. It is logical that an increase in taxation will follow. Mr. Endcan has telegraphed this reply to tlie Prime Minister, with the comment: "This would seem to he tbe sounder view. Kindly convey this information to Sir Henry Buckletori.”