Banks and Exchange

Dominion, Volume 27, Issue 109, 1 February 1934, Page 11

Banks and Exchange

Sir,—“Visitor’s”, letter in your issue of yesterday in reply to mine of the previous day calls for one or two comments. He remarks that “if the exchange funds were adequate in 1932, there is no valid reason why the banks should demand a monopoly of exchange at that time, nor why the banks should have rationed exchange.” As “Visitor” may not have been in New Zealand at that time (lie position may be briefly outlined: —When the Government became faced with the necessity of meeting its debt service abroad without overseas loan assistance, it requested the banks to undertake to provide the Loudon funds to.enable it to meet its impiediate commitments in Loudon, and to ensure that it would be able to meet its debt service in London during 1932. Moreover, the Government had to arrange without delay for renewal ot over £4 millions Treasury bills maturing in London, but this could not be done unless the banks • undertook in advance that they would meet, the Government’s requirements in London for the year (about £8 millions). The following extract from a public statement, made by the chairman of the Associated Banks in February, 1932, throws light on the position :— It has been asserted that the necessity to license exports to provide the Goveru-ment’-s requirements proves that the exchange rates would otherwise have risen, and that they are pegged at an artificially low rate on account of the banks having tlie monopoly of exchange funds. Those who make such assertions do not seem to appreciate that, the decision to bring in tlie regulations did not turn on the question of exchange rates, present or future, but rested entirely on the necessity of having a definite and sound basis on which the bunks could reasonably see their way to accept the responsibility of undertaking to provide the Government’s requirements. so far as their funds permitted. The Export Licenses Order is the price that had inevitably to be paid for this safeguard, which was essential not only in the interests of the Government and the banks, but also in the interests of tlie whole community. No commitment was made regarding exchange regulation, and the banks continue their regular practice of quoting what is believed to be the true and fair rate; and while this is in accord with the trade position, the rates cannot be said to be pegged. “Visitor” further mentions as an indication that rates are pegged by the banks the fact that the rates normally keep steady despite seasonal fluctuations (presumably in trade). A reason for this is that the banks base their rate on the position on both sides of the world and generally, and a steady rate is desirable hl business, which would be hampered by a day-to-day fluctuating rate. . But the banks can only smooth out the fluctuations so far as may be, and the steady rate they normally quote is actually the rate based on supply and demand, and while it continues so it cannot be said to be otherwise than the fair and corvee* rate.—l am, etc., OBSERVER Wellington, January 31. Sir, —Your correspondent, “Bank Accountant,” indulges in the stereotyped phraseology now so familiar and so little examined that it passes muster. If the Government fixes the exchange “it pegs it artificially.” If the banks fix it, it is at ita natural rate in accordance with the balance of trade. One would even think that it fixes itself by some miraculous method, and- not as actually happens, by a group of mere mortals on the speculation as to bow thousands of other people are going .to act so as to make exports balance imports and debt payments.

These gentlemen were apparently somewhat adrift in their calculations on several occasions. The rate fixed in 1920 did not prevent an excess of imports over exports of four million—is that an economic balance of trade? They did not take their lesson then and make the price of sterling dear enough to etop a repetition of such wholesale buying of it, but were so completely out in their calculations that the next year the excess of imports was still £2.000,000. In 1930 there was again tjn import surplus. So much for the natural fixation of exchange. The argument as to funds accumulating in London is equally spurious. Export trade at present is purely artificial, while import trade remains natural. By export trade being artificial I mean that if the commodities were fixed at an economic price to make a small profit to the producer and butter for example was sent overseas only in fulfilment of orders at this economic rate, say 90/- a cwt. there would be no surplus funds in London because no money would go. Manufacturers in Britain do not produce wholesale regardless of whether they are paying their employees, their rates or their .taxes, and sell of their maximum production for the price it would fetch irrespective of profit or loss. • —I am, etc., BE FRANK. Wellington. January 30.