EXCHANGE PROBLEM

Evening Post, Volume CVII, Issue 145, 20 June 1924, Page 3

EXCHANGE PROBLEM

STATEMENT BY BANKER

\ HOW IT AFFECTS TRADE

SHOULD MORE \ NOTES BE ISSUED

Mysteries of exchange were touched upon by the acting-chairman of the Bank of New Zealand (Mr. ■ William .Watson). in addressing • shareholders at the bank..-to-day. He showed'how' it came abont that, as gold currency having ceased to function, combined with the existing export and import conditions, the difficulties of .the "exchange position between London and New Zealand,: .and .New Zealand and Australia, had become intensified. The ■ present rate of ■ 2 per cent.'for purchasing sightj drafts on/London was unusually heavy for this Dominion, although light .compared! with the exchange ' burden -borne by many other countries—the, Australian rate for instance, was ;17s- 6d per ,ceri.fc!: higher. It-was-.fortunate; that .the better prices now ruliug^fpr most lines .of "produce' much more - than ' counter-balanoed the adverse excha:nge. the transfer of sur-: plus funds from London to Australia,' Are money was .greatly needed to I fcettle the adverse balance of New Zea-! iand trade with the Commonwealthj had, of late been effected on' extremely un-! favourable terms to' us, so that the purchase in. New Zealand-of exchange en London: was by no'means "so profitable as *orae critics appear.to think. " ■ . The question of exchange is so' interwoven; with that of currency; and the two are so-complicated,,that those who have lately expressed , impracticable views may perhaps bo excused," Mr ttatson remarked. - iu'V^ 8 hiShest' authorities have stated: that,in England currencies are necessarily lumted, and I have told you in my remarks on,note circulation that the currency i s here regulated to'sthte necessities, of the position, but in* such a way vas -to avoid inflation. _ Had the suggestion for an Empire currency; been adopted, it is difficult! to see Vow inflation could be locally controlled; thi= is- but one of the. objections'- to that measure. '•--;.' ' „ , . . . : ' AUSTRALIA'S POSITION.. „''./

Whilst in New Zealand the e\ change question alone presents dih1 cultj, An«trnhi his for *ome time pi«t experienced even highei t\change i itc« than the Dominion and his dl«o suffer ea from a shortage of cuirency 'ihe rote theie is in- the hands of the Commonwealth, being conducted by the note issue department of the Common veilth Bmk under a special boird of decided not to mike any fmther i= sues rf notes e-ven ,„ exchange foi an equu t'C EolrerelSns It is understood fear t f t° i rcaj°n lor thl^ >s a belief or fear, that such in increise in the note issues would leid to inflition Vre stnction of production, conrac»co nnd <h 8| ' j v natui-l1 01-t<-ome Tint t T, d, h' 5 d°Ptcd thls Police ,n vha it believes to be the best inteiut. of the Commonweilth „ not queH.oi, ed, but the point is this HiAe the Ht their command to enable them to determine what amount of cunencv i 'he n J T 1 hme t0 tlme s*^ C need. s of commerce nnd piocluct.on 6>uielj the joint s to<.k bmks with thtn intimate «d detailed knowledge of fin *nc, a l conditions, should be thl bett"r Wee,. Ihtheito the control o°f un ii Australu his been m unh , n the i>and s of the bulks, but the meisu le of ontrol uhicJi thoj e^rused has now, through tlio attitude adopted n> the note board, uUuallj pa^ed to the

■" It was qu^te apparent from th:quar- eterly banking returns that the cash holdings of the banks in Australia ne ! cessxtate * p,W, o f exlrenie restric . tion o said Mr. Watson, and; figures Went to prove that the supply of reldv money f and,.-; consequently, if Australia: is ■■ to, progre.«,. it is evident' that steps must.be'; taken to increase the currency sufficiently to meet the legitimate .requirements "of the country ° The banks possess the necessary funds for meeting the demands of. their enstomers; but,. unfortunately; a considerable portion of these funds is in Lonaon, and no means exist for transferrinc ,an adequate- amount to Australia :or oherwise making the money', available , h» cLV? lnt: Ithas been pubhcly stated _that' a s a result a borrower would find,it difficult, if not impossible, to obtain m the Commonwealth an overdraft of, say, £20,000 against gilt-edged securities, worth £50,00o! Another consequence, of the shortage of currency.is that the average rite of interest on overdrafts is higher than in New Zealand despite the much heavier income tax' paid by, the banks in this Dominion

A SUGGESTED WAY OUT. After analysing^ proposals made in Australia to meet: the difficulty .there ■^•Watson- said :;.••-'.': If Australia abol' ished the State ;issue and allowed' the banks_ to issue -their own notes, makinc the circulation- legal tender and a first charge on assets,' with the special security of one-third of the amount of issue to be held in gold and.;two-thirds in C,overnme^t . securities. ; t he financial stungency would be ended. No noteholder could reasonably question itho

safety of his holding if/thus safeguard-,i ed; and by taxation, of the circulation. '".-'■ ihe State could derive as large a profit. ; as it does under the present system, lliis Dominion is very much' interested:' to see a. satisfactory 'solution of \ the difficulty, because stringent monetary conditions.: in 'Australia are quickly felt here.- .'v Considerable sums of. Australian .money. . nave in the past been invested in New • Zealand, and- the remittance.'of"these '. iunds helped in a measure to minimise-- :■' the effects.of adverse trade balances between New Zealand and the Common- -'■ wealth; but now the shortage :of:money■'■ ' in Australia has .caused a cessation of such •investments.' The result is that) ~ lne_trade balance, to a considerable ex- ' tent .has to^be settled by ; remitting ninds from New Zealand to' London!. - and thence to Australia, this> being, nofa 7* v C°St!y Proceeding but somewhatdifficult to- arrange.. How the Australian, manufacturer who ships, in competition. . j th<L British exporter^ to" New Zea--and suffers fl- O m this state- Of- affairs"my b e _ gauged from tne fact that in Uie matter of exchange he is handi- ' capped to the extent of 3£ per cent.:as ■compared with the position in 1921 V. bhould Australia's exports in the ' i-ext few years largely exceed the- im-' ports, and should its Governments borrow extensively in .London- otherwise " man for conversion purposes, theposi- ' uon, without provision of' further currency, would become, still'more embarrassing. ■ I i Mr. Watson referred to;th e :-proposal' ' to increase the note circulation in Aaj-. ' tcaha, pointing; out that the notes*fc - the hands of the public in Australia are less on a population basis" than .in.NW /.ealaud. ■Development of; the country . . "f nd extension'of its trade'are beneficial - -. : .o the banks, but iftriation is -,uot,: and1. ■ ■ is therefore not encouraged... ■ V '-,'■■

BANE •N'OTES^AND POLITICS. i ..'.' Can tne same stability, combined! '- ■with elasticity, be expected from a- v btate note issue controlled by "a political i ■party !7 asked Mr. Watson. " "Our Australian branches., as wellas the other -\ bnnks and,the public there, and to a- ' certain extent here also (he.'said). havo> ielt the effects,of the restrictions of the t ommonwealth currency; while, on tha ' i ther hand, examples'are only too com.moii in other ' countries' of ' changes -ia government leading . to. e'xeessive ■ State .note issues, with all 'their concomitant, .evils. Banks, .more than the public," suffer from an excessive State note issue, r tor the public retain in their • possessioa' only as much cash as -is'neeSed for-poii-' ket money, the surplus being paid info ■ ,he banks. Therein lies the danger of ■. s-uch-an issue in the British Empire «>e • only ltauedy',for which Would appear1 to'"■ ,l>e that, failmg ,repa.yment in-.gold 'by the State, the banks: as note-holders should have the right to demand British " borernment securities .-of an'equivalent'' .^market value in exchange for surpliii, notes. It would, of .course, be.no safe- - guard;against an excessive assiie if th'a : htatecould redeem' its notes in. exchaiiKa ior its own bonds." • ■ • ■••:-~