ADVERSE EXCHANGE

Evening Post, Volume CXI, Issue 92, 20 April 1931, Page 8

ADVERSE EXCHANGE

DOMINION POSITION

EFFECT OF PRICE FALL

(By Professor D. B. Copland, Univer sity of Melbourne). I.

In common with other primary proclucing countries, Now Zealand has suffered a severe drop in the value of her exports. In 1928 the "value of exports amounted to £57,000,000, but in 1030 it fell to £45,000,000. With the progressive fall in export prices the monthly values of exports showed even greater disparities in the two years. Thus in December, 1928, exports were £5,400,000 compared with only £3,000,000 in December,' 1930. There was no decline in the volume of exports in this period; prices had fallen severely, and New Zealand's income from exports was cut down' by £12,000,000. This fall in income has many repercussions 'upon finance and industry; indeed it sets in motion certain fundamental changes in the economic structure which are not completed until the process of readjustment to a new equilibrium has been carried through. For example, it destroys a large part of the income of primary producers, and their demand,for industrial products, both imported and locally produced, declines until the prices of these goods have fallen in keeping with the drop in export prices. There are many other disturbing effects, but per-, haps the most immediate and the least understood is the effect upon exchange ■ rates. POBMER STABILITY. New Zealand has long been accustomed to stability of exchange about the rate of £100 (N.Z.) exchanging for £100 (British). As long as the two countries were on the gold standard there could be no variation from this rate. The free export and import of gold was a guarantee that the New Zealand and British pounds would exchange at par. But this was not the only condition. Of equal importance was the fact that there rarely occurred a great demand for gold . for import or export. The balance of payments was such that substantial movements of gold were rarely required to make up deficiencies. The debit and credit items in the , balance of payments were approximately equal. The chief of these items are exports and loans raised in London ion the credit side, and imports and interest payments'overseas on the debit side. The exports and the overseas loans build up funds in London belonging to New Zealand banks and financial institutions. They thus create the supply of funds in London. On the other hand, the imports and the interest payments overseas must be met from these funds. As long as supply and demand balance there is no scarcity or surplus of funds in London, and the exchange position is easy. A disparity between supply and demand in short periods can always be met by special arrangement, and it is only when the balance is upset for long periods on one side that special measures must be taken. Over the period of six years prior to 1930 an even balance between'debits and credits was maintained. Thus the net surplus of exports for the period 1924 to 1929 amounted to £24,500,000. The net increaso in the public debt overseas in this period was £27,000,----000. Hence overseas funds were built up on these accounts to the extent of £51,500,000. Against this, however, must bo set the interest burden, which amounted to approximately £45,000,000 in this period, leaving a balance of only £6,500,000 not accounted for. There are many minor items in the balance of payments which would explain this apparent surplus of £6,500,000 in London funds during this, period. For example, the investments of New Zealand capital made to an increasing extent in Australia in recent years are a debit item in the balance of payments. These investments must be met out of overseas funds. WHEN PRICES PELL. This balanced condition of affairs has been seriously disturbed by the fall in export- prices. By December last export prices had reached the level of the average of .the five pre-war years 1909-13. This represents a drop of over 35 per cent, on the 1929 level. The effect of this fall in prices can best be indicated by referring to the monthly exports during the second half of the years 1929 and 1930. Monthly Exports. Month. 1929. 1930. '£ £ Millions. Millions. July 3.1 ■ 3.4 August 2.6 1.9' September .. 2.5 2.1 October . ...^ 2.6 ' 2.4 November .T 3.3 2.4 December .. 4.6 3.0 18.7 15.2 The contraction of exports _ is continuing and there was a deficiency of £5,000,000 in the trade balance in the last half of 1930, compared with a deficiency of only £2,000,000 in the last, half of 1929. The- interest burden on the debt has to be met, and borrowing in London has not been possible in recent months. There is consequently a growing deficiency in the balance of payments, and the supply of funds in London. There is little prospect of the position being relieved in the immediate future, and the demands on London funds are likely to be severe. It is not surprising, therefore, that an increase in the rates of exchange has taken place, and there has been a suggestion that this increase is in part due to the financial ties between' Australia and New Zealand built up by the Australian banks that undertake trading activities in New Zealand. This problem will be examined in a later article. It is sufficient to state here that the Australian position at the moment is much more acute than the New Zealand and exchange rates for Australia on London are now £130 Australia for £100 British, compared with £110 New Zealand for £100 British. Whether the New Zealand rates will go higher depends upon a number' of influences which will be discussed later. ' It is clear, however, that the existing rate is the natural result of a disturbance in the balance of payments brought atout primarily by a reduction in export prices. .