EXCHANGE FUNDS

Evening Post, Volume CXI, Issue 93, 21 April 1931, Page 10

EXCHANGE FUNDS

WHY THE BATE VARIES

INFLUENCE OF EXPORTS

(Written for "The Post" by Professor D, B. Copland, University of Melbourne.)

Considerable astonishment and confusion is caused by the fact that £130 \ias now to bo paid in Australia and £110 in New Zealand for £100 in England. Much of (he confusion arises because the Australian and New Zealand pounds bear the same name as the British unit of account. As a consequence it is widely believed that under all circumstances £100 in Now Zealand should exchange for £100 in England. This would bo trim if both the English and the New Zealand £1 notes were convertible into gold freely and gold could bo exported and imported. But tliis* is not the case. The English £1 is effectively tied to gold; the Now Zealand £1 is not. Consequently the comparison between English and Now Zealand money is not a jomparison between currency units that are. convertible into the same quantity, of gold. It is a comparison between one currency unit that is so convertible and another that is not. We arc therefore comparing the English gold £1 with the New Zealand paper pound, and there is. no special reason why the latter should exchange for the former at par. The rate may return to par in the future, and the New Zealand pound will--then be. convertible into gold.on the same basis as. the English pound. But Hie rate of exchange may not return to par. It may be stabilised at its present rate of £110 (New Zealand)'to £100 (British)'., or it) may vary above or below that rate. THE PRICE OF MONEY. The rate of exchange between two currencies is a price, and like any price is determined in • accordance with the general laws of supply and demand. We may consider funds in London as a commodity bought and sold by New Zealand importers and exporters, the New Zealand importer buying claims on funds in London,, and the exporter selling claims to funds. there. English'notes .enter New Zealand only in infinitesimal -quantities in tourists' wallets, and ■ outside territorial, waters New Zealand notes are not accepted save at a discount." Even when gold is exported, it is exported to-day as a commodity rather than as money. AH that the.importer can do, as a rule, is to pay money in New Zealand to a New Zealand exporter or his agent for rights to money in London becoming due to the latter. The total supply of money in London offered for New, Zealand money, therefore, is limited by the value of our exports, and by any loans raised there. It is for these funds that importers compete against one another and" against the Government which requires money in London, in order to pay interest to holders of New Zealand securities in England. If -the demand for such funds in London is greater than the supply, the exchange rate will tend to.rise. If, on the contrary, the supply of such funds in London is greater than tho demand exchange rates will.tend to fall. It is well, known that, in spite of this tendency, tho exchange rates between countries on a gold standard never vary far from the "mint par" of exchange. ("Mint par" is tho ratio between the number 'of currency units of any two countries which entitle their holders to an equal quantity of fine gold. For instance, one pound sterling md 124.21 French francs ,eutitie their holders to the same quantity of fine gold, approximately 112 grains.) In I'pre-war times, when gold was ■ freely I available, £100 in New Zealand was always nearly equal to £100 in England. There were small fluctuations on either side of parity, but rarely any serious divergence. This was not because there was no tendency for rates of exchange to rise or fall, but besause the gold standard itself automatically set in operation forces which tended to restore parity.. In the last resort gold shipments would follow and correct an adverse balance-of pay-, ments. '''„.' . ■ HOW FUNDS ACCUMULATE. The quantity of funds accumulated :u London depends principally upon the volume of the exports from New Zealand, while the. demand for funds in London depends principally upon the volume-of imports to New Zealand. Governments have always played a prominent part in both demand and supply.by creating a demand for funds in London to pay interest and by providing a supply by borrowing funds there. The volume of trade exports and imports is closely associated with relative prices in tho. two countries. If prices,in New Zealand are relatively high, exporting industries experience high costs and low returns. This is the position at the present .time,. the index number for export prices fiaving fallen seriously whilst tho index 'num-ber-of'wholesale arid retail prices has fallen only moderately. There is^ indeed a growing disparity between English and New Zealand prices.' In. these circumstances exporting industries find it difficult to maintain their ..production. On: the other hand,, the ■' niaintenanoo of high prices in New Zealand encourages imports . unless action is taken' to' contract credit 'and reduce the volume of imports. The contraction of credit.is followed by a lower price level in New Zealand and reduced imports. In this. way the trade balance is corrected and the drain on London funds stopped. The lower prices in New Zealand enable tho export producers to continue' production, and the position is once more1 corrected. Under these conditions the r exchange parity can be restored, but tlie restoration'is conditional, upon a.fallin internal prices. It will 'be ' extremely difficult to obtain such a fall in the near future. In its Bulletin No. 71 (Dec, 1930) the Canterbury Chamber of Commerce state's: "While prices all over the world ' have been falling heavily, internal prices in New Zealand have proved particularly insensitive and'have remained at , high levels. While export prices average only 6 per cent, above tho 1914 level, retail prices arc *57 per cent.,' average wages 66 per cent., and the average of three sheltered groups of wholesale prices 70 per r.ent. above that level." This disparity between export prices and internal prices and wages must be corrected, and it would be a mistake to assume that it can be corrected immediately by lowering internal prices and wages." A good deal can be done in that direction,.but.immediate relief can also bo obtained by allowing ' exchange to move freely am? giving the export producers the benefit of a high rate. This would offer them some , compensation for their loss of income, and it would undoubtedly be in tho best interests of the'country.