ADVERSE EXCHANGE

Evening Post, Volume CXI, Issue 94, 22 April 1931, Page 9

ADVERSE EXCHANGE

AUSTRALIAN FUNDS

EFFECT ON NEW ZEALAND

(Written for "Tho Post" by Professor IX B. Copland, University of Melbourne.) HI. ; '■■■■■.. It has been asserted that Australian banks trading in New Zealand „ have been able to meet their''commitments on Australian account by using funds accumulated in London on ' behalf of 'New Zealand. The argument may bo stated as follows:— We may imagine a single bank controlling the whole of the business for Australia and New Zealand but keeping separate accounts ;for tho two divisions of its operations. If, in any year, the balanco of payments was £10,000,000 against , Australia there would be a £10,000,000 deficit; in the. bank's London accounts for the Australian business. ..■ On the other hand, if the Now Zealand balance of payments wore £10,000,000 in credit there would be a surplus of £10,000,000 in the London accounts for tho New Zealand business. The accounts in London could then be -balanced by the simple expedient of applying the New Zealand surplus to liquidate the Australian deficit. When stated in this way, tho argument appears so simple and so convincing that it is comparaj tively easy to work up a ease against banks who do trading in both countries. Clearly tho use of New Zealand funds in London to sustain Australian accounts there has the effect of keeping down tho Australian exchange rates and raising tho New Zealand rates. New Zealand is therefore tied to Australia by the system, and should Australia suffer severe depression causing A deficiency of funds in London, New Zealand, the argument runs, would be brought in to the depression by tho use of New Zealand funds to support Australia. TRANSFER OF DEPOSITS. This argument, however, is incompleto. It overlooks thq,effects that such transactions would' have upon banking accounts in Australia and New Zealand. When these arc examined it. will be found that such transfers of funds in London could not be accomplished without a corresponding transfer of funds from New Zealand to Australia. We have dealt with the London end of the transactions, let us now examine tho position in Australia and New Zealand. Taking Australia first, we have assumed a deficit in Ilio balance of payments of £10,000,000. This means that*the banks in Australia, have 'been, supplying more remittances on London than their purchases of London billfi. When purchasing a remittance on London, the client of the bank must draw a, cheque -which either increases his overdraft or reduces his deposits ■with the bank. Conversely, the seller of a remittanco on London to a bank is able to reduce his advances or increase his deposits. If a balance of payments shows a net. deficit on Australian account in London it means •that tho banking transactions which have increased advances or reduced ticposits have been greater than those transactions which have reduced advances or increased deposits. In other words, the excess of deposits over advances -would be reduced in Australia. The opposito would be true in New Zealand. . There would ,be an increasing margin between deposits and advances in New Zealand. Such a condition of affairs means a stringent banking situation in Australia, and a favourablo banking situation in .New Zealand. Tho continuation of the practice of meeting Australian deficits in London by drawing upon the New Zealand surplus would undoubtedly increase tho difficulties of the banking situation in Australia whilst encouraging an accumulation of banking funds in New Zealand. If, however, the banks operating in New Zealand were to transfer some of their New Zealand deposits to Australia, New Zealand's surplus funds could be used to relieve the banking situation in Australia. This indeed is the only condition upon •which, such a practice of using Now Zealand funds in London to liquidate Australian indebtedness there could be maintained. If this condition is not met the whole argument outlined in the iirsfc paragraph abovo is fallacious. The question thus becomes one of the degree to -which Australian banks deliberately transfer their deposits from New Zealand to Australia. Anyone familiar with banking practice in Now Zealand and Australia, or with the banking statistics knows that Australian banks do not adopt any- such practice. Bank deposits as a whole in New Zealand increased from £54,600,---000 in June, 1925, to £55,800,000 in June, 1930.

The Now Zealand deposits of Australian., banks have to be niet. in. New Zealand, and it would be unbound banking practice for the 'Australian banks to borrow money in New Zealand in order .to support an unsound credit sttmctur© in Australia. The practice of taking foreign ifleposita was thoroughly discredited in 'Australia in the 1893 crisis, and there never has been a suggestion, that it fehould be revived. TESTING THE POSITION. ' There are two other means of testing the position. It has been suggested above that the excess of deposits over "ftdvance varies directly with the balance of funds in London. If''there is a deficiency in the London balance the excess of deposits over advances is reduced, conversely a favourable London balance builds up the excess jof deposits over advances. This is true both of Now Zealand and Australia, as lias been demonstrated for New Zealand by Professor A. H. Tocker, of Canterbury University College. If it were true that deposits were being shifted from New Zealand to Australia to support a similar transfer of funds in London, this would destroy the correspondence between movements , the balance of payments in London and in the excess of deposits over advances in Now Zealand. There is indeed a graph in the New Zealand Official Tear Book '(39th Issue, 1931, page 679) showing fluctuations in the visitAe trade balance and the excess of deposits over advances. The statistician remarks on this graph: "The prosperity of New Zealand is so intimately bound up with conditions of external trade, that business conditions generally, and consequently banking resources are susceptible, in a marked degree, to any appreciable change in. the < balanco of trade." "New Zealanders who suspect that banks trading in tho two countries may use New Zealand funds in London to assist operations in the other country should examine this graph carefully and consider its bearing upon the argument put forward. FRBK EXCHANGE SAFEGUARD. The second method of discovering whether New Zealand funds are so bsed may be found by reforence to the balanco of payments for New Zealand. If the major items.in the balance of payments are considered it is found that over the period of 1924 to 1929 only £6,000,000 of a surplus was realised. That is to say the exports from Now Zealand and tho net increase in the public debt provided little more; than the funds required for paying for imports and meeting interest on the external debt. In order to test the position further I have taken out the advances and deposits of the four Australian banks trading in. New Zealand during the past three years. The figures arc as

follows, and for purposes of comparison total advances and. deposits for all bank in New Zealand are given. ADVANCES AND DEPOSITS IN NEW ZEALAND FOR DECEMBER QUARTKK IK 15ACH YEAR. Four Australian AH Banks. Bani«. £ £ "28- . Millions. ' Millions. Doporits »»«„.. 18.5* 53.T Advances S.S&, 18.6 SU. Deposits ..„,..,*, 10.0 BS.D Advances au^'^*.. 21.4 66.1 Deposits ~, , 18,5 53,2 Advances ........ 2o!» 59.7 There is a striking similarity between the movements in. the figures for the Australian banks and for all banks. It cannot be argued from theso figures that deposits have been taken from New Zealand to Australia to support the use of New Zealand funds in London by Australia. Now that both countries are off the gold standard there is no reason why tho Now Zealand-Australian exchange should remain at par. The New Zealand rate with London is £.110 and the Australian rate £130. Under a free exchange the Australian-New Zealand rate should be £118 2s 6d. But the banks quote £104 10s for "genuine trade transactions," and the higher rate is charged for other transactions. The lower rate is entirely artificial and cannot remain permanently in operation if tho present differences botween Australian and Now Zealand rates in London are maintained. The best guarantee that New Zealand funds in London are not appropriated to Australian use lies in a free exchange, the fluctuations of which would regi3tor sensitively changes in the economic conditions of the two countries.