FREE EXCHANGE

Evening Post, Volume CXI, Issue 95, 23 April 1931, Page 12

FREE EXCHANGE

A. USEFUL CORRECTIVE

HELPFUL TO EXPORTERS

(Written for "The Post" by Professor D. B. Copland, University of Melbourne.) IV., There is always a, sentimental objection to allowing tho exchange rate to move freely iv an "adverse" direction. Such a movement measures the degree of depreciation of the national currency, and is certainly an indication of economic disorder. To attempt to control the rate without tackling the causes of the disorder only makes matters worse. It is far better to recognise' Mio malaise at the outset and to allow die rate to move to its natural level. A. free movement in the exchange is itself the best corrective! to the disorder. This aspect of the exchange problem is frequently overlooked. A fluctuating exchange rate is at one and the same time a symptom of disorder and a corrective to the disturbing conditions which produced that disorder. This will be readily understood when. ;he present economic position of New Zealand is considered in relation to exchange policy. The cause of the existing depression is the fall iii export prices. From January to December of \ast year export prices fell from 139 to 101, that is by more than 25 per cent. This has ■ reduced the income available to New Zealanders from overseas, and therefore banking funds in London. Such funds being scarce in London, there would be a natural tendency for the price of the funds, that is, "the exchange rate, to rise. .Consider the net elfect on New Zealand producers of that fall in prices and the rise iv exchange. . They have suffered a serious loss of income. If the export prices of December, "1930, prevail for long, the .income of primary producers would be reduced by at least 25 per cent They therefore-suffer the first; and most serious loss in the crisis. But the loss is. not confined to them. Their demand for locally produced goods and services and for imports declines, and all trades handling ■ these goods ultimately .suffer., Ther©' is consequently an. indirect loss of national income at least equal to the direct loss on account of the fall in export prices. ■ A decline of 25 per cent, in export prices involves roughly a loss of £12,500,00.P of exports, as compared with the level of exports from 1923 to 1929. If the indirect losses are as great as the direct losses there will be a total loss of £25,000,000. According ■ to the last issue of the Official Year Book the aggregate private'1 income is estimated at about- £140,000,000. This, estimate appears to have been, based on the year 1926, and in view of;; the prosperity since then the aggregate income before the crisis may have been £150,000,000. The total loss of income at the moment is. therefore approximately 20 per cent. T O SPREAD ; THE LOSS. The immediate problem of economic readjustment in New Zealand is .the equitable spreading of this loss.. It is necessary, however, to distinguish the direct from the indirect losses of income. The latter are temporary, the former permanent pending a recovery of export prices. 'The indirect losses will be gradually made'good, as the direct losses, are'spread evenly over the whole country, and the spending power of the farmers restored to the general level of spending power in the community. As this happens the quantity of locally produced goods and services , formerly consumed1 will\be restored, but at lower prices. -Tie real income of the country from, these sources will have returned to its former level. The country as a whole will, however, be poorer by the extent of the loss of income from exports. It follows, therefore, that the rapid and equitable spread of this loss is the immediate problem'to be faced. This problem can be solved either by a rapid fall in internal prices brought about by a reduction in all costs, including wages and Government expenditure, or by "some action, to restore in part the spending power of export, producers. A third possibility, and perhaps the most satisfactory course, is a; combination of both. For thispurpose it would be necessary:— ■ ■ (a) To allow the exchange rate to rise to its natural level. ; (b) To bring about, a reduction m Government expenditure in conformity with the loss of income; and (c) To reduco wages and industrial costs. ■ . These measures .would spread equitably the loss of income.over the whole people and immediately relieve the farmers of a considerable part of the burden now concentrated on them. A ■high' exchange rate is therefore a device which promotes, rapid economic reconstruction in a country so dependent upon export production" as is New Zealand. The high rate adds to the New Zealand price of exported goods and therefore restores part of the income of producers. The reduction in wage rates and in the cost of government reduces all incomes equitably and lowers the cost of production-Bfiy locally produced goods and services, again bringing relief to the farmer. MAKING EXPORTERS PAY. The high exchange rate, . however, adds to the money cost of. importing and of making interest payments abroad. It is frequently objected to the high rate that theso costs impose an unjustifiableburden upon importers and taxpayers who havo to meet the added cost of the interest charges overseas. If, however, the problem be examined in the light of the above analysis, the case against a high exchange rate on the ground of added costs completely fails. A. low exchange rate pegged by the action of the banks and the Government certainly keeps down the money cost of making interest payments and of importing, but at whose expense? Clearly at the expense of the exporter whose income is kept down to the level of the overseas prices of his exports. Such a pegged rate of exchange is therefore in fact a special tax upon the exporter in order that the Government may keep down its costs of paying interest, and that importers may obtain overseas goods at relatively low prices. The exporter bears an undue burden of the loss of national income. That loss was brought- about by conditions over which he had no eontrul: , Tho added costs of importing and of paying interest overseas incidental to a high exchange fall upon the whole community. Thus part of the losses of export producers is spread widely over all other producers. Under the conditions of a balanced Budget and lower wages the exchange premium is a measure for assisting in the equitable distribution of loss. By sustaining the income of export producers when measured in New Zealand prices it maintains their capacity to meet their existing obligations, particularly interest, on mortgages and their general indebtedness. Drastic deflation of the New Zealand price level will adversely affect the capacity of all producers to meet their commitments, whilst at the same time (increasing the purchasing power of fixed incomes dependent upon interest payments. Those incomes can bo made to contribute their share of the loss of national income by special taxation. Considerable disorganisation in finance would follow if exchange rates were pegged at the par level and all prices reduced accordingly. Hence the high exchange rate also has a profoundly corrective influence upon the general egoagjnje