EXCHANGE RATE

Evening Post, Volume CXI, Issue 138, 13 June 1931, Page 14

EXCHANGE RATE

ECONOMISTS DIFFER

AUSTRALIAN INFLUENCE

TRANSFER OF FUNDS

The view held by Professor D. B. Copland, of the Melbourne University, that the Australian situation is not a factor in accentuating the present tightness or! the banks in New Zealand or the present adverse exchanges against tho Dominion is not accepted by Professor H. Belshaw, of the Auckland University College. Professor Copland's articles on tho subject were published in the "Evening Post."

In dealing with the mechanism of exchange, Professor Belshaw, in an article in the "Auckland Chamber of Commerce Journal," states that the importer finances his obligations by reducing his deposits or increasing his advances in New Zealand, and they are paid for from balances held by the banks in London. Imports, therefore, reduce deposits ov swell, advances in New Zealand and reduce London balances. Payments for New Zealand exports are made into the London balances, and the New Zealand exporter receives the amount to the credit of Ms account. Exports, therefore, increase the London balance and increase deposits or reduce advances in. New Zealand. An excess of imports will bo a factor increasing the ratio of advances to deposits in sympathy with the, decrease in the London balances. Loans raised by New Zealand companies, local authorities, or the Government abroad will paid into the London balances, and will increase their deposits in NewZealand, unless the whole of the proceeds are expended abroad in the purchase of goods.-Interest payments on loans or loans repaid will ,have a converse effect. So, there is a tendency for the ratio of advances to deposits to movo in sympathy with the London balances. This tendency is automatic in so far as transactions of the above sorts are concerned, but it should be noted that the exchange position, while it is of great and normally paramount importance, is not the only factor affecting the ratio of advances to deposits in New Zealand. Deposits or advances may increase as the result of conditions within the country, apart from the direct influence of the exchange position.. PEOFESSOK COPLAND'S ARGUMENT.

"Professor Copland appears to argue, though his argument is not altogether free from ambiguity," writes Professor Belshaw, "that the transfer of funds from the London balances on Hew Zealand account to support Australian exchange would encourage an accumulation of funds in New Zealand. The' only way in which the transfer could be made, ho contends, would be by transferring deposits from New Zealand to Australian, He supports the contention that such a transfer has not taken place, by pointing out that deposits in Now Zealand increased from £54,600,000 in 1925 to £58,800,000 in June, 1930, and by referring to the close coincidence between the visible trade balance and the banking position in New Zealand. As a further test, showing that funds have not been transferred, he states that, if the major items in the balance of payments are considered, it is found that 'over the period 1924 to 1929 only £6,500,000 of a surplus was realised. That is to say, that exports from New Zealand and the net increase in the Public Debt provided little moire than the funds required for paying for imports and meeting interest on the external debt.' "Professor Copland's arguments may be stated briefly: "(1) A transfer of funds from the London balances could only take place through a corresponding transfer of deposits from New Zealand, to Australia. "Q2) This would destroy the coincidence between the balance of trade and the banking position in New Zealand. "(3) The fact that deposits have increased and that the two 'tests' do not reveal such a lack of coincidence Bhows. that such a transfer has not taken place; ' "TESTS IRRELEVANT." "It is my opinion that Professor Copland's major arguments aro incorrect, and that his tests are mainly irrelevant to the present situation. The crux of Professor Copland's position is to be found in the statement that the practice of transferring funds from New Zealand balances to support Australian exchange would increase the difficulties of the ljanldng situation in Australia whilo 'encouraging an accumulation of banking funds in New Zealand,' and that the only way in which a transfer could bo made without this result would be the transfer of deposits from New Zealand to Australia. Individual' transactions, involving the payment or receipt of funds from abroad, cause a sympathetic movement in London balances, and in the ratio of advances and deposits in New Zealand. Tho movement is automation tnough the effects bo masked by banking policy in respect of purely domestic transactions. In the caso assumed— viz., the transfer of New Zealand balances in London to support Australian 3xchange, no such automatic, sympathetic movement takes place, and tne transfer has no direct effect on individual accounts in Australia and New Zealand, since holders of such accounts have not initiated the transactions." In so far as additional funds transferred to the Australian balances from the New Zealand balances in London were used to finance additional imports, this would increase the ratio of advances to deposits in Australia, and, while facilitating the financing of exchange, might cause the banks to restrict advances in respect of domestic trade. In this sense the situation might be regarded as becoming more stringent. But for a given volumerof exchange and domestic transactions together, an increase in tho volume of funds available in the London balances by means of a transfer such as is assumed, would ease the situation rather than make it more stringent. In other words, the increase in the London balances through the cause alleged would improve the banking situation in the sense that it would make it easier to increase total Australian advances by a given amount than if the transfer had not been made. It is by no means clear, therefore, that the transfer would lead to a more stringent banking situation in Australia. It seems likely tjiat a transfer' could be made to ease a banking situation already stringent. LONDON BALANCES. "Professor Copland's view that such a transfer as is assumed would lead to 'an accumulation of funds in New Zealand' is equally ambiguous. There seems no reason to suppose that the transfer of funds from Now Zealand to Australian balances in London would increase deposits in New Zealand, since the transaction has no direct effects on individual accounts in Now Zealand; If Professor Copland means that the ratio of deposits to advances would be increased by the curtailment of ad1 vances to purchase exchange, the result could scarcely bo described as an 'accumulation'of funds.' As I see it, the situation is reiulercd more stringent for exchange and domestic transactions

taken together than would bo tho case if tho London balance had not been depleted. Tho-argument of " those who boliovo that some such transfer of London balances has taken place is precisely that their depletion has caused a greater exchange movement than would othr/wise have occurred, and that it has been a factor leading to a somewhat greater difficulty in financing domestic transactions than would otherwise have occurred through tho reduction in the total of funds available for exchange and donlestie transactions taken together. "Though the major effects might bo expected to take place in the form of a restitution of finance for imports, yet it would I>o difficult to avoid some restriction of local finance unless tho whole of tho burden of restricting imports were thrown on the exchange rates. Tho fact that tho ratio of advances to deposits is at present higher than is usual is not, on tho other hand, valid evidence that no transfer has taken place; for it is not inconsistent with tho above argument to suggest that tho effects of the exchange situation are not inevitable and inelastic, and that the banks have increased the ratio, of advances to deposits beyond that normally considered desirable to meet a serious domestic situation, even though their difficulties in doing this may have been enhanced. The normal relationship may have* been masked by banking policy in respect of domestic transactions."

The concluding portion of Professor Belshaw's article will be, published tomorrow.