EXCHANGE RATE

Evening Post, Volume CXI, Issue 139, 15 June 1931, Page 10

EXCHANGE RATE

ECONOMISTS DIFFER

AUSTRALIAN INFLUENCE

DOMINION DEPOSITS

Continuing his refutation of 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 of the banks in New Zealand, or the present adverse exchanges against the Dominion, Professor H. Belshaw, of the Auckland University College, writing in the "Auckland Chamber of Commerce Journal," proceeds to discuss further aspects of the theory put forward by Professor Copland that a transfer of funds from the New Zea-land-London balances ■ for Australian purposes could only take place through a corresponding transfer of deposits from New Zealand to Australia, and that deposits in New Zealand, instead of decreasing, have increased. Professor Belshaw does not consider that tho increase in deposits is a valid argument that a transfer in the London balances has not taken, place. "In the first place," ho writes, "assuming Professor Copland's contention to be correct, the increase might have been greater had no transfer been made. In the second place, the increase has taken place almost entirely in deposits bearing interest: Govern- Not bearing Bearing nient. Interest. Interest. June Quarter, 1125 .. £3.09 m. £30.D0m. £20.97 m. June Quarter, 1930 .. £ 5.10 m. £ 23.22 m. £30.02 m. "This merely exemplifies the familiar phenomenon common to periods of depression of an increase in the relative attractiveness of fixed deposits, as compared with free deposits and other avenues of investment ,and'is paralleled in the United Kingdom. In other words, Professor Copland uses the existence of a phenomenon (viz., an increase in deposits) which can be explained on other grounds, as negative evidence supporting tho view that another phenomenon (viz., the transfer of London balances to Australian account) could not have taken place, even though he has failed to establish a connection between the one phenomenon and the other. RELATION TO TRADE BALANCE. "The graph in the last 'New Zealand- Year Book' referred to by Professor Copland certainly illustrates the normal correlation between the visible trade balance and the banking position in New Zealand, but it also shows that the banking situation was moro favourable in 1929, in the sense that the ratio of advances to-deposits was lower than it was for some years previously. A table in the 'Year Book' gives the following ratio of advances to deposits, per cent.: 1924 90.01----1925 56.77 1926 -.. 98.03 1927 103.60 . 1928 55.54 | 1929 h 55.5 A "The corresponding figure for 1930 is 95.09, which, while a considerable increase in the ratio of advances to deposits as compared with 1929, is not so bad as in 1926 and 1927. As an index of tho effect of New Zealand business on the London balances these figures show that there was no drain 'which might bo regarded as abnormal during.the adverse phase of tho trade cycle. ' ' "It must be admitted that these figures do not afford conclusive evidence that exchange funds were greater in 1928----1929 than, before the previous slump; but Mr. Asllwin points out that as at 31st March, 1929, the London balances of the Bank of New Zealand, which handles somewhere about 40 per cent, of the banking business, were- at least£l2,soo,ooo, probably more, and concludes: 'It would thus appear that the London funds wore ample to tide over the less prosperous period since exr perienced. Similar lean periods in the past have been financed without such a marked departure from the- traditional exchange policy.' There is at least prima facie evidence that the exchange situation did not provide justification for an adverse rate of 10 pelcent: - ANOTHER TEST RErUTED. "As a. further test in support; of his contention, Professor Copland stated, in effect, that the exports from New Zealand, and the net increase in the public debt from 1924 to 1929, provided only £6,000,000 more than the funds required to pay for" imports and the interest on the external debt. This is not a correct statement of the position. For the six financial years ended on 31st March, 1930, exports plus tho net increase in the State arid local authorities debt held overseas amounted to approximately, £357,660,000, while imports plus interest paid on. the external debts of the State and the local authorities amounted to £332,170,000, leaving a surplus for the six years, so far as these items are concerned, of £25,490,----000, as against £6,000,000 for the five years quoted by Professor Copland. It is not suggested that the London balances of the banks were- increased to this extent, as there are other items to be taken into account in respect of which there is, unfortunately, no precise data available. These items would include, for instance, movements of private capital and interest, and dividends on private capital jiayable abroad. The amount of the surplus on tho principal items, however, would seem to indicate that the balance of international payments for this period was in favour of New Zealand. Yet in the face of this th>e exchange rates for telegraph transfers New Zealand on London increased as follows:—

bo long a period as six years is not, in any case, a satisfactory test of the volume of London balances immediately prior to the present slump"; but in so far as it is relevant the extent of the balance damages, rather than supports, ProCessor Copland's contention. PREVIOUS DEPRESSIONS. "Finally, reference to the business indices in the Journal of the Auckland Chamber of Commerce for the current issue shows that the excess of imports ove/ exports was very much less, and persisted ov-er a very much shorter period, than during the depression following 1925, while the percentage1 ratio of deposits to advances is also more favourable. Yet, despite the fact that the balance of trade and tho banking situation are not less favourable, the exchange movement is decidedly worse. Tn the fa.co of those conditions neither Professor Copland's analysis of the position nor tho tests which he offers are convincing evidence that a transfer has not taken place from New Zealand to Australian balances. While it 33 conceivable that the situation may be explained in, the light of circum-

£ s. d. 4/12/29 ......... 1 lu 0 21/12/29 ......... 2 2 (5 31/1/30 . 2 12 6 17/ 2/30 3 2 6 19/ 3/30 ..* 3 12 6 3/ 4/30 ..., 5 0 0 ■14/ 1/31 7 10 0 28/ 1/31 10 0 0 'The favourable "balance of trade over