AUSTRALIAN CRITICISM

Evening Post, Volume CXIII, Issue 24, 29 January 1932, Page 9

AUSTRALIAN CRITICISM

PRESENT-DAY PROBLEMS

SOLUTION OR SHELVING ?

Mr. D. A. S. Campbell, an Australian writer on economic and financial topics, is not, apparently, of the school of thought holding the view that if the primary producer-exporter benefits by a. high rate of exchange, the rest of tho community likewiso benefits sooner or later, and that such ,a rate after all is in the best interests of everybody, Governments and all. In .an article eontiibuted to tho last "Australian Quarterly," Mr. Campbell deals at length with. "Tho'Melbourne Conference and Currency Depreciation.'' Criticising Mr. Theodore's election promises to spend a considerable amount of money on industries in order to absorb ■ uuciiiiployed, Mr. Campbell passes to wnat he subsequently describes as "Exchange Dope." He pohits to the danger of currency deflation from "an entirely unsuspected quarter." lie states that the crisis in the exchange position between .London and Australia has revealed tho'fact that "an influential section of the Press and. some prominent bankers, supported by one or two economists of standing, are in favour o£ keeping the exchange rate at £130 Australian to £100 English even if the trade position between England and Australia does not justify this rate. In other words, they are prepared to peg tho rate if necessary. Now the present rate, if it be an unnatural one, can only bo kept up by some buyer coining into tho exchange market and buying ,all the unwanted sterling bills at the carded quotations. It has.been suggested that the Commonwealth Bank should undertake this task. "If tho Government has 'neither, tho revenue nor capital funds to provide for such an undertaking, and the present Government lias certainly not oither, the only way open is for the Commonwealth Bank to itself create credit for the purpose," Mr. Campbell states. "It is tho duty oi' a central bank to acquire foreign balances for the purpose of correcting and preventing minor fluctuations around a stabilised exchange position, but this is a very different thing from stabilising the rate itself at an arbitrary level by heavy buying of foreign funds, and the works of the authorities on central banking will be searched in vain for approval of such a function. Tho "effect of its doing this would be to increase the deposits of the Australian banks in Australia with the Commonwealth Bank and to accumulate funds in the latter's London office. %It may be said at once that there can be no objection to a high adVerse exchange rate if it be the natural result of economic instability and, ,or, political uncertainty. But when the object is to hold a rate permanently, or at least for a considerable period above its 'true late, totally different considerations arise. ECONOMIC ADVICE. "The most recent development lias been the manifesto of the Australian economists who from time to time have been moved to offer advice., to politicians and .business people. One weakness about these pronouncements is that they do not tally -with one another. Last year the professional economists were advocating a'free exchange rate for the benefit of the export industries. Today they advise a pegged rate for the same puvpose, . In, June-tlieirijidea was a, direct' reduction of as many money incomes as possiblo as the most effective method of lowering Government and -private costs and as a protection against inflation. Now, apparently, arbitrary devaluation of the Australian pound, represents their- considered opinion. The oiiginal plan of direct reduction of money costs is to be abandoned and give place to an indirect attempt. to lower costs by currency depreciation, the very thing, it wa» hoped, that would be av<.ided by the adoption of the Melb'ourno plan. Costs, they have said,'must be veduced by a drastic revision of. import duties. Australia should have a scientific tariff. "Their next proposal is to dispense protection permanently to the tune of 30 per cent., simultaneously in all directions, thus plugging tho few remaining air holes of our economic hotnousc. In their latest decision, which deserves attention on account of its plausibility in favour of a forced devaluation, a subtle attack is made on the attitude of,tho Commonwealth Bank for refusing to accept their -view of the f unctions of a central bank. CENTRAL BANK FUNCTIONS. "The contention that a central bank should take definite and arbitrary action to value a currency at a level which is desired by some particular interests has neither authority nor precedent to support it. Devaluation, if it does take place; should be the result of natural forces and not of artificial management. Tho Bank of England and thc ( British Government are to-day allowing' the pound sterling to find its .natural level before attempting any fixed valuation which, -when it is made, will merely give legal sanction to the economic value of sterling as determined by unfettered world competition. 'Putting aside for the moment the question-begging phases of tho manifesto which aro put forward as proof of the alleged advantages of devaluation, it ,is abundantly clear that the Bnnk Board is adopting the correct attitude in refusing to interfero with tho Australian pound, which must be allowed to find its own value in relation to sterling and not arbitrarily valued at anyone's instance. If Jhe economists and others desire that the pound.'s value should be • artificially determined they should place their case before tho politicians, who, while they have iiot the same appreciation of economic and financial principles as the directors of a central bank, may neve: theless hesitate before deciding to oinbark on such a policy of political control over central banking as accession to the demands of the economists would involve. WHO PAYS? "Much has been written about the advantages which a depreciated exchange confers on the country conccrncd^but tho plain .truth is that a high exchange rate which signifies a depreciated currency benefits a section of the community—tho exporters at the expense, not of tho banks and importers except insofar as the trade of both is restricted, butrof the whole population. It has been estimated that the present rate increases the ijiqomc of the exporters by £30,000,000 per annum. Oi" this sum roughly £10,000,000 is paid by the Governments for Us exchango requirements in' the first instanco and by tho taxpayers in tho second. The remaining £20,000,000 is paid first of all by importers and lastly by tho Australian consumer. As the exporteis aio both taxpayers and consumers (though it has been said that a primary producer who cannot show a loss nowadays is not worth his salt) part of the benefit they receive is simply given to be taken away. But the cost to the community is even i greater. As tho expoit price, in Australhiu cuirency, of raw products deter-, miiies, with the exception of one or two commodities, which enjoy the protection afforded by ceitain 'schemes,' the price for homo consumption,1 the cost, to the Australian public of its bread,

meat, and locally manufactured woollens, to mention three important items in every household budget, is increased not to tho full 30 per cent., but to a very considerable ■ extent, varying with, the relation of tho cost of the raw product to the total cost of the retailed commodity. COSTS ABE STICKING. "The cumulative effects of a depreciated exchange on local money costs, especially labour costs, is generally underestimated. In the case of Australia, where labour costs aro determined largely on a standardised cost of living, the effects of increased prices for practically everything are obviously considerable. The exporting industries are certainly. having their returns inflated, but costs are sticking. "Exporters cannot have it both ways. Those who preach high exchange rates as a positive policy in the same breath talk about reducing costs, which is equivalent to an endeavour to go in opposite directions at the same time. If the export industries require help it would be far better to subsidise them directly. The wheat grower to-day has the advantage both of a high exchange rate and a direct subsidy. ."It is rather a poor commentary on the methods of. some of our business and financial loaders to find, them advocating an exchange 'dope' to exporters instead of pursuing a consistent policy of reducing costs . other than, by currency depreciation, which in the case, of Australia is certain to fail in its object. Moreover, some bankers may not be altogether trustworthy, guides on this question. Banks whisii have either advanced large sums oil the security of the exporting industries or which have bought exchange forward without covering'their purchase by sales are obviously interested in keeping the rate as high as possible and inflating the returns of those industries with which they are ■ closely connected; and if this inflation of returns to the primary producers by means of a high exchange rate which, if not manipulated, is at once a s\gn and corrective rt a lopsido external trade position, is to be regarded not as a natural result of unsound economic, conditions but as a deliberate policy supported by the operations of a Government bank, what answer in principle . have the 'sound' thinkers to the inflationist policy of Mr. ■Theodore? "Absolutely none. If it is justifiable to, depreciate the currency to keep tho primary producers in business to pay oversea debts and buy imports, it is,equally justifiable to depreciate tho currency to provide employment. "A DANGEROUS TENDENCY. '' "It may bo said, of course, that the unemployment problem would be solved by the exporting industries paying their way. So it would, provided they pay their way vi real money and sot in depreciated money. The present tendency to regard the depreciated currency as permanent is dangerous because the effect of permanent depreciation is merely to rjiise the old difficulties to a higher money, level. Jt does not solve them, it merely shelves them. And the position requires the more careful scrutiny on account of the fact that some of 'Australia's leading financial and business men and some important sections' of the Press appear to be toying with the idea, of currency depreciation through pegged exchange rates. The 'Sydney Morning Herald,' usually, a watchful guardian of the people's interests, is, on this matter, in danger of sleeping at its post. Quis custodies ipsos custodes? "The future policy of Australia must, if it is to have enduring results, be based on a plan which ■will enable Australian costs to approximate to sterling costs. Empire and. economic consideration..; demand this at least from, the Commonwealth. ; TO AVOID EXTREMES. ' "The 'position has been" made easier by ' the depreciation of ■ the English pound, and when .this finds its natural level, which will be for some time at least 15 per cent, below the old gold level, Australia should be able to trade with England at a reasonable basis, for we cannot expect- tho British public to pay too much in the form of preferences for the pleasure of consuming our products and- keeping a spoilt member of the British Commonwealth in luxury. The Premiers' Plan marked the commencement of a general plan to reduce costs by straightforward, and effective methods. Part of the community have already played their part. It is clearly up to the rest to carry on the work begun in Melbourne. A rue in world prices may be hoped for if not immediately expected. In tho meantime adjustments should be made in order to get costs somewhere near a sterling basis. A return to the present gold basis of costs is practically impossible, but the position of the British Empire provides us with the halfway house of sterling, and if Australia can reuch it she will be able to avoid the rampanty of inflatuV and. the extremism. of deflation."