ECONOMIC CONSEQUENCES

Evening Post, Volume CXV, Issue 16, 20 January 1933, Page 6

ECONOMIC CONSEQUENCES

For eleven months of last year New Zealand had a visible trade balance in her favour of £11,300,000 (New Zealand currency). Yet the rate of exchange has been raised to 25 per cent against the Dominion. This amazing departure from banking practice is, of course, accounted for by one fact—that the new rate is artificial and dictated by political considerations. The Associated Banks made that clear in their statement to-day: The banks have strongly pro-tested against Government fixatidn of the rate, but the Government has informed them that it must persevere in the matter. Therefore, and on the strong representations of the Government, and on its full responsibility, the banks aro reluctantly compelled to co-operate* with the Government in giving effect to its' decision. This statement confirms the declaration made by the Bank of New Zealand on 25th November, when it declined to raise the rate, holding that it was "not the business of the banks to adjust exchange . rates' to meet variations in the price of produce, nor should the banks be influenced by the rates prevailing in other countries, but by the supply and demand of money between London and New Zealand." The bank then refused 'to depart from sound banking principles for the sake of expediency." The departure now made is under compulsion. The Government has made it against advice and with an undertaking to indemnify the banks against loss.

Not only has the Government done this against the advice of the banks, but in opposition to the Treasury— unless the Treasury has changed its views since the Secretary (Mr. A. D. Park) stated them in his addendum to the Economic Committee's report. "~

■ I wish to record particularly (stated Mr. Park) my dissent from statements made in Section VIII and other references in the report to the effect that there would be a net gain to the Budget from an increase in the rate of ex-^ change. In fact, lam convinced that the immediate effect,would be to increase considerably the Budget difficulties. For Instance, an immediate substantial rise in the exchange rate to, say, 25 per cent., would increase the expenditure item for exchange by approximately £1,500,000 for next financial year. In addition it would assuredly lead to a-further immediate fall in Customs revenue of, say, £1,500,000, and through the reactions on the importing and mercantile sections of the. community, income tax and other items of revenue would be adversely affected, perhaps to i the extent of £500,000, making a total adverse effect of £3,500,000.

If this adverse effect were the consequence of an unavoidable rise in exchange to a higher true,level, it would have to be met. But it has not been argued by those qualified to give a judgment that 25 per cent, is anything but artificial. The Economic Committee which (wilh Mr. Park dissenting) recommended a rise, did not argue that it was warranted by the

-supply and demand for London money. The Committee, while stating that there were influences which coutd not be calculated so that it could not give an estimate, showed that the known facts were against a rise:

The funds held overseas in tho Docomber quarter last (1931) wore about £2,500,000 greater than in the-March quarter of 1927,, and £11,500,000 less than in the March quarter of 1929. In theso circumstan es (said the Committee) it might bo-expected that tho cxchango rate would not bo depreciated' more than in 1927, when it moved only i per cent, from par. On this occasion however, the fall in export prices has been heavier and more substantial.

This unwarranted increase in the rate is to be covered by a Government indemnity to the banks. The public will pay, that indemnity through taxation, and they are entitled to a full and exact statement of their liability and how it is to be calculated. The Government undertaking _is "b indemnify the banks against any losses that may be incurred on the sale of exchange purchased at that figure" (25 per cent.). This leaves in doubt how the existing London credits are to be treated, whether by sale at the old rate until they are exhausted or in dilution of the 25 per cent. rate. Further, it is not stated how new credits are to be disposed of—whether by sale at 25 per cent, until the demand stops and the Government must take the balance to be unloaded at a lower rate, or whether an attempt will be made to spread the loss over' all sales. These are points on which complete information should be given at once in fairness to importers and other purchasers of London credits and to lessen, as far as possible, the disturbing effects of un? certainty and speculation. An estimate of the cost of the Government guarantee should also be made public. The Government cannot have entered upon the course which has been taken without determining the methods of operation and procuring reliable estimates of the cost of its policy. This information should not now be withheld from the public, who must pay the bill and cannot be asked to sign a blank cheque. Finally, a complete statement should be made as to the effect on the Budget.. Mr. Park's estimate of an adverse effect of £3,500,000 took no account of the indemnity. How much will this add to the bill? We have shown previously that in 1933----34 the Government will have serious Budget problems—the elimination of this year's deficit .of £1,000,000 (more if the British moratorium on our funded debt is not extended), and the £2,500,000 covered this year by hypothecation of reserves in Soldier Settlement Loans. Mr. Park's estimate of £3,500,000 as the direct consequence of inflation doubles the amount -to be covered by economies already made, or to be made or by new taxation. How is it to be met? The Finance Minister last year refrained from using the reserve taxable capacity, of the country, but it was not a great reserve. Where and how will it be supplemented? Customs cannot yield more. Importers will be under the greatest handicaps in. maintaining trade at anything even approaching the present low level. Local bodies will be burdened heavily. They will be unable to give an impetus to industry by rate reduction. Indeed, they will be able^to balance their accounts only by further .economies .or by higher rates. On the credit side there is the caltulation of the Economic Committee (with which the Secretary to the Treasury did not agree) that the Budget burden will be lightened by a substantial increase in the national income. Mr. Coates to-day states this at ten to twelve millions. There is also the Government1 expectation of an impetus to industry and relief of unemployment. The basis on which the Government makes its calculations should be disclosed. The Government claims that it caused "a comprehensive Review of the- economic state of the country" to be made. In such a review has it reckoned the burden on importers and local governing' bodies, and how. does it propose that burden should be sustained? Has it also ascertained (in something better than round numbers and percentages) the true position of the exporters, the urgency of their need, and how far the largess now to be indiscriminately distributed will be intercepted by -creditors and applied to keep inflated land values still in- ■ flated? These are questions which a Government which lias rushed into inflation" .should be ready to answer without delay.