THE PRICE OF MONEY

Evening Post, Volume CXV, Issue 58, 10 March 1933, Page 6

THE PRICE OF MONEY

!An article in our news columns [last night stated the problem which will - f^ce ; the Government, as exchange guarantor of the banks, in disposing of accumulating London credits. Trade statistics reveal that there is a substantial surplus of such funds; more than the, Povemment and local, .bodies and importers are likely to require. In ordinary circumstances this position would be corrected by a fall in the exchange rate which would encourage importers to replenish their stocks, | and borrowers in London to choose jthis time for repayment. With a low exchange and ample funds in [London it might be possible and ! profitable to change the domicile of | part of the National Debt. Fbr I example, the £5,000,000 which is costing New Zealand £6 ls 3d per gent, might be repaid and replaced by a local loan at a lower rate. To do this, however, with, exchange at 25 per cent., would be a very costly operation. The Economic Committee suggested that accumulated funds could thus be used for redemption of overseas debt, but the Secretary to the Treasury pointed out how costly this would be and that a , further difficulty would arise in borrowing the necessary funds locally under present conditions. The exchange rate has a direct effect upon the supply of funds in the Dominion—whether For spending ior inyestment. Normally the high exchange should increase the supply, for all people who have commitments here, would endeavour to meet them so as to have the benefit of paying a debt of £125 with £100 sterling. Investors and others would find this market attractive and money would How freely in this direction. But there is an obstruction in the channel. The premium on moneys sent to New Zealand is not paid altogether by the persons who have to send money the other way. If it were, exchange would quickly find its true level. Part of this premium is to be paid by the Government in order to prevent exchange finding its level. Naturally a Government which has this obligation is anxious that its guarantee should not cost too much. In consequence we find that already there are restrictions upon the transmission of funds. Three weeks ago the chairman of the Associated Banks made the statement (in reply to reports published in Auckland) that tho Associated Banks had received no^ communication from stockbrokers in Auckland about resolutions on the negotiating of drafts on London, but the banks havo been restricting the negotiating of such drafts at the request of the Government. Hie restriction cannot, of . course, be fully effective—even against speculative transactions—as the holders of credits will simply he compelled to sell at a slight rebate of their profit to importers or others requiring funds. The demand for bank-held funds will, to this extent, be reduced. The Government's liability for the premium on surplus funds transferred tends to restrict the free flow of such funds. Such restriction must operate" as a check upon the achievement of a purpose which the Government greatly desires—the reduction in the price of money. Re-

cently the Government has taken drastic action to gain this end. It has made a compulsory reduction in interest and has launched a great conversion scheme with the spur of compulsion behind it. But the orthodox and soundest way of reducing the price of money is to adopt all means which will increase the supply. If this is done interest will be brought down without compulsion, by competition for investments. This would even affect the overdraft rate as the banks, rather than hold surplus funds idle, would make them available for sound investment at the lowest rate possible. To the operation of this law the Government must apply a check, unless it is prepared to pay the full price of its indemnity to the banks. Thus the adoption of artificial measures in the control of exchange tends to new complications and the defeat of the purpose which the Government has in view.