COST OF EXCHANGE

Evening Post, Volume CXV, Issue 81, 6 April 1933, Page 10

COST OF EXCHANGE

WHAT WILL IT AMOUNT TO?

PUBLIC BECOMING ANXIOUS

As the Importers' Association has already indicated, the observant section of the public-is becoming ur.easy as to the ultimate cost- of the expedient of assisting the primary, producer by the -medium, of raising the rate of excllange on London from 10 per cent, to ,25 per cent. The retail purchaser is already realising what the raising of the rate, cum sales tax, means to him. He is meeting the extra cost of things where he must, and "making do^' or going without where he can. Turnovers reflect clearer than anything else the effects of these price-raising devices. .

. In order to make the present position as to exchange a little clearer than it appears to many readers, it may be explained that the banks buy bills' drawn against produce shipped,, from. New Zealand to England or elsewhero at a premium, of £24 10s for every £100 worth of produce. As soon as that produce is sold, the proceeds arising out of it are placed to the credit of the banks concerned. But in dealing with exchange, it is often sold as soon as purchased, and the proceeds in London are not necessary to the carrying on of exchange business, because their own resources enable the banks to carry on such business in a continuous stream. The difference between the buying rate in this Dominion, namely, £24 10s, and the buying rate for bills in London, £25 per cent.—constitutes the banks' remuneration for their services in such transactions, the amount being J per cent., or 10s in every £100 worth of exchange; but out of that i per cent., the working expenses, interest, and other incidentals have to be met. •■'

The Government by Act of Parliament undertook to indemnify the banks in. Tespect to any funds arising from realisation of: produce, for which they were unable to find buyers in London, and to take over any surplus funds of this character in London, and to pay the banks the premium- of 25 per cent, on them, which they ivould receive in the ordinary course were they able to buy bills drawn in New Zealand, or sell to the public in New Zealand.

TALL IN IMPORTS. NBut it is common knowledge that already there has been a substantial _ decline; in the imports of the Dominion. This is not to be wondered at, considering the much reduced purchasing power of the public simultaneously with t,he. inevitable advance , in imported goods affected by (a) increased Customs duties; (b) sales tax; and (c) higher exchange, or by all three. Should this contraction in imports continue —and there is every indication that they will for some time^-it is conceivable that before March 31 next the Government may be called, upon to purchase unwanted exchange to the amount of millions and for which the banks will be entitled under the Indemnity Act to receive from the Government 25- per cent, exchange. . '

Even should a. settlement be made as early as next. June it is not at all improbable that the Government will have to face a liability on" account of exchange amounting to several millions, plus the 25 > per cent, exchange as abovementioned."

It has been estimated that the act-of lifting of the exchange rate from 10 per cent, to 25 per cent, represents an additional cost to the Government of & 1,700,000 for remittances to London, and that the fall in. the Customs -revenue will not be> loss than £1,500,000 so that, what with tho cost of indemnifying the banks and the increase in the amount of the remittances, an incscap&Tblo loss running into some millions of .pounds'confronts the Government .already as the direct result sof raising the exchange rate. The only relief to be looked for, and the prospects of that are very remote, is a demand Arising for the exchange at the price at which, the Government has acquired it. , The millions of leeway to be made up can only be estimated at the .moment. It .would b© idle in 'the circumstances to venture into figures, for whatever loss there may be cannot be ascertained with anything like accuracy until the transaction' is closed.-

It is .understood that the indebtedness for the time being is being met by the- issue' of' treasury bills, in 'other words, by expanding the Dominion's floating debt. These bills, of course, can. be renewed, yet sooner or later, they must be met in full.