EXCHANGE RATE

Evening Post, Volume CXVIII, Issue 8, 10 July 1934, Page 7

EXCHANGE RATE

DEFENCE OF POLICY

IX GENERAL INTEREST

MR. FORBES SPEAKS

WHY HE CHANGED HIS MIND

(Special to the "Evening Post.")

CHEVIOT, This Day. A justification of the Government's high exchange policy was a feature of the address delivered at Cheviot last night by the Prime Minister (the Rt^Hon. G. W. Eorbes). Mr. Forbes reviewed the difficulties experienced by the primary producers when the effects of the depression hit New Zealand, and went on to deal with the various steps taken by the Government to give them a measure of relief. ■He denied the charge that the exchange rate had been lifted without proper study and thought being given .to the problem, and defended himself against the charge of changing his : mind on the subject i»y stating that the circumstances .('*e such as to demand a different exchange policy^ Mr. Forbes declared that he cared little for charges of inconsistency compared .with the much graver charge that he and his colleagues would permit the community.-to go down into the depths of bankruptcy, repudiation, and general disaster for fear of hearing it said that he had changed his mind. The Prime Minister claimed that there had been an allround improvement in conditions as a result of the raising of the exchange rate.. , Mr. Forbes said that the Government had already—in December, 1931 —found it necessary to control the movement of credits overseas, so that the minimum requirements of funds for national commitments could be conserved. Exchange at that date stood at £110; in other words, £100 sterling was .remitted to New. Zealand at a premium of £10. Australian currency was depreciated at that time to the extent of 25 per cent, compared with, sterling. Producers across the Tasman. wore thus obtaining an advantage #f 15 per cent, compared with tho producers of New Zealand -in their realintious on the English market. Though drastic in its effects, the National. Expenditure x\djustment Act was fcardly 'in operation before the economic conditions of the Dominion made it. all too , .vividly evident that the measure was'mild compared with the need for economy in public expenditure and the reduction in costs of the Dominion?s producers. ~A familiar criticism of the farmers that their main trouble was due to high land values ceased to have any real sting when applied to the conditions of that 'date, for the great majority could not hare mate efficient farming pay if they held their land for nothing. The record of tho average prices of Now Zealand.": exports, in contrast, was as follows:— ' ' . January-June, 1929. 'January-June, 1932. a. d. s. cl. s. d. s. d. Creasy wool Ob):. 017 to OWi 0 Q% to 0 5 .Mutton (cwtj 14 o'to 40 0 23 0 toIGO Lamb •.-.-.- -> (CWt) 76 oto 72 fi 4S 3 to 40 10 -IlUtter.' .-■ '■• ■ -~:. (cwt) 169 oto ISO 0 109 0 to. 80 10 .cheese . (cntV- 86 6to 71 0 5S 0 to 51 7 • "All export prices had fallen by 49 tier cent/compared.with those of 1929," .[■aid the Prime Minister. "The actual fall in dairy produce, prices was 36 per i-.ent.; meat prices had dropped by 4,4 per cent., wool prices by 69 per cent., tind| other pastoral products by 66 per ■rent. . ,;■ •.'■". SAVING THE FARMERS. "Our farmers had made a valiant attempt to overcome low prices by increasing outputs, but the prices kept on falling.' Yet, they stuck to their farms, and the very existence of this Dominion as a, self-respecting people depended on a sufficiency of exports to cover our overseas debt charges and to pay. for what we were bound to import. But for the relief legislation of the Government the position of the producer's would have become quite impossible, for, despite all their hard work, they were running at a loss. "The figures just quoted illustrate the overwhelming difficulties of the farmer, but they had a much wider effect. From 1929 till 1932 the value of our exports fell from £56,200,000 ,to £33,600,000, or 40 per cent. This represents the calamitous drop in national income, and it would have been .worse but for the increased volume of exports, which, to some extent, offset the reduction in gross realisations overseas. The farmer working at a loss had 'nothing to spend, .his plight was reflected in declining business in tho towns and heavy reductions in imports. Alt the important sources of revenue of the State were drying tip. By this time the depression had hit tho towns in full strength, and without some drastic .remedial measure the' blow would become accentuated as time went on, for 'this withdrawal of purchasing power meant ruination to tho commercial Community and general unemployment Mike in town and country. A FRESH CRISIS. .'■' "Here was a fresh crisis, and as it "was beyond the capacity of any individual or group of persons to cope with i<, the responsibility rested on (lie Government. Wo did not hesitate to take that responsibility, though -there was no clear precedent to guide us. Further deflation could not go on. The Government did not act without duo consideration of all the possible remedies. It called in a committee of the leading economists of New Zealand together with an economist from Australia whoso assistance was of special value, for the reason that the most severe effects of the depression had been experienced in the Commonwealth much earlier than in the. Dominion. These experts were requested to make an impartial, complete survey of world factors which irere operating to cause the general depression, . their bearing on New Zealand conditions, and the future economic prospects of this country in tho light of the information at their disposal. They were asked to make suggestions, regarding measures which in their opinion would be most likely to relieve our community and modify the shock of the world" depression on the Dominion, and to investigate tho Budgetary position with the object of keeping current taxation down to the minimum safe point, so that the taxpayer would not be required to carry an im- j possible financial burden. j "How then can it be said that we I acted without proper study and thought when we took all the information and advice which was available before coming to a decision? More than one possible measure of relief was explored. "There was the possibility of direct

credit'expansion-to increase tlie supply of purchasing power in. tho hands of the people, and this involved consideration of more than one method of achieving that objective." AN EXPORT SUBSIDY. . Au: export-subsidy or grant had not been overlooked, and its probable cost i had been estimated, said Mr. Forbes. They also had to consider how long it would need to operate, and how-much indebtedness would pile up as a- consequence, while it also became evident on close examination that tho benefit to tho producers would, progressively decline year by year. "Practical difficulties would also, it "was seen, arise as to the relative amount of bonus to'bo paid to different classes of produeurs," said Mr. Forbes. "The piling up of debt to meet bonus requirements , would, if the depression was long-con-tinued, force the discontinuance of the : system, leaving tho problom of adjust- , ment by deflation still to bo faced, and , we havo unpleasant experience of what deflation means, particularly to tho ' wage-earners of the Dominion. "The essence of the difficulty was : that internal costs still remained high, while export prices continued low, with a far from favourable outlook. Finally, 1 in January, 1933, the Government came to the conclusion that the rate of exchange must be increased from £110 to £125, New Zealand on London. The immediate effect was to enable the New Zealand producer to obtain, in this country, £.125 of New Zealand currency 1 for every £.100 realised by him through the sale of his produce in England. As the trading banks had been conducting business on the basis of £110, it was necessary to indemnify them against losses which might bo incurred through the artificially higher rate, and this guarantee was given; .md subsequently incorporated in a statute. "I have been accused of changing : ray mind on this important question, and I have been reminded of statements which I made from time to time, that the fixing of the rate of exchange was a matter for the trading banks. And that was the actual fact when those statements were made. But circumstances proved the need, in .the national interest, for a change in exchange policy; the matter th^h ceased to be on a .purely business basis, "controlled by the operation of supply and demand. INTEREST OF COMMUNITY. "The larger interest of the community had to be safeguarded by tho Government, as custodians of the people's security and welfare, and I care littlo for charges of inconsistency compared with tho much graver charge that I and my colleagues would permit the community to go down into the depths of bankruptcy, repudiation, and general disaster for fear of hearing it said that I had changed my mind. The great gap between farmers' costs and income was thus bridged to the extent of the rise in exchange. They were able more adequately to meet their expenses. The additional income was passed on, either directly by the farmer, or by those to whom he was indebted. The circulation of the. additional 15 per cent, on our income from exports increased the national spending power to that extent, and its beneficial effects, have been felt not only in the country, but in every town in Now Zealand. The contraction in-trade and industry which was in full swing at that time, was steadied and reduced. • '• . "New Zealand has not been unique in devaluing its currency. Britain was off the gold standard before we took, the step, all the European countries had depreciated their currency, including our important rival in dairy products, Denmark, and ultimately the United States of America deliberately adopted tho policy of devaluation up 'to 40 per cent, as one of the measures of rehabilitation. Stabilisation of currencies would contribute materially to the revival of world trade, and this ideal is being worked for, though it is more than doubtful if stabilisation will involve a return to the monetary standai;ds of the various countries prior to the general movement of devaluation. EFFECT ON COSTS. "With more than a year's experience of the new exchange rate, it can bo 1 demonstrated from tho Government Statistician's figures relating to a wi<}e variety of prices that the rise- in the , rate brought no appreciable change for the worse in either the cost of living or costs of production. But the change for tho better in general business conditions is undoubted. What would have happened to our secondary industries had the national income continued at- the ruinously low point of 1932? The value of factory products manufactured in-the Dominion for the year ended March, 1931, < was £23,300,000, but drastically curtailed spending-power had its effect in the following year by reducing the demand for our factory products by move than four and a half millions—the total value of these products dropped to £18,600,000. It was quite'to-bo expected that, with the national income so low, this decline in industry would have continued, but instead of continuing to drop at that heavy rate, factory production for the year ended March, 1933, declined by less than one million; the rate of decline was substantially arrested, and there are in- , dieations • today that a welcome upward* movement has -commenced. "The Government has not been coneorned only with the problems of the producers and tho balancing of its Budget. Its measures havo included those directly, intended for the assistance' of , all classes in the community who have been financially embarrassed by the do- ' pression. What has been done for the t unemployed, always a matter of first concern, I will survey a little later. "It can.fairly be claimed that our exchange policy, though primarily aiming at bridging tho gap between producers' low prices and high costs, has in fact been of general benefit by enlarging purchasing power. "But there were measures designed to assist other classes than those on the land; Fixed charges such as rents and interest were, it was realised, pressing hard on all classes, and the National Expenditure Adjustment Act passed in May, 1932, imposed a standard reduction in the rate of interest and rents of 20 per cent.) operative until April 1, 1935. In the same measure, power was taken to deal-comprehensively with interest payments, maximum rates being' fixed in respect to savings brinks and building and deposit companies. This led the way to successful negotiations with the' trading banks for reduction of interest on overdrafts—a matter of great importance to the commercial community—and it was also arranged through the instrumentality of the Government, that the stock and station companies of the Dominion would 'pass on' to their clients the full advantage gained through the reduction in the bank rate of overdraft."