HIGH EXCHANGE RATES

Evening Star, Issue 18716, 19 August 1924, Page 1

HIGH EXCHANGE RATES

EXPERT BLAMES BANKS. In an address on ' Exchange ’ at Melbourne Mr J. R. Butch art, exchange broker, of Melbourne, blamed the banks for the present exchange difficulty in regard to Australia’s trade with England. ■ Mr Butchart was formerly chief inspector of ; the London Bank of Australia, Lt<L !• The buying and selling of exchange on I London, he said, was one of the branches jof banking; and ono of the greatest disj covories of modern times was that the I debts of banks could circulate and perform I most of the functions of metallic money, j Every shipment of Australian produce ' overseas created a debt due by the pur-' , chaser to some Australian institution or individual; and similarly every loan raised ' abroad, while it created a debt due by Australia at some future date and a lia- | bilily to pay interest, also created a debt ■ payable immediately to Australia. These , debts were not settled by sending out j money, but by using the credit in London I pay for imports to Australia and the ' interest on the immense sums borrowed in i London. The London exchange resolved itself into a scries of “sets-off.” The. 1 debts created in our favor by exports or borrowings were set off against the debts created against us by buying imports and paying interest on oversea loans. Where the set-off was equal the rate of exchange on a transaction should be par; but if the amount of debts payable by London to Australia were greater than the amount payable by Australia to London—as waa ' believed to be the case now—the London money would, be at a discount, which was actually the position at present. The extraordinary fact, however, was that, although the value of imports into Australia during the past three yeans and nine months to 31st March last had exceeded the value of exports by some £4,000,000, and although in addition to this Australia had paid some £28,000,000 more in interest on oversea, debts than the amount by which she had increased, her net indebtedness abroad by fresh borrowings, the London-Australia exchange waa such that the Australian exporter was paying as much as 72s 6d discount on every £IOO of sixty days’ sight drafts drawn on London. This was a discount that could be justifiable only if there were a great surplus of money due by London to Australia.—if the amount of debts immediately due by London to Australia were vastly greater than the amount of debts due by Australia to London. And the figures indicated that this could not be the case. The cause of the high discount on Australian produce exported was not difficult to find if we had the courage to hold fast to principles and look facts in the face. The cause of the present high exchange rates was not a great surplus of credit in London; it was a shortage of cash to liabilities in Australia, duo to too free advancing by the banks. There must be some brake on the amount of advances a bank could make, and that brake waa its holding sufficient of legal tender money with which to meet the drawings of its* depositors upon it. Experience showed that a bank should hold about 25 per cent, of its liabilities in cash; but with inconvertible paper money such adjustment was not effectable, and credit was no longer limited by the banks’ healings of the universal moneygold. Government notes to an extent of £4,500,000 had been issued to the banks lately, not because any future production of goods justified an increase of credit, but because the banks had so mcreased their advances of a non-liquid character that their proportion of cash to liabilities in Australia had become dangerously low—as low as per cent., instead of 25 per cent. Advances on London and purchase of credits in London embarrassed the banks by further increasing their deposit liabilities in Australia, and further reducing their already too scanty proportion of holdings of cash to liabilities. Here was the real reason for the present exchange difficulty. The real reason waa that the banks had made such large advances of a non-liquid character, which they could not pay off by ready cancellation of deposits being set off against the advances to liquidate' them. The delinquents were _ the bankers; they were at fault. As a British financial expert had put it: “ A big note issue told more of the past than of the future, and proved not that the moment had come for a change of course, but that the navigation was already at fault, and the ship was on the rocks.” It was the bankers who desired to increase the note issue to cover up their overtrading. Ono banker recently said the remedy was to cease borrowing in London. Ho (the speaker) wondered if this were the same man who, in December, 1920, said the only wav to bring abont a satisfactory state of things was to flfiat a loan of £10,OCX),000 in London. Circumstances altered morals. (Loud laughter.) It was hoped that whoever was placed in charge of the note issue would be wise enough and strong enough to appraise rightly advice given by bankers. With one or two honorable exceptions they had no principles, but were men of expediency, lire golden rule to bo followed by the authority in charge of the note issue should bei “Due limitation of the amount of the currency to maintain its purchasing power; keep your weather eye on the condition of credit, and let the request of the bankers for more notes go hang.”