The Evening Star WEDNESDAY, DECEMBER 30, 1931. THE EXCHANGE POOL.

Evening Star, Issue 20988, 30 December 1931, Page 6

The Evening Star WEDNESDAY, DECEMBER 30, 1931. THE EXCHANGE POOL.

Or New Zealand’s Public Debt, which totalled £276,033,858 at March 31, 1931, a sum of £154,546,941 is domiciled in London, The interest on this is payable in London in English money, and with the New Zealand pound standing at a discount compared with the English pound the New Zealand Government, which collects its revenue in New Zealand money, loses considerably over the transaction of paying out its overseas interest bill. Were it deemed expedient by the Government to add further to our overseas debt, such a loss could be obviated by using in London the proceeds of new loans to pay the interest on the old ones. Such procedure may not perhaps sound well, but in tho present disorganised state of exchange the spirit and tho letter of the business are not altogether coincident. However, the Government prefers to borrow from our own exporters rather than from British investors,, but the associated banks will immediately reimburse our exporters. Perhaps the scheme will be better understood from tho following statement obtained by a northern contemporary in an interview with the principal of ono of New Zealand’s largest exporting firms. He said:

“ The proposal will not affect the farmer —he will still receive the full value for his produce, and the premium on exchange will continue to he payable.” There could be no doubt, he continued, that it had been made clear to the Government that ordinary interest payments in London, amounting roughly to £8,000,000 per annum, plus the £4,000,000 outstanding in Treasury bills, would have to he “ cleaned up.” Consequently exports would have to exceed imports by £12,000,000, and unless some action such as the present were taken that margin would not be readied. Under the scheme the banks would give the Government first call on London funds; in other words, the produce would be shipped Home, and before the money received for it was paid out for the goods that under ordinary circumstances would come back to New Zealand in return the requirements of the Government would be ear-marked by the banks. The commercial community would have to be content with what w; i left. The banks would handle proceeds of all exports, and it would be quite an easy matter for them to meet the Government’s requirements under the plan adopted. “ The result, of course, will bo that importers must restrict their purchases,” he added. “ The exporter will not bo affected. The only firms who will he under any disability will be those who in the past have been free of the banks, and who have been soiling their London balances independently, and probably making an additional profit out of the transaction. There are very few firms who have been abA to do this. The scheme actually is for the control of the money received 'from the exports of New Zealand produce to England. The banks will decide how that money is to como hack to tho dominion. Ordinarily it would return in the form of importations, but now £12,000,000 has first to bo deducted to meet our overseas commitments. Tho amount of goods that will be imported will thus be greatly restricted, but if the £12,000,000 required A M

cannot be accumulated by the means proposed, then some more drastic steps will have to be taken to cut down imports. In what is being done now we are closely following the action taken by Australia twelve months ago.” The probability of an internal New Zealand loan following must 1i considered. In banking circles it has been pointed out that, as the farmers will continue to receive the returns for their produce in the ordinary way, the Government will have to reimburse the hanks for those advances'. “ The Government,” says one financial authority, “ will have to raise money in New Zealand by some of tho means open to , it—by taxation, a capital levy, or an internal loan—to obtain the funds necessary to repay the banks. On the other hand, tho banks may bo prepared to make advances to the Government by way of overdraft; in other words, the banks in New Zealand may provide tho short-term loans that hitherto have been floated in London.” It has also been pointed out that if, under the Government’s plan, with tho requirements of tho importer taking second place, as it were, to those of tho Government, funds in London were not sufficient to meet the importer’s needs, the banks would have no choice but to ration credit or to reduce the demand for it by increasing the selling rates of exchange. It is clear that the business of foreign exchange is closely connected with that of foreign trade, and in addition to enabling exporters and importers to receive payment for their wares tho reader will perceive that the bills of exchange of merchants have another function. They enable funds to be transferred from one country to another without the risk and expense of sending the precious metals, as was the case in pre-war days, when tho whole Empire was really on the gold standard. A banker in this country, for instance, may be called upon to make funds available on the other side of the world. He buys bills of exchange in connection with the export' of produce to that country, sends them to his agent there, and in due course the bills are presented for payment, and with the money so received he has the wherewithal to meet the payment he is called upon to make for his client. With the trade of tho world in a state of suspended animation, it would seem that a further problem has emerged, illustrating the old axiom, “ The nation that does not buy, neither shall it sell.” With fewer bills of exchange being drawn in connection with imports and exports, the means of transferring funds in settlement of foreign indebtedness for interest payments, services rendered, war debts, reparations, and tho like have diminished alarmingly. It is the balance of indebtedness, the excess of what a nation owes one country over that which it is owed, that causes exchanges to move against the debtor country, and (when the gold standard prevailed) resort then had to be made to gold shipments to cancel that excess.