Awaiting Judgment

Evening Star, Issue 21316, 21 January 1933, Page 13

Awaiting Judgment

Leaders Justify Exchange Inflation

“Time Will Tell”

[Per United Press Association.]

WELLINGTON, January 20. A defence of the high exchange rate, emphasising its favourable effect on the national income, was made this evening by the new Minister of Finance (Right Hon. J. G. Coates), who said: “The exchange rate is a’ controversial problem on which there has been no lack of discussion. The' pros and cons have been set forth exhaustively, and the arguments are fresh in the public mind, so that it is needless to say much at this juncture. The wisdom of the action that has been taken can only be borne out by experience. I believe that the* decision of the Government to take part and, indeed, to assume the responsibility in the matter, will be shown to be justified. Time will tell. Personally, I am quite prepared to await the considered judgment which will be given in the light of experience, and to accept my share of the responsibility. Many arguments were raised against the increased rate of exchange, and to every one of these we have given careful thought. Some, of these contentions are certainly of considerable weight and appear valid. 1 can well understand reasonable-minded persons believing that the objections outweigh the advantages. It is all a matter of one’s point of view, and this is the time when thoughtful people must make an effort to understand other viewpoints. At least it can be said that Cabinet has taken full account of every opposing argument, and has decided on a course of action with a clear understanding of the objections. “ We do not believe,” he continued, “ that the variation in the exchange rate will of itself solve the dominion’s difficulties. This is merely one step in the necessary measures of adjustment in bringing monetary receipts and costs of production into line. At the moment they are seriously out of line, and widespread dislocation is the result. Primarily this concerns farmers, though all industry is affected, and employment suffers accordingly. The increased exchange rate by no means removes the need for other measures. These are engaging the Government’s attention, and may be revealed by the Prime Minister next week. Nobody pretends that the increased exchange rate will at once ease the Government’s budgetary problem. It will, on the contrary, cause the position to be increasingly difficult in the early stages. Yet if the change is in the interests of the economic soundness of the country, as we believe it will be, and particularly in the interest of the basic primary producing industries, it must strengthen also the stability of our public finance. When the initial difficulties are overcome a substantial increase in the national income, as represented in New Zealand currency, of from £10,000,000 to £12,000,000 will result from the higher exchange rate. This will give much-needed stimulus to trade and industry, and will strengthen buying power. Incidentally it must tend ,to augment the receipts of the Government and other public bodies, and to this extent it will assist the public finances.

that the budgetary position would, be adversely affected to the extent of £3,500,000, but this, of course, took no account of further large sums which may now be required to purchase accumulated credits in London. Since last February the position of the State and national finances has altered, and the effect of the higher exchange on the items mentioned by Mr Park may not be so large. He estimated that the rate of 25 per cent, would increase the expenditure on account of exchange on debt services by £1,500,000. This estimate, according to an authoritative estimate supplied yesterday, will remain much the same. Mr Park considered that the higher exchange would lead to a further and immediate fall in Customs revenue of about £1,500,000, but this has been revised to a figure in the vicinity of £1,250,000. In addition, it was estimated that income tax and other items of revenue would contract to the extent of £500,000, but this is amended to, roughly, £400,000 for next year. Thus the total extra burden on the Budget for these items alone is set down at about £3,150,000 for the coming 3*ear. It is expected that the Prime Minister will deal with the position of the State accounts for the nine months of the current financial year when he makes his statement to the House, next week. From what can be gathered at the moment, the figures are expected to show that the Estimates have been fairly closely reached both in regard to expenditure and revenue, and that the general position will not be very different from that anticipated some months ago. Income tax receipts, however, may show a fairly heavy decline. NEW CROP OF RUMOURS UNEMPLOYMENT TAX OF 2/[From Ode Parliamentary Reporter.] WELLINGTON, January 20. , Unofficial statements regarding the Government’s plans turned out in one instance this week to be so well substantiated that a further crop of rumours cannot be ignored without investigation of their probability. One statement circulating unofficially is that the Government, as an offset to , the exchange burden on importers, will introduce a 15 per cent, reduction in tariff items affecting British goods. There is a natural reluctance on the part of Ministers to discuss tariff changes in advance, but one member of Cabinet showed surprise at this report, suggesting that it was based on an inversion of the complaint against the 25 per cent, exchange premium, “ as this will involve a 15 per cent, additional handicap on importers.” “ Anyhow, exchange is not linked with tariffs by any Government,” he added.

“ I am aware,’’ added Mr Coates, “ that apart altogether from the merits the important change now made, criticism by some will be directed to the mere fact that the Government has accepted responsibility for this change. In normal times this criticism would be valid. To-day conditions are abnormal, and such criticism is beside the point, and is unhelpful. For myself, I say deliberately that when the country and the people are facing a crisis the Government must play its part in guiding economic forces along channels which it believes will bring recovery. .That is a responsibility which no Government can disclaim at such a time. “ The resignation of the Hon. Downie Stewart,” concluded Mr Coates, “ is a matter which I regret for personal reasons, and I join with everyone in regretting, on public grounds, the loss of his services at the present juncture. We have been colleagues together in office and in opposition. I had hoped that he would have been able to continue in office, for compromise is the essence of coalition government, but if a Minister finds himself unable to concur in any decision it is, of course, his inherent right, which nobody can deny to a public man, to dissociate himself from that policy. Mr Downie Stewart’s broadmindedness is universally acknowledged, and though he is not in office the Government will. I am sure, continue to have his friendly support.” BUDGETARY POSITION ADVERSE EFFECT—£3,SOO,OOO Confident statements were made today by both the Prime Minister (the lit. Hon. G. W. Forbes) and the Minister of Finance (Rt. Hon. J. G. Coates) that the Government, in giving a guarantee to the banks to indemnify them against any loss they might incur on the sale of exchange purchased at the new rate of 25 per cent, had gone thoroughly into all aspects of the responsibility it was shouldering, and that it would be able to meet any demands made on the Consolidated Fund for the purpose. Although the Government _ admits that the immediate effect of the increase in the rate upon the Budget will be serious, it has not divulged to what extent it might have to provide funds for the purchase of accumulated credits in London. There is reason to believe, however, that it has made a fairly close estimate of the amount that might be required to maintain the high rate. The expectation is that a large sum will be involved over a complete year, and although Cabinet is optimistic about the possibility of being able to meet all the requirements in order to indemnify the banks, one prominent financial authority, when asked for an opinion, was not prepared to acknowledge that this could be done without a heavy drain being made upon the State finances. Some idea of the effect upon the Budget of the exchange rate of 25 per cent, was given by the Secretary to the Treasury (Mr A. D. Park) in his addendum to the Economic Committee’s report last February. He estimated

Another interesting rumour which had to be tracked down was that the Government contemplates increasing the present unemployment tax on wages to Is Bd, or even 2s in the £. Ministers, by the process of denials, could give away their whole plans, so that explicit information was impossible to obtain here. However, it appears that the facts of the situation suggest the unreliability of the report. High exchange operates to diminish the purchasing power of wages, so that another rise in wages taxation would be imposing an exasperating overload on taxpayers. “ PLAYING WITH DYNAMITE " REBATE ON IMPORTS AS OFFSET [Special to the * Star.’] AUCKLAND, January 20. In the course of an editorial entitled ‘ Playing with Dynamite,’ the ‘Star’ says: “Against the advice of the Minister of Finance, against the opinion of the permanent head of the Treasury, and in spite of the stand made by the Associated Banks, the Government has forced the issue, and increased the exchange rate on London to 25 per cent. It is a farmers’ Government, and the pressure on its supporters has been too strong and too persistent to ho resisted; but it cannot be accepted that the Government’s action is in he best interests of the country. No one can endorse the view of Cabinet on such a question, when it is diametrically opposed to the opinion of all its financial advisers. The banks have, perforce, had to agree, but they are indemnified against loss on the surplus of exchange that must accumulate abroad. Even with exchange at 10 per cent, the London funds were steadily increasing, and there was a case for a reduction rather than an increase of the rate. Now there must be a rapid transfer of New Zealand money to Britain, and though' banks may be compensated, the national and industrial finance of the dominion must be disrupted to such an extent that it is impossible to see all the contingencies that are liable to arise. The Secretary of the Treasury estimates the extra cost to the Government at £3,500,000 as the result of arbitrarily raising the exchange rate 15 per cent. It is difficult 'to see where, in this overtaxed country, with its dwindling revenues, it can hope to secure such a sum. At a time when the Government is clamouring to reduce costs in every direction, it has definitely added 15 per cent, to the cost of living, thus involving wage scaling and accentuating the burden of unemployment. “ Temporarily the farmer may secure some benefit, but within a very few months this will lie adjusted by the increase of internal prices to meet the altered conditions. There is one point that wo think should be strongly urged on the Government, and that is that the tariff on manufactured goods should be immediately subjected to 15 per cent, rebate. If this course is taken without delay, the stream of importation will be much less seriously disturbed,

and any revenue that may be sacrificed will be more than compensated for by there being no fall in the quantity 01 imports, and therefore less money to be found to purchase the surplus of exchange abroad. The Government is under a pledge, made at Ottawa, to reduce existing tariffs, and its action in introductiug the equivalent of a 15 per cent, addition over the whole import field is a flagrant breach of faith. This can be avoided by the simple expedient that we have suggested. It would obviate that serious dislocation on business that the 15 per cent, increase has precipitated on the community, and at the same time, the disastrous effects on the national finance would be, in some measure, modified. We are launched » troubled waters, and apart from financial difficulties, political repercussions that may involve the existence of the Coalition Government are a consequence that (it is to be presumed) Cabinet took into consideration'before making such a momentous decision.” TIME TO MOVE CITY INTERESTS POORLY REPRESENTED [Pm United Press Association.l WELLINGTON, January 20. The president of the Wellington Chamber of Commerce (Mr J. P. Luke) _ was emphatic in his protest. He said that the imposition of an artificially high rate of exchange by the action of the Government was a direct .violation of economic principles, and, in addition, a direct contradiction of the undertaking by the Prime Minister that the Government would not in any way interfere with the exchange position. “ Palliatives of such a nature,” he said, “do not even commence to touch the real problem. Until the country recognises, the necessity drastically to reduce all costs the economic position will drift from bad to worse. The fact that a section of the community ’by extremely debatable methods can impose its will on every other section is in direct conflict with political and economic principles. There cannot be any doubt that the financial position of the country will not be improved, and the dislocation of trade and com* merce will inevitably bring in its train far greater evils than those which the artificial pegging of the exchange attempts to remedy. “ It is high time,” he added, “that the commercial and industrial community took drastic action in the only possible way available to it to see that the whole country is adequately and fairly represented in the political arena.” COALITION CRASH FORETOLD AUCKLAND, January 20. Representatives of local bodies and the commercial community received the exchange announcement with consternation, the latter describing it as a panic measure. The Power Board and the Transport Board, facing maturing loans, will have to meet greatly increased expenditure in London. Mr AI. J. Savage, deputy-Labour Leader, said that the decision was a disastrous one, and suggested that the remainder of the Ministry might profitably follow Mr Downie Stewart’s lead. The development was an evidence of the disintegration of the Coalition. Criticising the Government’s decision, Mr E.i C. Creagh (president of the New Zealand Stock Exchange) predicted extra taxation and increased cost of living. The Government, he said, had followed, the advice of university professors in preference to that of sound business men and bankers. FALSE CONDITIONS FURTHER UNEMPLOYMENT PREDICTED WELLINGTON, January 20. The action of the Government in, deciding the' new exchange rate was condemned by Mr A. S. Burgess (president of the Associated Chambers of Commerce). .The executive met to consider the exchange situation, and at the end of the meeting Mr Burgess made a statement in connection with the subject. “The extraordinary attitude of the Government,” he said, “in reversing the assurance given by the Prime Minister that the Government would not interfere with the rate of exchange, and that it would leave it with the banks to fix such a rate as supply and demand required in the ordinary way, is greatly to be deplored. The raising of the rate of exchange by artificial means is a deliberate act of inflation. It disregards economic considerations entirely, and it will create false conditions, just as would the artificial lowering of the rate-below its proper market level. The Associated Chambers of Commerce have from the beginning consistently advocated a free exchange rate, and it is no more in favour of a rate that is artificially low than one that is artificially high. Apart from the unjustifiable interference in what is obviously a banking function, the action of the Government in making this bargain with the banks is in direct violation of the spirit of Ottawa. “ While not going into the question of whether the principle is right or wrong to grant assistance to primary producers,” said Mr Burgess, “ the method or using the exchange rate is quite wrong in principle. Under this system the primary producers, who are obtaining lower prices for their produce, are receiving the lowest benefit, while those who are _ receiving the # highest prices for their produce are receiving the highest benefit. Therefore, if any assistance is to be given it should bo on a more equitable basis, ensuring that primary producers receive the greater benefit: lam firmly convinced that this action of the Government is going to lead to further unemployment, and a considerable increase in the cost of living. A further meeting of my executive is to be held next week to consider what action is to be taken by my association.”

HAD TO GIVE WAY THE BANKS' ATTITUDE WELLINGTON, January 20. Referring to the Government’s action iu raising the exchange rate, Mr J. T. Grose (general manager of the National Bank of New Zealand) said:—“The National Bank has been one of the banks most firmly opposed to the raising of the rate of exchange, but we had to give way under the pressure of the other banks, and we were compelled to follow. The views of the National Bank on the exchange question are well known. These have undergone no change. vSince the beginning of the movement for tiie raising of the rate I have been against such a step being taken, and I have not altered my convictions to that effect. I believe that a very grave mistake has been made by the Government iu forcing the banko into their present position.’’