The Evening Star SATURDAY, JULY 28, 1934. CURRENCY DEPRECIATION A FIXED POLICY?

Evening Star, Issue 21784, 28 July 1934, Page 12

The Evening Star SATURDAY, JULY 28, 1934. CURRENCY DEPRECIATION A FIXED POLICY?

Professor Tocker, of Canterbury College, has deputised for-Mr Coates in a very important matter. There has been a widespread -demand to know how much the arbitrarily fixed exchange rate of 25 per cent, on London has cost New Zealand. This demand was voiced by those to whom it is a matter of vital concern that their pound has only 16s purchasing power in Britain when, on the authority of Sir Harold Beauchamp, it ought to have 20s of purchasing power. When the Government forced further devaluation of our New Zealand currency on the banks, they, accustomed to the operation of the law of supply and demand in the sphere of currency (no less than in other commodity markets), and evidently sceptical of arbitrary ukase prevailing, for an indefinite time over economic daw, successfully contested their right to evade the loss falling on them when the New Zealand pound was freed and allowed to regain its proper purchasing power in Britain. Correctly forecasting that New Zealand consumers would minimise their purchases in Britain so long as their pound would buy only 16s worth of goods, and that exports from New Zealand would tend to grow in volume so long as the British buyer’s outlay of 20s represented 25s to th» New Zealand vendor, they anticipated an accentuation of one-way trade, a falling off in the New Zealand demand for sterling, and consequently a growing accumulation of the funds in their London branches due to New Zealand’s “ favourable ” trade balance congesting with them. Their forecast was accurate. The surplus of the proceeds of pur exports over the withdrawals to pay for indispensable. imports and the requirements of the New Zealand Government for overseas debt services have grown steadily to a present total of £23,000,000 sterling. By Government decree that sum represents £28,500,000’ in New Zealand currency. Unpegging the exchange, which is now a Government prerogative, might soon mean exchange at par. Had there been no Government indemnity the hanks which have credited depositors here with £28,500,000 would have in that case only £23,000,000 with which to reimburse themselves. Instead, they hold Government Treasury bills to the larger amount mentioned. The difference between the two sums is £5,500,000, and that is the chief item in the cost to the country of the artificial exchange fate which has been the subject of pertinacious inquiry and of equally adroit countering by the Minister of Professor Tocker has now corroborated Mr Wright’s “feeler” in Parliament on Thursday. This, sum, however, cannot be counted as an immediate loss to the country. The Government has liquidated its liability to the trading banks by passing it on temporarily to the Reserve Bank; and, as between them the Government and the Reserve Bank are to dictate the rate of exchange, the potential loss of £5,500,000 is to be deferred indefinitely- by maintaining the present rate of exchange on London indefinitely. This determination is now acknowledged openly. Some time ago, when rumours gained strength as to the possibility of the rate being lowered, there came the Ministerial announcement that it would be maintained at least until the end of the 1933-34 export season. Then the period was extended to a year, then to two years perhaps, and now the prospect is of the deliberate depreciation of our currency remaining New Zealand’s fixed policy. At any rate, in the present state of our national finances, there seems small probability of the Government assuming immediately or in the near future a burden of £5,500,000 which it has now empowered itself to shelve indefinitely. (Mr Coates has put it that “ there may be no loss.”) Rather would the temptation be the other way unless general conditions improve. For, as Professor Tocker points out, “a, further rise in the exchange rate would mean an increase in the New Zealand value of sterling, which the Government, and not the ' Reserve Bank, would get. Conversely, a fall in the exchange rate would mean a reduction in the New Zealand value of sterling assets and a loss which the Government, and not the Reserve Bank, would meet.” One hesitates, however, to believe that, in face of the view of an important section of the community on the ethics of a currency so managed as to automatically transfer New Zealand money from the pockets of some of the community to those of others, the Government would aggravate the feeling by cumulative currency depreciation. With the latter part of Professor Tocker’s statement regarding the Government, and not the Reserve Bank, bearing the loss resulting from a lowered exchange rate, our previous statement as to the Government having temporarily passed on to the Reserve Bank the liability for the loss appears to be in conflict. Perhaps a summary of the transactions over the surplus London funds may explain our contention. The trading banks hold £23,000,000 sterling in London. The New Zealand Government acquires this, paying the banks in Treasury bills of a face value of £28,500,000. The Reserve Bank takes over the £23,000,000 in London mul holds it there as a “ Dominion Exchange Re-;

serve” —unwieldy under present trade currents—and in return credits its New Zealand Government account with £28,500,000. On that account with the Reserve Bank the Government draws to redeem its Treasury bills from the trading banks, which thus acquire Reserve Bank notes or credits to their accounts here with the Reserve Bank. Thus throughout the transaction the Government is only an intermediary. The net result is that the Reserve Bank acquires from the trading banks £23,000,000 sterling in London, and the trading banks are credited with £28,500,000 in the Reserve Bank in New Zealand. The Reserve Bank undoubtedly begins by being a great convenience to the Government. On certain points regarding its future we are curious. One is as to whether competition between it and the trading banks over the transfer of money between here and abroad will resurrect a state of things existent here when channels other than the banks—such as mercantile houses—were found and availed of for the purpose. Another point is whether external conditions or influences will operate against New Zealand’s ability to keep the exchange pegged. As has been shown, the inducement to try and keep it pegged, “ though the heavens fall,” is strong with both the Government and the Reserve Bank authorities. The legal power is with them. But is it supreme ?