EXCHANGE AND CURRENCY.

Hawera Star, Volume XLVIII, 21 June 1924, Page 16

EXCHANGE AND CURRENCY.

A DIFFICULT PROBLEM Speaking on exchange anu currency at the annual meeting of the Bank of New Zealand this morning, Mr William Watson (acting-chairman) said: — Owing to the fact that gold has <-eased to function and to the existing export and import conditions, the difficulties of the exchange position between London and New Zealand, and New Zealand and Australia, have become intensified. The present rale of 2 per cent, for purchasing sight drafts on London is unusually heavy for this Dominion, although light compared with the exchange burden borne by many other countries—the Australian rate, for instance, is 17s 6d per cent, higher. It is fortunate that the better prices now ruling for most lines of produce much more than counter-bal-ance the adverse exchange. The transfer of surplus funds from London to Australia, where money is greatly needed to settle the adverse balance of our trade with the Commonwealth, has of late been effected on extremely unfavourable terms to us, so that the purchase in New Zealand of exchange on London is by no means so profitable as some critics appear to think. The question of exchange is so interwoven with that of currency, and the two are so complicated, that those who have lately expressed impracticable views may perhaps -be excused. The highest authorities have stated that, in England, currencies are necessarily limited, and I have told you in my remarks on note circulation that the currency is here regulated to the, necessities of the position, but in such a way as to avoid inflation. Had the suggestion for an Empire currency been adopted it is difficult to see how inflation could be locally controlled; this is but one of the objections to that measure.

Whilst in New Zealand the exchange question alone presents difficulty, Australia has for some time past experienced even higher exchange rates than the Dominion, and has also suffered from a loss of currency. The note issue there is in the hands of the Commonwealth, being conducted by the note issue .department of the Commonwealth Bank under a special board of directors. The Note Boa*rd has recently decided not to make any further issues of notes even in exchange for an equivalent of sovereigns. It is understood that the reason for this is a belief ,or fear, that such an increase, in the note issues would lead to inflation. A restriction of production, commerce, and trade is the natural outcome. That the board has adopted this policy in what it believes to be the best interests of the Commonwealth, is not questioned, but the point is this : Have the members of the board the information at their command to enable them to determine what amount of currency is required from time to time to satisfy the needs of commerce and production ? Surely the joint stock banks, with their intimate and detailed knowledge of financial conditions should be the better judges. Hitherto the control of credit in Australia has mainly been in the hands of the banks, but the measure of control which the£ exercised has now, through the attitude adopted by the Note Board, virtually passed to the latter.

It is quite apparent from the quarterly banking returns that the cash holidngs of the banks in Australia necessitate a policy of extreme restriction. The returns at December, 1920, show that the banks held 48 millions in coin, bullion and legal tender notes against 215 millions of deposits, whilst for the same quarter of 1923 they held 6 millions less of cash resources, although deposits had increased within the three years by 17 millions, and advances by 14 millions. These figures go to prove that the supply of ready money 'is insufficient, and, consequently, if Australia is to progress, it is evident that steps must be taken to increase the currency sufficiently to meet the legitimate requirements of the country;

The banks possess the necessary funds for meeting the demands of their customers, hut, unfortunately, a considerable portion of these funds is in London, and no means exist for transferring an adequate amount to Australia or otherwise making the money available at the latter point. It has been publicly stated that, as a result, a borrower would find it difficult, if not impossible, to obtain in the Commonwealth an overdraft of, say, £20,000 against gilt-edged securities worth £50,000. Another consequence of the shortage of currency is that the average rate of interest on overdrafts is higher than in New Zealand, despite the much heavier income tax paid by the banks in the Dominion. A /prominent bank director in Sydin discussing the position recently, publicly suggested that the Note Board should issue ten millions in notes in Australia to the banks in exchange for an equivalent cash payment in London, and it is not easy to understand why some arrangement of this kind should not be effected. The. fact is that State issues of notes from their very nature tend to run to one extreme or other; either they are not elastic enough to meet- the varying requirements of a country, or, in the hands of reckless Governments, become the instruments of inflation.

If Australia abolished the State issue and allowed the banks to issue their own notes, making the circulation legal tender and a. first charge on assets, with the special security of one-third of the amount of issue to be held in gold and two-thirds in Government securities, the financial stringency would be ended. No note-holder cotild reasonably question the safety of his holding if thus safeguarded; and by taxation of the circulation, the State could derive as large a profit as rc does under the present system. . This Dominion is very much interested to see a satisfactory solution of the difficulty, because stringent monetary conditions in Australia are quickly felt here. Considerable sums of Australian money have in the past been invested in New Zealand, and the remittance of these funds helped in a measure to minimise the effects of adverse trade balances between New Zealand and the Commonwealth, but now the shortage of money in Australia has caused a cessation in such investments. The (result is that the trade balance, to a considerable extent, has to be settled by remitting funds from New Zealand to London, and thence to Australia; — this being not only a costly proceeding but somewhat difficult to .arrange. How the Australian manufacturer who ships, in eomn’etition with tfie British exporter, to New Zealand suffers from this state of affairs may be gauged from the fact that in the matter of exchange he is handicapped to the extent of 3-J per .cent, as compared with the position in 1921. Should Australia’s exports in the next few years largely exceed the imports, and should its Governments borrow extensively in Loudon otherwise than for conversion purposes, the position, without provision of further currency, would liecome still more embarrassing. Can the same stability, combined with elasticity, be expected from a State note issue controlled by $ political

party? Our Australian branches, as well as the other banks and the public there, and to a certain extent here also, have felt the effects of the icstrietions of the -Commonwealth currency ; while, on the other hand, examples are only too common in other countries of changes in government leading to excessive State note issues with all their concomitant evils. Banks, more than the public, suffer from an excessive State note issue, for the public retain in their possession only as much cash as is needed for pocket money, the surplus being paid into the banks. Therein lies the danger of such an issue in the British Empire, the only remedy for wbicli would appear to be timt, failing repayment- in gold by the State, the banks, as note holders v should have the right to demand British Government securities of an equivalent market value in exchange for surplus notes. Tt would, of course, he no safeguard against an excessive issue if the State could redeem its notes in exchange for its own bonds.