EXCHANGE PROBLEM.

Hawera Star, Volume XLVIII, 13 December 1924, Page 15

EXCHANGE PROBLEM.

COMMENTS BY A BANKER

NO .EASEMENT IN POSITION

in the course of his address at the half-yearly meeting of the Bank of iNe\y Zealand this morning Mr. William Watson, actingrchannian, referred as follows to exchanges:

There . has ’ been no easement of the exchange position since 1 addressed von in June last; neither is there any practical solution in sight, although many theories have been pub forward. The hope that the reconstitution of the State Bank in Australia would effect Something beneficial to exporters has resolved itself into a temporary method, very much akin to what a hanlt director in Sydney proposed’ early this year. It was found that, owing to the restrictions of' the note issue; neither the ‘ banks nor any others in the 'Commonwealth could finance the heavy exports of this season. so it was arranged that certain hanks, fanning themselves into' a .pool; should obtain against undoubted : securities a down of £15,000,000 in notes from .the new board to cope with the,'pressing situation. It is difficult to see why the old note board Could not have done the same thing; thus it would appear that Dr. Earle Page was a true prophet when he said that “the proposed new Act will not work miracles. 1 ’

Had not the present arrangement been made, however, it would have been impdssible to estimate the extremity -to' which the rates of exchange might extend, 'and the condition of the Commonwealth might be yery different frpm “Advance, Australia.’’ What the permanent benefit will amount to remains to be seen. The adoption of the method referred to has, of course, been of benefit to the primary producers br this country, for any dearer exchange charged on produce bills in Australia, would’ compel greater discounts op drafts and telegraphic transfers to be allo\yed to. importers there, and the banks in this Dominion would have to follow suit, and raise, their buying rates on London as well as their selling rates on Australia. Thus pur importers from Australia and our primary producers would both suffer.

The banks here do not require State, assistance in financing the exports, and there is . every probability that in New Zealand this season’s produce hills will be .negotiated, at rates of exchange more favourable to exporters than those in Australia.

To those who appear to believe that the present situation has.been engineered by the banks for profit-making, purposes,. I would point out that, to he logical, they must blame the banks in the Cpmmbnwealth-—including the State Bank—to a greater degree. But the hanks are not to blame. The fact is that all the banks would prefer to get hack to. pre-war rates, and conditions, w;hich were seldom or never complained' of, but which were more profitable on ? the capital employed than* they are now.

In October last, with the approval of my colleagues, to meet unfavourable criticism, I announced through the P r ess that our Bank had in London resources .to the amount of £9,500,000, which was at least £5,000,000 ’ more | than was suitable for the conduct of our business. At times during the year the surplus was some millions in excess of these figures. If we considered only our present interests we should decline to purchase hills on London to add to funds there on which we can get hut half the interest obtainable in New Zealand or Australia. Such a step would, however, he disastrous to producers and exporters, and we concluded it to he in accord wtih our nubile responsibility and better for the Dominion as a whole that all the bills should be purchased., the Bank charging rates of exchange to cover to some extent the loss of interest. In this connection primary .producers should reflect that,’ while to-day exchange op London bills op demand is 2 per cent more than in 1914, average prices for wool are .80 to 100 per cent, and for butter about 50. per cent, more in their favour. They should, also realise that increased, volume and high values of exports augment the funds in London, and therefore conduce to higher rates of exchange. Charges and interest loss on transmission of gold from London, even if the gold were obtainable, would now cost about i>ev cent. The more one studies the exchange question the more one must be convinced that it is governed by strict econoniic laws which cannot he permanently set aside, Supply and demand, imports and exports, both visible and invisible, Government and local bodies borrowing in London, and rates of, interest have, with other matters, to he taken into account. "While the demand for our exports is strong in Great Britain, so that the prices are high, and while both price and volume, combined with loan money raised in .London, for transmission to the Dominion, create much greater value .than that of our imports and interest disbursements, then exchange must go against the exporter and in favour of the importer. Neither tentative method nor even gold itself can in such conditions permanently ensure stability in the world’s exchanges.

On a reasonable estimate this country, at the close of the oreeent season, should be more than £10,000,000 better off than at the commencement; therefore,, if the Government requires to borrow, it should be possible to raise a loan in the Dominion without unduly disturbing local' 1 financial conditions. A somewhat higher rate of interest would have to be paid here than in London, but. on the other hand, there would be saving in exchange and in costs of flotation and administration, while the inteiest would remain in the Dominion. Such a course would certainly tend to steady the exchange market." Other steadying factors would be more value or imports, which, considering it alreadv too great, many would deplore; and a heavy fall in the value of our exports, which none of us want to see.