RAISING OF EXCHANGE RATE

Hawera Star, Volume LII, 27 January 1933, Page 9

RAISING OF EXCHANGE RATE

FULL INQUIRY MADE

AID TO DOMINION INDUSTRIES

Meeting Decline in Export Prices

Cabinet Confidence in the Step Taken

“There are those who hold different opinions from the Government in regard to the policy of raising the rate of exchange to relieve what all must agree is a very serious position, but it is the responsibility of the Government to decide the course to be adopted. This we have done and we are confident that the wisdom of this step will ere long be apparent,” stated the Prime Minister, the Rt. Hon. G. W. Forbes, in the House of Representatives this afternoon in presenting a statement outlining the reasons for the decision taken by the Cabinet last week to have raised the rate of exchange, New Zealand on London,

ECONOMISTS_GIVE ADVICE FARM INTEREST ARREARS

DEBTS OWED TO THE STATE. (Government Memorandum.) WELLINGTON, Jan. 27. A ministerial statement issued by the P'rime Minister, the Rt. Hon. G. \V. Forbes, is as follows: “Honourable members will recollect that on December 1, last, in intimatting that it was proposed to move the adjournment or Parliament until January 26 I stated that the intention was to allow Cabinet to give a fuller and more thorough examination or proposals affecting the general economic position of the Dominion and particularly the difficult condition of the farming industry owing to the further drop in the prices ot export produce iu our external markets, than was possible while the Ministers were closely engaged in Parliamentary work. “Alter the House adjourned on December 9, the Government lost no time in making the necessary arrangements to have the fullest information sup-] plied as to the effect of the low prices, on the budgets of the farming com- 1 nmnity and in this connection Dr. j James Hight and Professors H. Bel-j shaw and A. H. Tocker were asked, to come to Wellington to make a report on the changes that had occurred since the compilation of the report of the Economic Committee, of which thev were members in February, 1932. The report which they have furnished 111 compliance with this request has been most helpful to the Government, especially in arriving at the decision of Cabinet- to bring about an increase in the rate of exchange. “The information supplied by farmers’ agencies and by the various State lending departments showed that tile farmer borrowers had slipped back very seriously m their payments of principal and interest during the last 12 months. To give honourablemembers some idea of the magnitude of the arrears outstanding on loans to settlers in respect of the State Advances Department and the Lands Department I quote the following figures. , ‘•At March 31, 1931, the amount owing "by settlers to the State Advances Office was £411,740. At 1 March 31, 1932, it was £835,760 1 and at September 30, 1932, the total had increased to £1,056,830. “In the Lands Department £1,522,1-37 was due for rent and interest in arrear at September 30 last and in addition the postponements of rent and interest

amounted to £283,650. “I think members or the House will agree that the figures supplied ; by these two State Departments'furnish a fair index as to the position of mortgaged farmers generally in the Dominion. The growth of these arrears on the part of the farming community has been particularly rapid during the last few months owing to their credit and reserves becoming exhausted and the more recent decrease in the prices of their products, especially dairy produce, will no doubt accelerate this slide!

“It will be readily seen that a serious position has arisen which will soon become a further problem for the already over-weighted Consolidated Fund. The review of the economic position submitted by the Economic Committee showed that it had become progressively worse since the report in February last. “Comparative figures or all New Zealand export prices with the period 1909-1913 shown as 100

show that, whilst in 1928 it had increased to 168, in November of 1932 it had fallen as low as 86 or a decrease of 49 per cent, in four years. I may mention .in passing that the further recent decline in dairy produce prices is not taken into account in the figures I have just quoted. “Now as to external trade. The most obvious effects of this decline in export prices may be seen in the overseas trade returns. In 1928 the value of our exports was £56,200,000, whilst in 1932 it was £33,600,000. The value of our imports for the same years was £44,100,000 and £22,800,000. These figures represent a decline of 40 per cent, in the value of our exports and 53 per cent, in imports.

“The heavy fall in imports is, of course, the direct effect of the contraction in exports. “I will now take production in iolation to national income. The estimate of national income is approximately made by adding about 20' per cent, to the official estimates of total production. . The following table sets out the position:

£ Million. 1928-29 1932-33 Estimated value farm products 82 ~1 49 Other products 41.2 32.5 Total production 123.3 81.5 National income 150 98 “There is thus' a rail in the national income- of 35 per cent. it may therefore be concluded that the national money income, which constitutes the purchasing power of the community, has declined by at least one-third of the 1928-29 income. “Again in regard to internal trade and finance it is inevitable that a decline of this magnitude should he reflected in the volume of internal trade. The best available indication of internal business is the return of total debits per week to all bank accounts in the Dominion, published by the- Government Statistician. These show that in 1929 the average debits were £20,900.000 and in 1932 they are £13.500,000 or a decline of 35 per cent, in the total volume of financial business in the country.

“The figures I have given to the House present striking record of the decline that lias occurred iu New Zealand income and trade. The effects of the depression have been cumulative. Felt first- by the farmers, they have passed on to the producers of local goods and services of all kinds. The full extent of these effects, however, is only now beginning to be felt in internal trade. The farmers in their efforts to maintain production have drawn upon their resources <ff capital and credit. Now largely they have to depend solely on income from the sale of their products. As the resources upon which they can draw become progressively exhausted their purchasing power must decline further and the effect on the cities and towns must be felt more severely. “It becomes apparent, therefore, that the essence of the present difficultv is in the progressive disappearance of profits and in the increase of losses, the restoration of sound, business conditions, the expansion of production, the absorption of the unemployed, the increase in purchasing power and in demand and the revival of general business activity.

“All these must depend on the creation of such conditions as will permit profits to reappear. Profits, depend on the relation of costs to prices. Since 1929 export prices have declined by 49 per cent. Retail prices have fallen by only 19 per cent., wholesale prices by 14 per cent, and wages (nominal) by 16 per cent. “A 'reduction of internal prices and costs of about 35 per cent, is required to bring about the same relationship to export prices as existed in 1929. The main problem is to reduce the disparity between costs and selling prices. To let matters drift and to allow undirected deflation to have full sway would be obviously unthinkable and could not be countenanced by the Government. Such a policy would dangerously aggravate our already serious difficulties.

‘ * Cabinet in its consideration, of the position has examined various suggested remedies, having for their objective the increasing of prices, such as a rise in the rate of exchange and various forms of internal credit expansion, including a grant or bonus to primary producers, and also a grant or subsidy to farmers financed by taxation. After mature deliberation the Government came to the conclusion that an increase in the rate of exchange from 110 s to 125 s would he more advantageous to the country as a whole than any other method in easing our present difficulties.

“The Government .approached the banks and requested them to take the necessary action to give effect to this decision. In the arrangement with the banks the Government has undertaken to indemnify Them against any loss that may he incurred on the sale of exchange purchased at the new figure and a Bill will be introduced accordingly to obtain the necessary parliamentary authority to give effect to' this undertaking. “I do not in this statement propose to deal in detail with the various arguments for and against this decision. Ample opportunity will he afforded to honourable members for discussing ihe subject. I will briefly mention some of the advantages which may be expected to accrue from the course that has been decided upon. “The national income and the national spending power will be prop or-1 tionately increased. It is estimated that the proportion of costs likely to increase with a rise in exchange is small at the present time. Industry and trade are being contracted and unemployment lias not decreased because much business cannot be conducted on a profitable basis. With production contracting, as it is at present because of maladjustment of costs and prices, a rise of exchange which increases prices more than costs will certainly tend to arrest the decline and may stimulate an increase. “It- may be urged that the primary effect of a rise in exchange is to increase Budget expenditure through the increase in the cost of overseas interest payments and to reduce customs revenue temporarily, but the secondary and more important effect is to prevent an appreciably great fall m taxable capacity and non tax receipts. “It is confidently anticipated that the net benefit to the budget from the increase in exchange rate will not be long delayed. The full effects of tne present depression have not yet teen freely felt, but it is quite certain that unless further adjustments are made the national income and taxable enpaoity will fall further.

“It will be remembered that a short time ago I expressed the opinion that the question of exchange was one that should he properly determined hy the hanks. Since that date, and consequent upon a close examination of the position, the Government came to the conclusion that the'matter had become one of serious national importance and could not he left to outside agencies. If the country had been able to continue without an alteration in the rate of exchange no one would have been better pleased than myself; tout in the history of all countries grave emergencies arise when it becomes necessary for a Government to interpose and place upon their own shoulders the responsibility for the course of action they deem best in the interests of the country.

“What I stated on the occasion to which I have referred was my opinion in the light of conditions then existing. These conditions have unfortunately become more unfavourable and rendered action on the part of the 1 Government- imperative. I recognise | that the action of the Government in bringing about an increase in the rate of exchange does not find favour with

those engaged in the import trade and in othei- business circles, but I woind earnestly ask those who are loudly criticising the Government to view the position from a national standpoint and consider what would happen .1 a policy of extreme deflation with aIL its attendant evils were allowed to hold sway. Two of the outstanding factors which appealed to the Government were the existence of a distressed farming community and the unioitunate position of the unemployed. “It is indeed a sad state of affairs when 68,000 of our citizens are. out of employment at a time usually regarded as* the busiest season of s'® - When we remember this fact I reel certain that the pressing nature of the problem must be brought home to everyone of us. i would ask our enti-s to regard the position m the same spirit "as actuated the Government in coming to its decision. If orthodox methods failed to find a solution m times of grave emergency then I claim that the Government is justified m resorting to other means in order to lighten the burdens of the people T loci confident that, yith the stimulation which will now be given to both primary arid secondary industries, \\e may look forward to a gradual tout certain absorption of a large namoei of those, who are at present unemployed. The importance of this aspect of the present conditions can, in the view of the Government no longer be '“There ar© those who bold different opinion from the Government in regard to the policy of raising the rate of exchange to relieve what, all must agree is a very serious position but it is the responsibility qt the Government to decide the course to be adopted. This we have done and « are confident that the wisdom of this step will ere long be apparent. ’