NEW ZEALAND EXCHANGE.

Matamata Record, Volume XVI, Issue 1443, 20 July 1933, Page 5

NEW ZEALAND EXCHANGE.

AN AMERICAN OPINION.

Currency Stabilisation Needed.

The June Circular of the National City Bank of New York deals with the subject of currency stabilisation, and in the process comments on the action of various exporting countries to the United Kingdom in competitively depreciating their currencies.

A danger that always exists when paper currencies are no longer fixed in their relations to each other through some common standard of value is that of a competitive depreciation of the currency, says the circular.

“ International Price-cutting.”

. During recent months we have seen a number of evidences of the endless chain of international pricecutting competition that is set in motion when one country seeks to obtain advantage over a competitor in this way. In the February issue of this Letter reference was made to the action of New Zealand in reducing the value of her pound from a 9 to a 20 per cent, discount in terms of sterling. At that time the Australian pound was selling at a discount of 20 per cent, in terms of British pounds, and Australia is a competitor of New Zealand in the British markets. Hence it is to be presumed that a desire to “equalise” exchange had something to do with New Zealand’s action.

Hardly had this step been announced, however, when Denmark, also an important exporter of agricultural products to Great Britain, took similar action, altering the pegged rate on the krone from 19* to 22* to the pound sterling. This was in consequence of a political crisis in which the Government turned for support to the Left, the inflationary party. It is the theory of this party that as the bulk of Danish produce is exported the easiest way to increase returns to the farmer is to reduce the value of the currency.

Denmark and New Zealand. But it is pertinent to ask why the previous depreciation of this currency was not adequate to restore the profit-earning capacity of the export industries, what Denmark’s competitors will do x to offset this move, and what will happen when the internal purchasing power of the depreciated currency decreases ? Will New Zealand, an exporter of products competing with Denmark, be content with her recent depreciation? What will be the reaction in Australia, which had doubled her exports of butter since 1928? Of course, this situation illustrates the truth that the competitive gains from a depreciating currency are rapidly lost in the readjustments that follow, unless the depreciation is continuous. The inducement to make it continuous is great, and so is the inducement to other countries to depreciate their own currencies further, since each can argue that its decision is defensive or retaliatory. The ultimate end of such competition is the extinction of all currencies. The Situation in New Zealand.

The Circular notes that the foregoing mention of the situation in New Zealand prompts it to reproduce part of an article which appeared in the London Stock Exchange Gazette in which the writer comments most illuminatingly upon the effects of exchange depreciation. The writer’s remarks indicate an aspect of. the question to which little attention is usually given, and illustrate very clearly some of the disadvantages of a currency depreciation policy. The article in the Gazette states, inter alia:—

“ Admittedly the immediate effect of the Government’s action in depreciating the currency will be to augment, but only temporarily, the income of New Zealand primary producers. ... On the debtor side is firstly the fact that the New Zealand Government requires to pay some £8,000,000 in sterling annually on its London loans. The raising of the exchange . discount automatically adds an additional £1,200,000 in New 7 Zealand pounds to this debt load. As the Government had already budgeted this year for a deficit of round about £1,000,000, and that after drawing on 1 reserves ’ for £2,500,000, the additional burden on the Budget is unmistakably serious. It represents, in fact, an addition of 35 per cent, to the income tax, if the f (Continued it. Next Column]

Government proposes to keep its estimates. “New Zealand imports from the outside world goods to some £21,000,000 annually (in these times of economic adversity). The latest exchange depreciation will, in its cumulative effects, add another 25 per cent., or £5,250,000, to the cost of all imported goods, many of them * tools of trade ’ or other necessaries of the primary producer. Burden on Wage Earners. “ The ‘ New Zealand parity ’ of such home products as ‘ Canterbury’ lamb, butter and cheese, etc., also having been raised by the exchange move, an increase in the general cost of living in New Zealand by 15 to 25 per cent, would appear a logical sequence. This will mean that the greater part of the burden imposed on New Zealand by the increase in the currency depreciation will fall on the wage and salary earner, pensioners, and persons living on fixed incomes from investments. . . .

“ Now, as regards the London market, it may be taken for granted that, as the task of meeting the internal debt service has been increased by nearly 15 per cent., New Zealand stocks cannot be regarded as favourably as before the rise, while there is the added important and very serious point that the Budget deficit will be raised by over £1,000,000 to around £4,500,000, or, roughly, 20 per cent, of the country’s revenue for the year. “To prolong the sorry tale of some of the unfavourable effects of advised move, it may be mentioned the New Zealand Government’s illthat the Government will, perhaps some years hence, have to bear the loss of the banks having ultimately to sell London funds below cost, and that Australia now will probably hesitate about lowering its exchange rate, that is, from £125 to £l2O or lower, as has been looked for recently as a result of the growth of Australia’s London funds, arising from the increasingly favourable balance of trade.”