FINANCIAL SURVEY

Manawatu Standard, Volume LIX, Issue 18, 17 December 1938, Page 3

FINANCIAL SURVEY

EXCHANGE CONTROL SCHEME. reduced" FUNDS. WELLINGTON, Dec. 16. A critical survey of the position created by the heavy • drain on the Reserve Bank’s sterling funds and tho control of imports and exchange was made by Mr Andrew Hamilton, chairman of the Wellington Stock Exchange in his address at the annual meeting last night.

“Much could be said about the weakness in overseas stock markets during the first half of the year till the upward turn in New York in June, with the resultant easing of pressure on tho London Stock Exchange,” said Mr Hamilton. “The sharp fall in all markets on September 28, when the European rupture was at its worst and the recovery following Mr Chamberlain’s peace negotiations aro still fresh in your minds. “The demand for New Zealand shares prior to the general election and the subsequent fall in prices could easily be ••a subject for discussion, as well as the marked demand for overseas investments, but at this present stage it is more likely that your interest, and that of your clients, is centred chiefly in the present, and future, financial condition of New Zealand from an investors’ point of view. “In spite of the fact that we have had the benefit of increased prices for our primal y products for the past four or five years we find ourselves to-day back again in many respects to the same position as we were in when New Zealand, in keeping with the rest of the world, was weathering the greatest economic blizzard of this century. Today we are practically as bankrupt of overseas assets as we were in the days of the depression and the question so prominently to-day in the minds of those who have any real stake in the country is the latest move on the part of the Government to control our imports, thus placing an embargo on exchange.

REASONS FOR CONTROL. “Reference has been made to tilefact that exchange was controlled by a previous Government in 1931, tho present control therefore being nothing new. For the benefit of those who have little understanding of currency and credit beyond receiving and cashing our own notes, it could have been explained also that the cause of the embargo to-day is totally different from that of 1931. Then our primary products were bringing such low prices on account of the general depression throughout the world that we had next to nothing to work on.

“To-day we are deficient in sterling funds for the reason that since the end of last June .we have raced through some 75 per cent, of those funds in the hands of the Reserve Bank, or about 70 per cent, of the combined Reserve Bank and trading banks’ funds. No similar depression lias been ruling outside, and our produce still brings prices far ahead of those ruling in 1930 and 1931. Reference to tl)c weekly returns of the Reserve Bank shows that from the end of June to December 5 sterling had dropped from £N.Z.16,609,000 to £N.Z.4,200,000, actually about £3,360,000 in London. Our reserve ratio, the statutory requirement being 25 per cent., had fallen for the same period from 75.8 per cent, to 29.8 per cent.

“Early payments for debt service require a payment in London on December 15, of £187,500 on a 6 per cent, loan of £7,500,000. On January 1 two further payments have to he made, £IBO,OOO on a 3 oer cent. 1952 loan of £12,000,000 and £300,000 on the 3’ per cent.' January 1 1940 loan of £17,176,582. These payments total £667,500 or about £N.Z.834,00C1. We have also Local Body interest to meet in the same place of about £106,000 sterling during January. At the same time advances to State Departments have increased considerably and we find on December 5 £5,486,000 to the Marketing Department, and to other departments, presumably public works and housing £8,680,000. With the above interest payments and any further increases to other departments we would have been sailing perilously close to our minimum percentage. 4

BANKER’S WARNING. “Ample warning has been given us to the result of draining our London funds,” said Mr Hamilton. “Reference has recently been made to remarks by the Governor of the Reserve Bank at the annual meeting in 1935, and in his annual report for the year ended March <sl, 1938, published in June,

read: ‘The surplus for the year was several million pounds less than the favourable annual balance required to provide for Government and- local bodies debt service and other expenses overseas, in addition to the estimated

amount of invisible items such as net tourist expenditure commissions, interest, etc. The Dominion has thus been drawing upon its overseas resources during the year to a considerable extent.’

“Further on in the same report we find: 'While not wishing to comment

upon the question of public works generally, tho board regards it as highly desirable, on financial grounds, that tho extent of such works should bo regulated as far as practicable according to the state of employment in other directions, a slowing-down being arranged when the demand for labour for other purposes is relatively satisfactory, and an acceleration during periods of comparative business inactivity; but it is considered that in neither event should reliance be placed upon the requisite funds being provided by the Reserve Bank when they can reasonably be derived from other sources unless, and to the extent that, any expansion of the currency is indicated at the time.

“ ‘lf, however, recourse is to bo had to additional expenditure on public works during periods of relativo trade depression, the board would stress the importance Of avoiding any undue expansion of credit when the trade position of the Dominion is favourable; for in the ordinary course unless overseas funds are allowed to accumulate when the proceeds of exports—and consequently the national income—are at a high level, it would be difficult to maintain purchasing power—involving a strain on tho overseas.position—if and when the Dominion’s overseas trade position materially deteriorates.’. “It is difficult to believe that exchange and import control is part of a uniform scheme and not tho outcome solely of necessity,” said Mr Hamilton. “In November of last year, Mr H. Kitson, in his presidential address at the annual meeting of the Stock Exchange Association, after commenting on the depletion of overseas funds, j said that ‘should there be a marked. fall in the prices of overseas primary I products, some form of rationing of j imports may have to be exercised to j conserve overseas funds.’ ! “Again during the week prior to the; general election we had a strung call j on overseas funds and one of the

heaviest weeks for advancing to State departments—some £950,000. Would nnt this have been an opportune time to annnounce any such policy in answer to inquiries why the previous promises of removal of sales tax and exchange had not been given effect top”