The Manawatu Daily Times The Exchange Rate

Manawatu Times, Volume 59, Issue 223, 24 September 1934, Page 6

The Manawatu Daily Times The Exchange Rate

The raising o£ the exchange rate by the Government in January. 1933, was the most hard-fought political question . before New Zealand over the past quarter-century. Ihe opponents thereto predicted dire disaster to the country, but undoubtedly the Government did the only possible thing to save the primary producers from widespread bankruptcy, the alternatives were complicated and enormously expensive export subsidies or this appalling deflation. Twenty months have passed and the rate ruling has almost become considered as normal. Adjustments in pastoral, industrial and merchandising business have been made upon an income, based on London prices, plus 25 per cent, exchange. The recently-issued report of the Monetary Committee contains two very important and definite statements, firstly, that the authority of the State must be paramount in monetary affairs. Secondly, that the New Zealand currency should be devalued upon its present exchange rate with sterling. The first pronouncement is new to our country, but lias been recognised the world over for centuries, the action of out Government in arbitrarily raising the rate from 11U to 1-5 was perfectly within constitutional rights. The only question was as to whether the action was beneficial to the national economy. The second pronouncement is that we should stabilise at the rate of £125 New Zealand to £IOO sterling. To do so would be acting in accordance with the views generally held by worldrenowned authorities. Stabilisation of currencies is considered to be one of the prime meusurcs to induce world recovery of trade. So long as we speak Of a 2o per cent, exchange rate, so long do we introduce a feeling of uncertainty into business transactions. What might not the rate drop to in three months’ time, six months of a year hence? Concern as to this is retarding our recovery. The Danish exchange rate rose at the same time as ouis. Not because of our action, but owing to similar courses operating in both countries. But the Danish Government spoke not of raising the exchange, but of maintaining the currency at 22.40 krone to £1 sterling as against a par of 18.159. That was a devaluation Of 20 per cent, j this is the same as our exchange rate in effect. The difference is that the Danes do not contemplate alterations.' Their action was similar to that of France, United States of America, and numerous other countries. If New Zealand’s currency had been known by different names from that of Britain we should have almost certainly acted as did the Danes.

The Reserve Bank Act empowers the bank to fix our exchange with sterling at whatever rate the bank considers necessary and desirable in the economic interests of the Dominion. That authority determines the rate at present, but gives no guidance as to the future. The future holds three alternatives. That most generally expected is that the rate will be gradually reduced to par. The possibility of this is most certainly retarding our recovery. Without a marked rise in the values of our exports upon the London market a reduction of the rate would spell national disaster. This would completely demoralise the finances of the whole country and we would experience slump conditions infinitely worse than sounded in the darkest days of 1932-33. Generally, indications are that we have no sound reasons to anticipate an early and striking price increase for our primary exports. The second alternative is that the exchange rate could he further increased. Unless prices further seriously decline this course would not be entertained. Any alterations should be avoided if possible. The third course is to maintain the present rate. There is good reason to believe that this is the policy of the Reserve Bank acting in concert with the Government. Currency stability is net, however, achieved until the Government definitely devalues the New Zealond pound. At the present exchange rate appears most desirable. Stabilisation would do much to further recovery by eliminating the greatest cause of uncertainty as to the future course of events. Stabilisation is desirable. The question for the Government is when to bring this about. If at all possible early action would be in the best interests of this Dominion,