MONETARY POLICY

Nelson Evening Mail, Volume LXVI, 14 January 1936, Page 8

MONETARY POLICY

REDUCING EXCHANGE RATE DOUBTS IN ENGLAND FINANCIAL JOURNALS’ VIEWS How the Government will reconcile its internal policy, which suggests inflation, with its staled intention to reduce the exchange rate of 125 per cent-., is a point which has puzzled observers in New Zealand. Ihe leaf - ing financial journals in England have fastened on this aspect of Ls.iours policy and the view is express id that the Government’s ideas about exchange will be quietly dropped. The “Economist” states that reducing Hie exchange rate, .or deflation, will doubtless benefit the purchasers of imports. but will at the same time be directly contradictory to the rest ol Mr Savage’s policy. “There is one form of combined 'inflation and deflation which is practicable and may be desirable; that is the policy adopter! bv Australia of simultaneously deflating costs and inflating prices,” tho journal states. EFFECTS OF PROGRAMME “This naturally promotes profits and so general recovery. But Mr Savage a idea is simultaneously to deflate prices and inflate costs. Tho. effect of such a policy is not difficult to foresee. W o strongly suspect, however, that the deflationary part of Mr Savage s programme—the reduction of the, exchange j, a te—will fade decorously into the background.” . The Labour policy is described by the “Statist” as one of exchange deflation and internal inflation. “The guaranteed prices for agricultural products will safeguard the farmers from the proposed appreciation of the exchange value of the currency,” says the writer. “If to carry the new exchange and credit policies into practice it is necessary to convert the Reserve Bank into a State institution, the new Government will have no hesitation in doing so. Mr Savage has quite evidently a great deal to learn about the practice of banking and exchanges.

. “TWO OPPOSITES MUSH CRASH” “One cannot announce a policy of gradually increasing the value of a currency without immediately bringing that appreciation about. Intentions of that kind cannot be officially divulged without the market taking the subsequent course of events into its own hands.

“Equally evident is Mr Savage’s ignorance of the fundamentals of foreign exchange theory. His wouldbe exchange policy is wholly incompatible with his domestic policy of high guaranteed prices, removal of all cuts in wages and pensions, public works, etc. “These two opposites must crash, even allowing for the fact that at £125 the New Zealand pound is probably still undervalued and that this allows a little scope for the development of divergent exchange and credit policies, That scope is, however, very limited. The burden of the fixed guaranteed prices would increase far more rapidly as exchange appreciated than the cost of the external debt would fall. The new Government, if it proceeds at all with its exchange plans, is likely to be cured very quickly of any enthusiasm to continue on that particular line.”