SEEN FROM LONDON

Nelson Evening Mail, Volume LXIX, 29 January 1936, Page 2

SEEN FROM LONDON

NEW ZEALAND POLICY PRICES AND EXCHANGE Smooth working of the policy of the Dominion Government, in so far as guaranteed prices and exchange in Loudon are concerned, does not appear likely to "The Statist,” London. That journal remarked that despite the highly important monetary issue involved, the City took curiously little interest in the New Zealand elections.

"That lack of attention i» likely to he remedied now that the Labour Party has scored so sweeping and so unexpected a victory,” the journal proceeds. "Though tl\e question of the exchange rate was made a point of challenge by the new Democratic Party it has never been a live issue in the election. New Zealand is reconciled to a ‘high exchange,’ i.e., to a low value of the local pound. There could in no case be any question of falling once again out of step with Australia in this matter. Since, moreover, the main issue in the elections was the supposed plight of the farming community—this was, in fact, the influence which carried the day for the Labour Party—there can be no reasonable prospect of reducing the present discount on the New Zealand pound. If there is aay chance of a change in the rate it is in the direction of a further widening of the discount. The same, no doubt, holds true of Australia. This L made all the more likely in New Zealand by the extravagant and inflationary programme on which the Labour Party made its appeal to the country. The main plank in its platform was the guarantee of fixed prices for agricultural produce. The least expensive way of fulfilling this promise would, of course, be to let the domestic prices rise to the desired guaranteed level by allowing the currency to depreciate in the exchange market. SOCIAL CREDIT EXPEDIENT

Further, in order to appeal to the strong Social Credit vote in New Zealand the Labour Party saw fit to include in its programme as curious a botch potclT of the Douglas theory as was put forward in Alberta. It has undertaken to find adequate employment for all unemployed workers in the Dominion by financing public works of various kinds through the issue of fiat money. Social Credit is to be put to work not through the distribution of unearned dividends but through unemployment relief schemes. The object is admirable ; the means chosen to achieve it are dangerous—nolle the less so for being by now so thoroughly familiar. When it comes to putting the plan into operation more moderate counsels will probably prevail. . Meanwhile it is natural that the inflationary flavour of the new Government’s programme should have found an immediate reflection in the marking down of all New Zealand bonds.

"The confusion in the situation in New Zealand has, hou’ever, been increased by an unduly precipitate pronouncement on the exchange position on the part of the Premier-elect, Mr Savage. According to this, the New Zealand Government will as soon as possible begin a gradual reduction of the exchange difference between (the value of the British and New Zealand pounds’. In other words there is to be a policy of exchange deflation and ini ternal inflation. The guaranteed prices for agricultural products will safe-t guard the farmers from the proposed appreciation of the exchange value of the currency. RESERVE BANK’S POSITION

“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. 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 would-be 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, howev*v, 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 .like-, ly to be cured very quickly of' tiny enthusiasm to continue on that particular line.”