EXCHANGE CONTROL

Nelson Evening Mail, Volume LXXII, 6 December 1938, Page 8

EXCHANGE CONTROL

VIEWED AS LIKELY i GOVERNMENT’S PROBLEMS I LONDON OBLIGATIONS 1 he financial problems facing the Government of New Zealand in its second term of office are discussed impartially and constructively by Mr H. V. Hodson, editor of the ‘‘Round Table,” in an article headed “New Zealand and the Future” in the latest issue to hand of “Jobson s Investment Digest of Australia and New Zealand.” Mr Ilodson comments on the draining away of sterling reserves and points to the likelihood of some form of exchange control being introduced, particularly in view of the imminence of the attempted conversion of overhanging maturities in London on orthodox lines. “It seems likely that the first severe strain on the financial capacity of New Zealand will come in the matter of overseas exchange,” says Mr Hodson. “The problem of internal finance is not yet acute. Revenue is still fairly buoyant, and the Government has not by any means exhausted its internal borrowing capacity. But externally the strain is already causing headaches in the Reserve Bank and the Ministry of Finance. The draining away of sterling reserves lias been due to two main forces; a flight of capital and excessive imports in relation'to the value of exports and overseas debt service. The first of those elements has already had to he brought under official control. For some time past, although external investor ? have not been prevented from withdrawing their money, New Zealand citizens have been unable to obtain more thar* small quantities of exchange, except for commercial transactions. Of course, there is nothing very vicious in this as an emergency device. It was practised by Great Britain as a result of the financial difficulties of 1931, and control of new overseas investments has not yet been fully relaxed in London. BAN ON TRANSFERS j “When, however, it i 9 used in a coun try like New Zealand, at a time of rela. I live prosperity both there and abroad, men of business and finance have reason u, be frightened. Moreover, the ban on direct capital transfers by New Zealand citizens is all 100 likely to be extended. It us still possible to get capital out of the country by such means as buying Australian securities on local Stock Exchanges' and selling them tn Australia, or buying export produce, selling it abroad, and retaining the proceeds abroad. If the financial exodus continues, these gups may be stopped also. The Labour Ministers’ view is that the exchange derived from Lilt sale of New Zealand's products is a national asset; while the New Zealand exporter must be rewarded by receiving the equivalent in local currency, he is not entitled to deprive the country of that as«ot by hoarding it abroad. Whether con tro! of this kind of possible export of cap. ital will take the form of direct control through the banks, or an extension of the State marketing scheme, which at present applies only to dairy produce, it is too early to guess. “The approach to general exchange control may also he forced on in another way. Ihe second cause of the loss of sterling reserves has been a flow of impoits in excess of current means of payment. This is an obvious secondary reaction to the expansion of internal purchasing power, which has been a proud feature of Labour policy. If Labour tries to carry out its electoral promises —and no doubt it will—purchasing power will be still further expanded. Internal borrowing for public works is now o:i a scale of about £15,000,000 a year, and although other forms of internal investment may have been checked by fear of the future under Labour, the rate of public borrowing is enough to keep internal purchasing power up to a high level. Labour’s policy is deliberately to continue

to do this through thick and thin of international economic conditions, through periods of high world prices and periods of low world prices for New Zealand's exports. If this is what they do in the green leaf, what will they do in the dry :’ INSULATION POLICY “Maybe the policy of ‘insulation’ against international economic shocks is ( a feasible one. Nobody will blame New Zealand for trying it, since every country is anxious to effect the same result if it can. But in her case the policy will certainly involve a severe restraint upon imports, which would otherwise fail to respond to loss of export income. There ar» three possibilities open to her in seeking to restrain imports. The first is a further depreciation of the currency; the second is a big increase of tariffs • and the third is general exchange control. “Neither depreciation nor high tariffs seems likely, unless things change very much ; for either would mean a direct and immediate increase in the cost of living. Labour must avoid that if it is to keep its popularity. It was actually in the Labour programme of 1935 to appreciate the New Zealand pound. That has naturally proved incompatible with the rest of the programme, but further depreciation is not in Labour’s intentions, and the party has not hitherto stood for high tariffs. That leaves the alternative of exchange control, against which it seems that Labour has no such inhibitions. LOOPHOLES MUST BE CLOSED j “Exchange control has a way of add- j ing to itself bit by bit, like a rolling snowball. One loophope of evasion after another must be closed. New Zealand Labour, one may guess, will not be special, ly reluctant to use this particular instrument, which is suited not only to its general political philosophy, but also to itr particular ambition of canalising external trade on reciprocal’ lines, it was 11 -> accident that Mr Nash brought back from his European visit last year a trade treaty not with the United Kingdom, as hi had hoped, but with Germany. Germany is the world’s most efficient exponent of exchange control, and of the theory of bilateral ‘reciprocity’ in trade. There is the model for New Zealand, and there is also the warning. It is not Communistic Russia that is the pattern to be feared for New Zealand's economic future, but Fascist Germany. “These fears may not be realised. There are moderate and sensible men in Labour counsels, who realise Lite dangers and arc determined to avoid them. Whether they Will be powerful enough to withstand either their extremer colieagues or the march of events which they themselves have set on foot remains to he seen. At present the repudiation of debt is not in the picture, and there will certainly be a genuine and vig. orous attempt to convert the overhanging maturities in Loudon oil orthodox lines. But the very imminence of those necessary conversions makes some form of exchange control all the more likely. Those who look upon New Zealand’s affairs from the outside need not fear Socialism as such ; they may, indeed, feel to some extent the pinch of heavy taxation, but their real cause for anxiety lies in the chances of internal inflation in a country dependent, as few others are, upon external trade and finance.’’