EXCHANGE CONTROL

Nelson Evening Mail, Volume LXXII, 16 January 1939, Page 10

EXCHANGE CONTROL

BRITISH JOURNAL’S COMMENT “EXPEDIENT OR EVASION?” “With a rapidity and efficiency which should put the ‘old hands’ at totalitarian economics to shame, New Zealand has this week imposed virtual control over the foreign exchange market,” writes the “Economist” (London) in the first leading article of its “Business World” section. The reference is to the completeness of the control assumed by three steps. “In three strokes the whole —or virtually the whole —of the Dominion’s foreign exchange machine has been placed under the control of the authorities.”

The article sets out in considerable detail the financial and economic policy leading to control: the drop in exports with no corresponding reduction of imports owing to customary timelag, the rise in costs through high wages and shorter hours, and expanding Government expenditure with the “admirable but expensive” Social Security to follow. The flight of capital and its contributory causes are also referred to. In explaining the control measures the “Economist” comments: “The Finance Minister has announced that this control of imports will be used in order to strengthen the preference already enjoyed by British goods in the New Zealand market. Even so, however, it is likely to mean a fairly substantial curtailment of non-essential imports into New Zealand from this country.” On the possible results the “Economist” states: “New Zealand begins its experiment in controlled exchanges with considerable advantages. In th° first place, it is insular and far from other territory and particularly well equipped, therefore, to tackle the problem of currency smuggling which tends to arise whenever exchange control is imposed. Secondly, its population is not ‘exchange conscious’ in the Continental sense of that term. Despite the undoubted efflux of capital which has taken place in recent years, there is no serious distrust of the currency among New Zealanders as a whole. Thirdly, the market in New Zealand pounds is an extremely small one, centralised in the hands of a few highly-respected trading banks, which would not lend themselves to any evasion of the official control. None the less, it is almost inevitable that a ‘black’ market in New Zealand currency will develop. Su^ 1 - a market might assume appreciable proportions if a thoroughly unsound financial policy by the Government were to give the controlled exchange rates a

character of artificiality. There is no lack of channels throu r ' , i which such a ‘black’ market could be fed. The fund of external investments held by New Zealanders provides an ample source from which such a market could be supplied with sterling and other foreign currency. Any repatriation of cental to New Zealand from such a fund might tend to use the channels of the unofficial or ‘black’ market if the rates offered in it w-ere sufficiently advantageous and the means of operating in it not unduly dangerous. One can cor live of a 1 ’ kinds of remittances to New Zealand which would follow the same route under those circumstances —for example, maturing insurance policies held by New Zealanders with British offices, legacies left to relations in New Zealand by people in Great Britain, and the like. “In other words, it is evident that the success of the New Zealand Government's control scheme depends, not so much upon the effectiveness with which it is worked, as upon the manner in which the fundamental economic problems of New Zealand are tackled. If the New Zealand Government temper their grandiose public works schemes and their progressive policy of social services with caution, and if they have the luck of good export prices, the exchange control scheme may happily prove to have been a valuable, but temporary, expedient to tide over a difficult period. Mr Savage, however, has gone far to shatter this hope by his declaration that these measures were intended to form a permanent part of the Government’s plan for ‘insulating the economic life of New Zealand from outside disturbance.’ If, in the course of this insulation policy the control scheme s merely used as a means of evading :he fundamental issues invoiced, if it serves only to ‘plug the clinical thermometer,’ it will land the patient in a much graver crisis than that in which re finds himself to-day.”