UNSTABLE EXCHANGES.

New Zealand Herald, Volume LXVIII, Issue 20989, 28 September 1931, Page 6

UNSTABLE EXCHANGES.

The exuberance which characterised the popular impression of Britain's' abandonment of the gold standard has already been moderated, according to the latest cable news. A few weeks ago, no serious credence would have been given to a forecast of such a development, which implies the surrender of one of the fundamental conditions of the financial supremacy which Britain has striven to maintain. Faced with the established fact, public opinion has been inclined to overestimate the temporary advantages, especially at the outset, when estimates of the actual effects were necessarily speculative. But the precipitous fall of the pound in all foreign exchange quotations has had a sobering effect by compelling recognition of the fact that such wide disparities must seriously disorganise financial and commercial transactions and adversely affect industries working upon foreign raw materials. Those who have been advocating manipulation of New Zealand exchange rates may be encouraged by Britain's decision to press their views, but the apparent analogy between their contentions and the course of events in Britain is not proved merely by the evidence of elation among the British public. The suspension of the gold standard and the abandonment of sterling to its fate were not the result of official deliberation and decision, whether political or financial. They were forced upon the Government and the Bank of England by the pressure of circumstances which had become irresistible. Formal acknowledgment of the situation might have been postponed until the bank's stock of gold was exhausted, but the authorities were evidently convinced that the drain could not be arrested and nothing was to be gained by delaying for a few days a decision that would ulti-

mately be made for them by the sheer inability of the bank to produce gold from its vaults. The courße of New Zealand exchange rates cannot be predicted without knowledge of such factors as future borrowing abroad, but, apart from any fresh disturbance of the Dominion's economic conditions, the tendency should be toward more favourable rates —a reduction of the premium on London funds. Assuming that the banks were persuaded to raise the present rates to an artificial level, the inevitable curtailment of imports would quickly force a downward revision, for the banks cannot pay an exchange bonus to exporters unless an equivalent amount can be collected in premiums from importers. There is a popular impression that the two charges roughly balance, but it should be understood that exporters receive an addition of only 8i per cent, to British prices, whereas the cost of imports is, in most cases, increased by ll£ per cent. With prices rising in Britain, as may be expected, conditions are favourable for a gradual reduction of exchange rates to parity, without prejudicing either exporters or importers, and the course of the Dominion's own trade should facilitate the process.