MONEY AND EXCHANGE.

New Zealand Herald, Volume LXVIII, Issue 20991, 30 September 1931, Page 6

MONEY AND EXCHANGE.

UNITY OF THE EMPIRE. BRITISH POUND THE BASIS. LESSON OF RECENT EVENTS. 'Amid all the'uncertainty created by the Suspension of the gold standard in Britain, IDne fact of outstanding importance is manifest. The actual effects of Britain's Return to inconvertible currency could not Joe immediately calculated, yet within a Jew days the valuations of the pound Sterling in all important foreign currencies had closely approached a uniform ratio. In dollars, francs or marks, the pound deprived of gold backing was appraised at about. 80 per cent, of its value 5n gold. Yet its value in the greater part £f the British Empire is the same to-day as it was on September 20, when officials iof the Bank of England met representatives of the Government to proceed to their fateful decision. Foreign exchange quotations of sterling Immediately plunged vertically to a level of depreciation midway between those at which the currencies of New Zealand and {Australia have been rated for eight pionths. The ratio of New Zealand and [Australian pounds to sterling has not been altered. The value of the Indian rupee }ias been maintained by official decree, at the former figure of 18d, a decision endorsed by the absence of any unfavourable Reaction in India. Canada and South Africa. The Canadian dollar, nominally still on gold standard, has risen against sterling, but has fallen to a substantial discount in terms of the United States dollar, fend it would appear that Canada is hesitating between her sentimental attachment to sterling and her commercial association with the dollar. Even in South Africa, the source of more than half the {world's annual production of gold, the exchange rates have moved by only an insignificant fraction, according to the Available information. If this is« confirmed, its meaning will be that South [Africa is treating her weekly shipments of gold as exports of a commodity—the jvalne of which has jumped from 84s 10£ d to 114s 9d an ounce, or, on the basis of. Jast year's production, from £45,500,000 io £61,000,000. That sudden increment in South Africa's trade balance is incompatible with the maintenance of her sterling exchanges at parity, but it is possible to prevent its affecting the exchanges, for instance, by raising internal loans and jising the funds acruing in London to redeem overseas debt. Thus, the present position reveals in the most striking fashion that the currencies of the overseas Empire are so intimately linked with the pound sterling that the association has not been seriously dis- * turbed by a revolutionary change in the relation of 'sterling to foreign currencies. fThe explanation in the case of New Zealand is probably equally appropriate to Wher Dominions.

Trade with Foreign Countries. New Zealand trades with many foreign Countries as well as with her sister Dominions, but without exception buys more from them than she sells in their markets. Her ability to do this depends wholly ' upon a single circumstance. She pays the balances of all these unfavourable trading accounts with pounds sterling, which are available to her because she liuys far less from Great Britain than the yalue of her exports purchased by Great Britain.. It is not merely for convenience that conversion of New Zealand money into foreign currencies is customarily done by expressing both in terms of sterling; the practice-is simply an acknowledgment of the indubitable fact that the Dominion' cannot carry on her trade with foreign countries except through the medium of the London financial machinery and the solvent of the British pound. Consequently, the valuation of New Zealand money in terms of American dollars cannot be directly determined. It depends upon its valuation in sterling, so that a variation in the latter automatically changes the value of the New Zealand pound, and other circumstances remaining stable, the relation between New Zealand and British pounds is not altered. The only way in which New Zealand fcould detach herself from sterling, even partially, is by shipping produce to the United States or other foreign countries, and thus securing dollars or other currencies at par, but since that cannot easily be achieved, it is clearly preferable to increase her imports from Britain and reduce those from foreign countries. Anomaly of Intra-Empire Disparities. This general review of the situation suggests that the economic unity of the Empire is more firmly established than has been generally supposed. A decision is made in London which creates consternation throughout the world; it immediately reveals an- intimate interdependence throughout the Empire, which is strengthened rather than disturbed by this extraordinary event. Incidentally, it has also demonstrated the commercial dependence upon Britain of such countries as Denmark and Argentina. These conclusions have more than an academic interest. They demonstrate the deficiencies in a banking, currency and exchange system which allows such an anomaly as the present rates of exchange in Australia and New Zealand. Bankers may justly protest that the present situation is not due to action or inaction on their part, but to political influences beyond their control. So far as that contention is true, it confirms the doctrine,/that the responsible for the management of currency and the operation of exchange must not only have power to fulfil those functions, but, as Sir (Jtto Niemeyer insisted, " must be entirely free from both the actual fact and the fear of political influence." By its control of the supply of credit, through the instrument of its interest rates, it would regulate exchange rates within nominal variations from parity. The present generation may not be prepared for a uniform currency and free exchange throughout the Empire, but what is possible within one economic unit should not be impossible within the economic unit of the Empire. Inland exchange rates in Britain used to be very heavy; they rio longer exist. The Federal Reserve Board has abolished exchange rates within the United States, Simply by perfecting the banking organisation. To suggest that the banking machinery of the British Empire cannot, be raised to an equal degree of perfection is a criticism which a layman would hesitate to advance. " Our position as the international clearing-house will be subject to , competition from more quarters than one after the war," Mr. H. S. Foxi. well, prpfessor of political economy in the University of London, wrote as long ago as February, 1918. "Would not our longstanding financial supremacy be distinctly fortified against the new attacks if we ■were able to say that exchange on London meant exchange on any part of the British Empire? Exchange on London, since 1820 or thereabouts, has meant exchange on any. part of Great Britain. Why not, after 1920, exchange on any part of Greater,, T3ritain ?" Perhaps the answer is that each of the Dominions enjoys economic autonomy and that Empire finance is dream. The experience of the last few days suggests that this economic indepsndence is an illusion and that it is maintained only at a heavy cost for which there is.no adequate return. »