THE EXCHANGE POSITION.

New Zealand Herald, Volume LXIX, Issue 21116, 25 February 1932, Page 12

THE EXCHANGE POSITION.

LONDON EXPERT'S REPORT, t HIGHER RATE INJURIOUS. j _L I FARMERS* GAINS ILLUSORY, i { t CONSEQUENCES OF INFLATION, j j [BY TELEGRAPH. —OWN CORRESPONDENT.] ' WELLINGTON, Wednesday. j A report upon the New Zealand ex- ( change position has been obtained by I the National Bank of New Zealand from ' Professor T. E. Gregory, in response to a request by Mr. J. T. Grose, general ( manager of the bank in New Zealand, < that, the independent opinion of a 1 British economist of high standing should be obtained. Professor Gregory is pro- , fessor of banking in the. University of London; he accompanied Sir Otto Niemeycr to Australia and New Zealand in 1930, and was a member of the. Mac- , millan Committee on Finance and Industry. Professor Gregory says that since primary production in New Zealand is carried on chiefly for export, the direct and short-run effect of. raising tho exchange rate on London would be to increase the income of primary producers, but how far this immediate benefit means eventual and permanent improvement in their position is another matter. Moreover, even if it can be shown that part of the increased income could be pormanently retained by farmers, this does not settle tho question, for other aspects must also be taken into account. Rising Prices in Britain. Wholesale prices in the United King- ] dom lvavo now begun to rise and can be j expected to continue rising under the I combined influences of the tariff and the suspension of the gold standard. To j tho extent that sterling prices rise, the j position of the New Zealand primary j producer would improve even without a 1 change in tho exchange rate. Professor j Gregory shows that during the months j from August, 1931. to January, 1932, the. ; margin between British and New Zealand wholesale prices has narrowed appreciably, and says it would appear not unreasonable to defer action in the immediate future in order to establish more clearly than is possible at the moment tho trend of British prices. He emphasises that in this matter raution is especially necessary in view of tho fart, that a rise in the exchange rate is bound | in anv case to affect tile level of import prices. "A rise in exchange rate to say 125 or 130." says Professor Gregory, "must cause a rise in the cost of production directly proportionate to the percential distribution of expenditure on imported goods, in so far as these are not, capable of being replaced by domestically produced articles." If imported goods riso in price because a rise in the exI change rate has cut off a portion of the i imports and competition is less acute, i then costs must again rise directly and indirectly. | " Effect Upon Wages. j Professor Gregory shows that the ini direct effects would exert their influence j in part through the wage level. If | farmers' sale proceeds go up in consequence of the exchange rate rising, and if at t lie same time pr'.ces of imports are forced upwards, it seem s inevitable noi only that the wage level will cease to j fall, but also that money wages will go up again, if the pressure on real wages becomes marked. Comparison of the average figures for 1930 with figures for November, 1931, indicates that agricultural and pastoral wages have fallen by some 18 per cent., while export pr.ces have fallen by some 23 per cent. Therefore if tho tendency of wages to fall is reversed, and at tho samp time other costs also rise, the benefit from the rise in the exchange rate will in part at least bo lost. It appears from investigations that not less than 33.3 per cent, of farm expenditure is composed of interest and rent. It may be argued that this portion of tho farmers' expenditure will not rise if the exchange rate rises, so that primary producers will be permanently better rtff through a reduction in the real burden of interest and analogous charges. This argument can, however, easily be pushed too far. for though there is a time lag during which creditors suffer, yet the experience of all countries is that, in periods of rising prices, interest rates tend to move upward because lenders will riot incur the risks associated with lending for long terms at. fixed rates at a time of rising prices without at the same time seeking to compensate themselves for the fall in the values of "principal and interest by charging higher interest rates. Automatic Inflation, i Tt may be asked why should prices in New Zealand rise. The answer has in part been given. Prices will rise through tho influence of the rising exchange rate on imports and indirectly on wages rates. There, is another point to bo taken into account. A rise in tho exchange rate adds to the, cost of remittances, and since the Budget is unbalanced and the banks are lending exchange to the Government ! ;igainst Treasury bills, the volume of such ! bills is automatically extended as th o ex- ! change rate rises. ' Since the banks buy i exchange from exporters and replace | sterling as an asset by Treasury _ bills. ! there g"es on an automatic expansion of j the volume of credit and currency which j must, in the long run help to raise tho I New Zealand price level and thus de- ! privo farmers of a further' part of their gain from an increased exchange rate. It- may be argued that with the level of money income, rising through credit expansion and through higher prices received in terms of New Zealand money for primary produce, the yield of incqme tax and other (axes will rise and budgetary burdens will be alleviated, but expenses will ! also tend to increase and if, as is inevitable, the increased cost of imported goods leads to a reduction of consumption, cus- ! loins revenue at. least will decline. Morej over, approximately 55 p»r cent, of New ! Zealand's public debt, is held in London, and thus the relief to public debtors which accrues from rising prices and rising exchange rates, applies to the lesser portion of the debt. Reactions in London. 'l'lle psychological effect of a further sharp rise in the exchange rate on the London money market and on British investors must not be overlooked. 1 lie co,st of I he last loan raised in London was £6 Is 3d per cent., after allowing for expenses. It is certain that with a further increase in the exchange rate, the market price of existing New Zealand securities will decline, making conversion or the issue of a new loan either impossible or extremely expensive, to finance. Professor Gregory emphasises liis opinion that it is inevitable that if the exchange rate is allowed to riso now and depression continues, further demands will be made for a further increase, and so on. Fear that such demands will be made and will be conceded is bound to exert a depressing influence on the value of New Zealand stock in London, and restrict conversion and the chance of future issues even more Some of the dangers outlined above, Professor Gregory remarks, could be mitigated if the banks were in a position to keep the general level of wholesale prices steady; that is, exchange stability could be sacrificed for the sake of price stability, but this policy means that if import prices rise and tho wholesale price level in coni sequence goes up, then other prices must i be kept down by credit restrictions so as ■ to keep the general price level steady. \ It also means that if, in order to help the Government, tho banks expand credit, thus tending to raise prices, they must

ration credit and control other prices to compensate for this. lie asks whether, in the absence of central banking machinery, the banks are in a position to keep prices steady while allowing th 6 exchange rate to look after itself. s If the exchange rale is to be allowed to rise further, it must be recognised that it may ultimately prove impossible to revert to 'the old parity between sterling and New Zealand money, for if the rise in sterling prices lags behind the movement in exchange, it would be impossible to regain parity with the British pound except by means of drastic deflation of New Zealand prices. If, on the other hand, British prices clo rise after the exchange rate has risen, an equally difficulty problem would present itself. In such circumstance, unless the exchange rate is at once forced downward, primary producers receipts would expand and all the conditions for a sharp rise in land values and for local over-expansion would be created. Hut would the Government or the banks be in a position to force the exchange rate down and thus deprive primary producers of what these would regard as legitimate profit ? Professor Gregory says the facts that the greater part of the present exporting season is over, while the British price level is likely to be opposed to quite novel influences in tho hear future make it seem desirable to wait for some time, even if on balance a change in the rate is | considered desirable. r lhe argument that the present exchange rate seriously overvalues the New Zealand pound loses a good deal of its force in the light of trade figures, from which' it appears that for the first 11 months of 1931 the cumulative balance in favour of New Zealand is £7,000,000. In conclusion, Professor Gregory emphasises that he feels strongly that it is not enough to prove that a rise in the rate of exchange will increase the farmers' receipts. Even if it, affects his receijVs more favourably than it affects his costs unfavourably, the influence on Government finance, on wages generally, and on the credit of New Zealand, have also to be taken into serious consideration, as well ns | the danger that a movement of this kind j once initiated may be very difficult to j check. 1 OPPOSITION TO POOL. ! j TH E CHAMBERS OF COMMERCE ! " SIMPLER AND BETTER PLANS." ■ [r.V TELEGRAPH.— PRESS ASSOCIATION. ] WELLING TON. Wednesday. A statement was issued to-day by the. executive of the Associated Chambers of Commerce explaining its attitude on the exchange credits pool. Ihe association declares its opposition to artificial pegging of exchange and affirms the opinion that there should be a return to a free, open I market for exchange. It considers the method chosen by the Government to extricate itself from its difficulty of making overseas payments by commandeering the export income of the Dominion in London is wrong in principle and inimical to the commercial and productive welfare of the Dominion. It considers that simpler and better plans could have been devised than those forced on the community without consultation by Order-in-Council at shore notice and without adequate explanation or machinery for working. The association is still of opinion that there is no necessity for the present system and no reason why tho banks should insist that all export moneys should be remitted to New Zealand and all moneys for import requirements remitted back to London, thereby duplicating a large proportion of the exchange business.