EFFECT OF PEGGING

New Zealand Herald, Volume LXIX, Issue 21346, 22 November 1932, Page 11

EFFECT OF PEGGING

" COLLAPSE INEVITABLE "

IMPORTERS' CONTENTIONS

SURPLUS FUNDS IN LONDON

[BY TELEGRAPH —OWN CORRESPONDENT]

WELLINGTON, Monday

In a statement issued to-day the ©xchange committee of the New Zealand Importers' Federation stresses the danger of a collapse in the exchange market if the rate is pegged at an artificially high level.

"A collapse of the rate." contends the committee, "woud have such violent repercussions and disastrous consequences that the Government, forced to adopt tho lesser of two evils, would necessarily have to step in to prevent such a collapse." The statement continues that tho inevitable result of such action would bo additional taxation and a marked increase in tho floating debt.

"Tho greatest danger attendant on an exchange rate pegged at an artificially high rate," states the committee, "is not tho possibility but tho certainty of collapse of tho market. Exchange is a commodity and, as with every other commodity, its price is determined, or should be determined, by the law of supply and demand. From time to time attempts have been made to contr6l the price of various commodities. They have always proved unsuccessful, except when confined to a very limited period and a very restricted sphere. The same holds good in regard to exchange.

Position of London Funds

"It is a well known fact to-day that New Zealand is accumulating substantial surplus balances in London. The batiks are finding it difficult to dispose of London funds at the current exchange rate of 10 per cent. The supply is greater than the demand. This, as wo havo emphasised bofore, is strikingly demonstrated by the fact that the outside market rate stands at about £9 18s—less than the bank rate to a certain extent.

"There is no necessity, however, to labour this point., for advocates of higher exchange are not basing their arguments on the grounds that tho present rato is artificially low and that the normal factors which determine exchange warrant a considerably higher rate, but that a higher rate is an expedient in order to give some relief to the farmer. But it is an impossibility for one-way trade to be' maintained. The banks cannot go on purchasing export bills at 24£ per cent, thus piling up heavy accumulations of funds in London, when they cannot sell those funds at 25 per cent, thus reaping their profit of j per cent. "Inevitably the collapse of the market would be the result. Tho banks would refuse to buy export bills to finance the farmer unless the sale of London funds was guaranteed. The alternative would be a drastic reduction in the exchango rate, perhaps even to the extent of the premium swinging the other way. It is obvious that a collapse in the rate would involve heavy losses all round; nobody would escape and intense local depression would be created to accentuate the difficulties already existing as a result of the present world-wide depression. Example ol Australia

"This position arose in Australia fit the end of last year. The trading banks had such accumulations of London funds that they could not continue to buy export bills, and to enable the farmer to be financed and to prevent the huge losses involved in the collapse of the exchange rate, the Commonwealth Bank was forced to intervene. If the exchange rato is pegged at an artificially high rate of 25 or 30 per cent, a similar position is certain to arise in New Zealand, but we havo no central bank to step in and save the position. "The Government, beyond its immediate requirements for. interest payments, does not require London funds. It has no substantial loans maturing abroad and it apparently has no large conversion scheme in contemplation. Consequently, if it were forced to purchase surplus funds in London, the amount so expended would represent sheer waste. In essentials, the Government's position would bo identical with that of the savage, who, habitually going naked, purchased a thousand evening suits."