SACRIFICE TO AUSTRALIA

New Zealand Herald, Volume LXX, Issue 21404, 31 January 1933, Page 8

SACRIFICE TO AUSTRALIA

The announcement of restrictions upon the sale of securities from New Zealand to Australia is the first technical evidence of the difficulty of maintaining the fixed rate of exchange in New Zealand without full provision for Australian influences. Demand for remittance of funds to New Zealand may arise from three causes: Australian purchase of securities held in New Zealand, repatriation of New Zealand funds previously immured in Australia by the exchange barrier and demand by Australian importers for exchange on London. Transfers of funds in the first or the second category would have the effect upon the banks concerned of increasing their liquid assets in Australia or reducing their deposit liabilities, while their liabilities in New Zealand in the form of deposits or notes would be increased. Sale of sterling exchange to Australian importers would also increase the banks' Australian assets at the expanse of their London assets. There is no reason for opposition by the Government to these influences. The repatriation of New Zealand funds from temporary or other investment in Australia is the reverse of a flight of capital and the greater the sale of sterling funds to Australia the less irksome will be the guarantee to the banks against exchange losses. Indeed, it is suggested that the restrictions originated in the desire of the New Zealand banks to liquidate their own investments in Australia, but, in present circumstances, they could do so only if a demand for Australian securities were created in New Zealand or particularly if the

Australian banks were willing to buy assets of the New Zealand banks by depleting their own resources in the Dominion. The final effect of these influences would be a reduction in the strain on Australian funds in London and an increase in the demand on New Zealand funds there. Hence, if free play were given to them they would tend to bring the Australian natural rate below 125 per cent and to raise the New Zealand natural rate toward 125 per cent, and thus to discover a natural rate for Australia and New Zealand combined. In these conditions, New Zealand must share the burden of any adverse development in Australia, such as a reduction of its trade balance by the effects of drought. Under the Government's exchange policy, the New Zealand banks may have to submit to an indefinite transfer of their resources to Australia, and New Zealand's economic independence will be surrendered in an economic federation with Australia.