EXCHANGE RATE

New Zealand Herald, Volume LXXI, Issue 21830, 19 June 1934, Page 5

EXCHANGE RATE

HIGH LEVEL DEFENDED PROFESSOR TOCKER'S VIEW 3 "ADVANCE TO PROSPERITY" That the return to slump conditions or the climb toward normal conditions is dependent upon the rate of exchange was the contention of Professor A. H. Tocker in an address to tho Canterbury branch of the Economic Society last week. He argued that a return to parity with sterling would 1 mean a deep slump; that maintenance of the present rate would mean tho attainment of 1929 levels this year and a balanced budget; and that there was no justification yet for tho restoration of tho wage cuts. Professor Tockcr maintained that given a maintenance of present conditions, including the rate of exchange at its present level, there were definite indications that tho Dominion would this year reach a level on a par with that attained in 1929. If the exchange rate was not maintained and was returned to a parity with sterling, then the result immediately would be moro slump, less business and more unemployment. The maintenance of tho rate at the present level meant the continuance of the advance toward prosperity. If the rate were eased back to say, 110, then Now Zealand would nearly be back to a deep slump position. He was convinced that the full advantages of tho advance in the rate to 125 had not been felt yet and the case for the maintenance of the rate was extremely strong. Accumulation in London One of the chief statements made against the maintenance of the rate was that which called attention to the amount that the maintenance was costing tho Government. According to the figures quoted by the Minister of Finance, Mr. Coates, exchange was costing the Budget £1,750,000 and funds accumulated in London totalled £20,000,000. Tho fact was. that tho revenue from taxation, with the exchange at 125, was £22,000,000, and with the rate on a parity with sterling, revenue would have been £17,500,000. The increase of £4,500,000 . was the result of tho advanced exchange. Those figures were approximate only, but the validity of tho reasoning was undoubted. The Government had secured £4,500,000 at a cost of £1,750,000. Referring to the accumulation of £20,000,000 in London Professor Tocker said that that sum had caused much, misunderstanding and confusion. In terms of that fund the raising of the exchange rate could be calculated to have cost the Government approximately £525,000 for the year ended March 31 last. That was not the cost of maintaining the rate nor the cost of maintaining the fund in London, but -was really the cost of the Bank Indemnity Act, which he considered largely anomalous. If the exchange rate was reduced to a parity with sterling the loss to the Government would depend on the amount of accumulated funds, and there was no loss yet. Dealing With the Excess ; The size of the accumulated fund 1 was interesting, since it was £10,000,000 • more than could be expected from calJ culations made on the trade figures. I For that he advanced the reasons: (1) ; That British exporters chose to leave • funds in New Zealand; (2) that New i Zealand importers had deferred making payments overseas in the mean- . time. The hope that the rate of exchange would be reduced was actuati ing many to operate as they were 1 doing, in swelling the fund. In reality approximately £10,000,000 was being held in speculation. What would the Government do with that accumulated fund in London? was asked. Many had supposed that it would be an embarrassment. Through the Reserve Bank of New Zealand tho Government would have the fund absorbed and Treasury bills would be repaid. The Government would be rid of its funds in London, and the Reserve Bank would have a new asset and a new liability. "Of course I have no special knowledge of this action, but this seems to be so," Professor_Tocker added. The result of that £10,000,000 having been accumulated, Professor Tocker considered, would be to make it available for investment in New Zealand. That would cause an abundance of money, which was likely to depress interest rates still further and stimulate business. The Reserve Bank would be in the happy position of having £20,000,000 in London earning 1 per cent. That reserve in London was better than an accumulation of gold, and New Zealand appeared to be in an extremely strong position.