THE EXCHANGE DECISION

New Zealand Herald, Volume LXXI, Issue 21857, 20 July 1934, Page 10

THE EXCHANGE DECISION

The immediate consequence following the Reserve Bank's announcement of its exchange policy is to dispose of all doubts and uncertainties about any movement of the rate in the near future. To the extent that uncertainty is the greatest enemy of orderly trading, the effect should be to encourage activity. A practical result of the new order soon to be established will be the end of discrimination between capital and other funds for the purposes of transfer. The restraint placed on the import of capital funds must go. The Reserve Bank is bound to buy and sell sterling on demand, above a minimum of £SOOO. With such a proviso existing, there need be no difficulty about bringing money into the country, whatever the nature of the funds or tho purpose for which they are intended. There are other and longer range inferences to be 'drawn from the official announcement. The policy amounts in effect—whether in deliberate intention or not is immaterial—to a devaluation of New Zealand's currency. With the bank taking over the surplus sterling accumulated by the Government—as inferentially it does —the Government obtains the means of disposing of the Treasury bills issued in connection with exchange operations, extinguishes the risk of loss through the sale of sterling by normal process, is relieved of the interest charges on the Treasury bills, and of any responsibility analogous to that of its indemnity to the commercial banks. The Reserve Bank will presumably write up the sterling funds in its balance-sheet at New Zealand currency rates. The par rate of exchange will, therefore, become £125 Now Zealand to £IOO sterling. These consequences follow in logical sequence from the inferences which the official announcement of policy suggests. The sterling funds in sight will form a reserve, making possible a vast expansion of New Zealand currency, far greater than seems necessary on past experience. Whether the' Reserve Bank will be able to maintain exchange at its pegged rate will depend on the future balance of payments. If there is a continued excess of exports, London funds should sell at a discount, or the New Zealand pound appreciate in terms of sterling. The conventional remedy in the hands of the Reserve Bank to prevent a marked appreciation is its power to issue notes. In view of the magnitude of the sterling reserves, the determination'how far this power shall be exercised in pursuance of the policy now indicated will make a heavier demand on the judgment of the Reserve Bank authorities than any other decision they seem likely, at the present time, to face.