THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, MAY 7, 1937 EXCHANGE ON LONDON

New Zealand Herald, Volume LXXIV, Issue 22722, 7 May 1937, Page 10

THE New Zealand Herald AND DAILY SOUTHERN CROSS FRIDAY, MAY 7, 1937 EXCHANGE ON LONDON

A report from Canberra that, as the result of an excellent export season, the possibility of reducing the rate of exchange on London was being considered has not been allowed a long start before being followed by a definite denial. The original message said that Australian reserve funds in London were likely to be increased by £10,000,000. As has been suggested by Auckland comment, this is not an enormous amount for a country whose principal exports may fluctuate heavily in pvice, nor, it may be added, for a country where the liability to a prolonged drought can never be left wholly out of account. If the Australian reserves had been exceptionally heavy before this season, the addition of £10,000,000 would make a substantial difference to the outlook. Actually it i's not long, little more than a year, in fact, since there were suggestions in the Commonwealth that the rising tide of imports had created an exchange position needing care, in spite of better export prospects. This year's

exceptionally good prices for wool and much improved return for wheat have, no doubt, altered the situation, but hardly so drastically as to make consideration of exchange adjustment mandatory. Actually the latest official statistics available do not wholly endorse what is suggested by the cable messages. They cover Australian overseas trade for the

eight months from July to the end of February, two-thirds of the financial and production year in the Commonwealth. Over that period exports were valued at £7,742,000 more in sterling than for the corresponding portion of 1935-36, while imports were £2,946,000 higher. Such an increase in the visible balance, less than £5,000,000, does not 'suggest pressure on the exchange likely to force an alteration in its level. In addition, it was estimated that the Coronation exodus of Australians would increase the invisible imports substantially by the added demand for London credits. Statistics support the denial of the Canberra report.

! It was inevitable that any sugges- ; tion of a change in the Australian i rate of exchange on London should I direct attention to the New Zealand. ! After all, the present Government I did undertake to bring the exchange back to parity with sterling if ! returned to office. The fact, that it has not done so, nor has made any move toward the gradual reduction that was at one time suggested, indicates the rashness of the original promise rather than any particular delinquency in having failed to keep it. At the end of November, 1935, just about the time the Government assumed office, the combined London assets of the Reserve Bank, and of the trading banks in respect of New Zealand business, amounted to just over £29,500,000. At the end of last March, the latest date for which the figures are available, the total was a little more than £30,000,000. The statistical position differs very little. At 'other times there have been sterling accumulations nearly £10,000,000 higher in value than those figures, and substantially higher than at any date since Labour has held office. The actual pressure of London funds has not made consideration of a lowering of the exchange imperative on it if the rate could be held without difficulty in face of heavier balances before its time. In fact, heavier imports and some repayment of overseas debt have eased whatever pressure the Reserve Bank may have felt previously. If the level of sterling reserves has not altered to bring the promise of an exchange rate on a parity with sterling more into the picture, the Government's internal policy has acted entirely the other way. At | the time Labour took office it was pointed out that to follow a policy at once inflationary and deflationary in tendency would prove impossible v The promise of higher wages, salaries and pensions, increased expenditure of borrowed money and greater exploitation of the Reserve Bank's credit resources were all inflationary, or at least expansionist, in character. The proposal to lower the exchange rate wa'3 deflationary. The two simply did not go together. Pursuit of the expansionist policy, if carried far enough, might even demand a higher exchange rate, or strict rationing of imports to avoid it. There is no apparent necessity for such a step at present, thanks largely to buoyant export trade and prices. But the way in which promises and good intentions can be brought to nothing is shown by what happened in France. The present Goverhment, led by M. Leon

Blum, took office deeply pledged against any devaluation of the franc. To keep it at the level then obtaining, considerably above its real value in terms of other currencies, demanded a policy of rigid deflation, such as M. Blum's predecessors had been pursuing. The new Government, by increasing wages and pensions, reducing hours and speeding up capital expenditure by the State, set inflationary influences in motion. The eventual, and inevitable, result was that devalua-

tion of the franc against which it had given many solemn promises. The French Government could not have it both ways. Neither can this, nor any, New Zealand Government. Mr. Downie Stewart, who opposed the original raising of the exchange as strenuously as any man, put the position with complete realism when he said subsequently that it could not be reduced, or, to

use hi's own idiom,, that New Zealand was up the tree and could not get down again.