WORLD CURRENCY UNION

New Zealand Herald, Volume 81, Issue 24878, 27 April 1944, Page 3

WORLD CURRENCY UNION

DOMINION POLICIES AFFECTED INDUSTRIAL AND FINANCIAL ANGLES

By H. BELSHAW, Professor of Economics, Auckland University College

Political leaders in New Zealand have reiterated on more than one occasion that New Zealand should accept the responsibility of cooperating fully in schemes of international political and economic collaboration. It is my opinion that neither the public nor our political leaders have fully appreciated that this is likely to involve substantial modifications in our domestic policy. Willingness to accept such modification is the supreme test, either of the proper understanding of the full implication of such co-operation, or of the sincerity of pronouncements in its favour. Such a tost seems likely to be applied by the terms of the International Currency Agreement as reported in the New Zealand Herald on April 24, and in particular, by the paragraph which reads, "members will be permitted to retain wartime exchange controls, with the understanding that they will gradually be relaxed." There may be qualifications not covered in the summary report, but I believe that it means what it says, and that it is intended to cover controls which existed prior to the war, as well as those imposed since it broke out. Pernicious Controls My reasons for this view are that ' there is a considerable body of authoritative opinion which classifies exchange controls as among the most pernicious of the instruments of economic nationalism in their effects on international trade, though they might be excused as salvage operations. Moreover, the revised draft of "An International Stabilisation Fund," published by the United I States Treasury in July, 1943, states j that each member country shall underj take "to abandon, as soon as the J member country decides that conditions j permit, all restrictions (other than I those involving capital transfers) over J foreign exchange transactions with ! other member countries," while the rej port of the Canadian experts has a i similar proposal. The Iveynes report is j not so specific, but suggests that meini ber States might resort inter alia to im- ! port control under abnormal ciroumI stances. I Since exchange restrictions and import control are integral parts of one policy, and especially since the latter requires the former, it is a reasonable inference that the abolition of both is covered by the clause in the agreement quoted. Moreover, the gravamen oi the charge against exchange controls is that they are intended, or soon become, devices which restrict trade. I repeat, however, that there may be _ provisos • and qualifications, though 1 think them I unlikelv, except in a minor form. In reference to policy during the im- ! mediate post-war years, it is important | to note that existing restrictions are to I be gradually withdrawn. This is a | necessary requirement; for during a | period oi several years after the I the urgency ol demand, the shortage of I supplies, and tlie need to restore pro- ! duction to a peace footing will necessi- ! tate some sort of sequence in the satis- | faction of wants. Restoring Plants After the War In particular, there will probably be a considerable demand for capital equipment to make good depreciation and obsolescence, and establish new plants. Import and exchange control are ' necessary instruments for the enforce- | ment of"priorities. 1 hazard a guess, ! however, that the agreement will proj vide that a majority of the governing j body of the stabilisation fund may at j the least make representations as to the | appropriate time to remove restrictions. ! Full participation in the proposed international currency union is almost certain to require the abolition of our system of import and. exchange controls, except that the latter may be applied to capital transfers. The purpose of this exception is to prevent a country's economy being thrown out « balance by flights of capital, especially of a fluctuating nature. _ It does not affect the major changes it) jiolicy which conformity with the scheme will require New Zealand to make. The first effect- is that import control will no longer be available as a device to protect local manufacture. As yet, nothing has appeared which suggests that powers to impose tariffs are restricted, even although _ substantial tariffs would not be in keeping with the spirit of the agreement, or of international economic co-operation generally. .But tariffs would at least have the advantage that the extent of the protection would be more likely to attract public attention and its bearing on prices would be more readily appreciated. Moreover, unless the tariff _ is very high indeed, or natural protection exists through transport costs and the like, it is less likely than import control to rule out external competition altogether. Policy for Manufactures It is not a necessary inference that New Zealand manufacturing will be irreparably damaged, more especially as exchange controls would be gradually removed and some tariff protection would doubtless still remain. It is a necessary inference, however, that a constructive manufacturing policy of another kind is forced on us. It would seem to me that such a. policy should have the following aspects: — (1) A survey of our resources and potential domestic markets with a view to determining which can be established without the necessity for artificial aid, or with very little. In general such industries would be those which reach an economical scale while still of small size. (2) Assistance during the transitional period in directing labour and capital away from uneconomic industries, especially from mushroom war growths, to those of a type which have a reasonable' chance of competing effectively. (3) A full investigation into the existence of monopoly in New Zealand, and firm action to control it, especially where the restriction of supply and inflation of price by the monopolist affect the costs of other industries. (4) An investigation into the extent to which the rationalisation of manufacturing industries would effect economies in costs, and the formulation of a programme to encourage rationalisation. Reserve Bank Financing Another major effect is likely to be on financial policy. If the Government ■ uses the Reserve Bank to finance housing at very low rates of interest, there are many who appplaud it, on the assumption that this cheapens building costs and nobody pays. Unless such a policy is applied when there are unemployed workers, the effects are inflationary, and the cost is borne by all whose incomes do not rise proportionately with the rise in prices. Moreover, there is also some effect on building costs, although the major net effect is a subsidy on building paid bv those whose incomes are sticky. These are likely to include wage earners as well as salaried workers and rentiers. In the absence of exchange control an increase in imports results, and this means a depletion of exchange funds, The funds act as a barometer indicating that credit lias been expanded, and prices have risen too far. With import and exchange control, the barometer is "plugged," and there is no need to restrain inflation because of any contraction of exchange funds. Inflation may continue without hindrance and although the-housewife may complain

about rising prices, her husband still thinks he is getting & cheap Government house. . . The moral is that, with the abolition of import and exchange control, the use of Reserve Bank credit must be limited to such an amount as will not lead to a depletion of exchange funds, and houses and other requirements which it is considered desirable to cheapen by subventions must be given their subsidy direct instead of under the concealment of inflation. I for one do not object to subsidies _ to cheapen houses for those on low incomes, but except when there is unemployment such houses should be financed at normal existing rates for Government loans and subsidised out of taxation. Acceptance of membership in the proposed international currency union seems likely to require substantial changes in public policy, and a great deal of objective, constructive thinking. It will he a test of our international protestations.