RATES OF EXCHANGE

Otago Daily Times, Issue 21446, 22 September 1931, Page 5

RATES OF EXCHANGE

FLUCTUATION CAUSES RELIEF FROM INTEREST. The following report on rates of exchange was received at last night’s meeting of the Dunedin Chamber of Commerce from the Associated Chambers, Wellington; — The rates between Australia and New Zealand were for a number of years merely nominal, and it is only during the past few months that they have violently fluctuated as the position in Australia developed. It is evident that the heavy discount at which the Australian pound stands in relation to the British pound sterling (practically 30 per cent.) is responsible for the present high rate of exchange between Australia and New Zealand. The New Zealand pound is at a discount of £lO only compared with the English pound, and if the rate between Australia and New Zealand remained at the normal rate it is obvious that there would be a heavy transfer of funds from Australia to London via New Zealand. The present rate of £lB 12s 6d for telegraphic transfer from Australia to New Zealand acts as a brake on such transactions. Incidentally, it favours exports from Australia, to New Zealand, and, conversely, acts as a deterrent on exports from New Zealand to Australia; in fact, it has practically killed the export of timber from the Dominion to Australia. For a period the banks sought to alleviate the burden on New Zealand exporters by a concession rate —practically artificial —of £5 per cent, as against the ordinary rate of £lB 12s 6d. But this led to abuses and the “ concession ” was abolished. The report of the committee on currency and exchange which was unanimously adopted by the delegates of 39 nations present at the International Conference at Brussels stated; Attempts to limit fluctuations in exchange by imposing artificial control on exchange operations are futile and mischievous. In so far as they are effective they falsify the market and tend to remove natural correctives to such fluctuations. Moreover, all Government interference with trade, including exchange, tends to impede that improvement of the economic conditions of a country by which alone a healthy and stable exchange can be secured. Summed up briefly, she position appears to warrant the following conclusions: — 1. Exchange fluctuations have been aggravated by the fact that the Dominion currency is not based on the gold stand ard—one of the essentials of which is that the free import and export of gold bullion must not be interfered with, and holders of bank notes must have the right of converting them at standard rate into gold bullion for the purpose of liquidating foreign debts. 2. That under the Dominion's present currency system the extent of the funds held in London by the banks operating in the Dominion is the dominating factor that rules the exchange position. 3. The system under which the banks have operated has had the effect of keeping the exchange rate between the Dominion and London at a fairly stable rate (for about 10 years prior to 1914 the T.T. rate was 17s 6d) in past years and the New Zealand pound practically on a par with the English pound. Regulation of exchange could also bo effected in a simple way, by raising or decreasing the overdraft rate in New Zealand.

4. Over a series of years the proceeds of realisation of the Dominion’s exports, combined with the proceeds of loans raised in London, were sufficient to maintain the London funds of the banks at a level sufficient to meet the demands upon such funds arising out of import* into the Doipjnion, and to meet overseas payments ol interest and other liabilities.

5. The heavy and sudden drop in the prices realised for the Dominion’s primary products (in sympathy with a similar world-wide movmeent) stemmed the customary flow of funds into the bank’s hands in London, whereas, on the other hand, there were still heavy demands upon the banks' funds to finance imports into the Dominion and to meet other overseas liabilities for interest, etc. This has caused a breakdown in the system that operated so smoothly for many years. C. The position could be temporarily rectified by further overseas loans, but unless the sterling value of our exports could be correspondingly increased the ultimate result would be worse than the present position. 7. One is forced to the conclusion that the position in regard to New Zealand exchange has been aggravated by the Australian position, seeing that the system followed by the banks in each country for financing imports and exports has been practically similar. In consequence, the Dominion’s rates have probably been higher for a time than would otherwise have been the case, but as the fall in prices continued the present position was inevitable.

8. No good grounds appear for the assertion, frequently made, that the present high rates are being maintained by the banks without justification, 9. There seems no prospect of immediate relief, but an improvement in the Australian situation should be rapidly reflected in the Dominion. 10. It 's suggested that every encouragement should be given to the production of gold in the Dominion, as an increase in the output of this precious metal would materially alleviate the present situation; also that every means should be explored to increase the volume of our primary products. 11. It is suggested that opportunity should bo taken to approve and further the economy measures of the Government und impress further economy and production on the people, that our creditors may be assured that we have taken our position seriously in hand; that we will balance our Budget: that wo will spend wisely or not at all. So their confidence will be restored, and our currency appreciate; or, to put it otherwise, our exchange rates be reduced. 12. In conclusion, the further suggestion is made that the Government explore the possibility of funding the whole of the public and local body debt into one loan at a reasonable rate of interest, payable over a long period of years on the amortisation principle, thereby obtaining some relief from the present burden of interest.

Mr Bcgg remarked that it was difficult to_ say anything about exchange rates. With Britain again suspending the export of gold the whole matter of exchange was in the melting pot again, ami none of them knew what the rates might he within the next week. They could only hope they would not see sterling at a big discount compared with countries that remained on (he gold standard. He thought the chamber might recommend that the exchange rates bo allowed to take their natural course, and that there be no artificial pegging of rates whatever. Mr P. O. Smellio agreed with the previous speaker that exchanges should be allowed to take their natural course. Artificial pegging, he added, would defeat itself. It would benefit the farmer at tlie expense of the importer und the general community. It was rather difficult to arrive at what was the proper relationship of the currency in New Zealand with the pound sterling, but the fact that little business was ever done outside the banks seemed to indicate that the rate of 10 per cent, between London and New Zealand was about the natural rate of exchange, and it should be allowed to remain at that until movements of money brought about the necessity for alteration. Mr A. 11, Alien said that if exchange rose to a much higher level it would probably mean that a dumping duty would he imposed, and that would come back on New Zealand like a boomerang instead of helping primary producers. Mr J. R. Faivbairn said that any movement upward must be for the good of the Dominion as a whole.

Jt was resolved—“ That, in the opinion of this chamber, there should be no artificial pegging of exchange rates, a copy of this resolution to be forwarded to the Government,”