THE EXCHANGE POOL

Otago Daily Times, Issue 21544, 16 January 1932, Page 14

THE EXCHANGE POOL

TO THE EDITOR. Slit,—l have taken some interest in this question, and am disappointed that in your leading article to-day you do not give whole-hearted support to the protest of primary producers against the action of the Government in pegging the rate of exchange on exports at 8i per cent. The question is of very great importance to primary producers. At the recent election all shades of political opinion, including the press, almost made it a slogan, that the backbone of the country is the primary producer, and that one of the first things the Government of the day must do to bring the Dominion back to prosperity was to make things better for the producer —to put him on his feet again. The first step has been taken—but what a step! It is well known that the purpose and effect of the export license is to give the banks a monopoly of the exchange business, and enable them to keep the exchange at the present rate. It is the general opinion that, without Government interference, the rate ot exchange would, now that Government borrowing in London is stopped, increase by tome 15 to 20 per cent. If the Treasury officials and the banks thought that there was no likelihood of the rate increasing then why the necessity to peg it? ibe answer is, it seems to me, obvious. A rise in the rate would, of course, increase the cost of our imports at the expense ot the general public. After all, the Government is the public, but why should the general public be protected at the expense of a section of the pub he—the primary producers? And so at the very first fence the Government baulks—protects itself and commercial interests, and imposes a penalty, a straight-out tax, on farmers. With butter and cheese at present prices a rise of 15 to 20 per cent, in exchange means approximately 2d per pound butter-fat; on wool, at an average price of sd, it means Id per pound; on lamb at sd, it means Id per pound; and to on with other primary products. individual farmers have only to examine their returns, whether it be butter-fat, wool, meat, or other products, and they will realise the heavy penalty that has been imposed on them by tins action ot the Government. It is absolutely unfair that farmers should be penalised in tins manner, and it. is to he hoped producer organisations will take up the matter and press the Government for a free market. When dairvmen wanted to control the marketing of their butter and cheese certain interests left no stone unturned until control was wiped out. I hope to see these same interests now come to the assistance of the farmers in their endeavour to secure a free market for exchange. I tm .etc. Butter-fat.

TO the editor. Sir, —You have a report in to-day’s paper. of a deputation headed by Mr Jones which waited on Mr Forbes in reference to exchange credits. It behoves intelligent citizens, if they wish to protect their meagre savings, to take more interest in the actions of our amateur politicians. Since Great Britain left the gold standard the British £1 note has depreciated in relation to its previous value or in reference to a currency still based on gold—e.g., the U.S.A. dollar—from 20s to 13s 9d. The New Zealand £1 note is 10 per cent below the British because of the exchange—i.e., it is worth 12s sd. A Now comes the ridiculous part. Every New Zealand £1 note which the present exchange depreciation makes worth 12s sd, is backed in gold by 24s 6d (see the last banking returns). Yet, even the halfway nigger at Colombo or Panama emits at our currency. Surely this in itself is sufficient evidence that currency reform is urgently needed. - Mr Jones is suggesting that we should depreciate the £1 still further. Unless we maintain the relative value of our curreucy in terms of world prices or, in other words, minimise the lag between external and internal prices, we may experience great difficulty in paying for esesntial imports. It is economically impossible to grant any real benefit to any one section of the community by juggling with exchange. Excessive exchange manipulation raises production costs and so hampers exports and depresses the standard of -living ot the worker. So, in return for in&kins Jite hard for the poor, you swell the number of unemployed and cripple the primary industries. Our amateur politicians uie full of fallacious panaceas. It will be seen that our currency could be increased by £945,735. (The present note circulation is £5,926,902 and the gold reserve in banks is £6,872,637.) It the currency were increased by this amount each fl note would still be backe.l bv £1 in gold. Or if the currency were increased by £5,000,000 each £1 note, which to-day is worth 12s sd, would be backed by 12s 5d in gold. To proceed even further, the notes of the Bank of England are backed by 30 per cent, of their face value in gold Hence, if our circulation were increased by £15,000,000, it would be backed by the same amount of gold per unit as m the currency of Great Britain. What is not inflation in Great Britain is not inflation in New Zealand. In New Zealand we are suffering from severe defor circulation is obtained in two ways—(l) bank notes, (2) bank overdrafts operated by cheques. These two items have been reduced by f3,000,00°. during the last 12 months. Is it any wonder that we are short of ready cash? Bankers say that they can not see whj money should be cheap merely because, it is scarce, but there is no need toi money to be scarce. Let the banks stand midway between inflation and deflatio . Let them increase their currency and lend a little to the Government. If theie must be a debt at all. let it be a made debt. One cannot blame the banks for skimping the cin-rency as a shortsighted Government makes them paj L Cd per £IOO per quarter of the avci.igc of their note circulation. . Contrary to Mr Joness opinion, banks are not justified in considering Uu. effect which a high or low exchange iat will have on any group of individuals. This is giving a political complexion to KU of eato®, «»; £ ;l - banks are making a whip toi then own backs in that at some future date they will not be able to deny the pme pim lege to some other group of individuals. It is not the banks that are to blame our financial chaos, but an exti.ivaga vote-catching Government. Dining the last 10 years, while our politicians have been busy piling up trouble, the banks, controlled by men of vision have been piling up strength to meet it. Had tin. banks not been ably and prudently conducted over a long course of years, the support they have accorded tne Government would have been impossible. We must really come down to a conception of cheap government. Iho real mandate given to the Government at the last election was to reduce public expenditure. Anybody can balance Ins budget bv increasing taxation as long as there is anything left to tax. The test of true statesmanship is correctly to handle public expendiure. Ihe- formidable volume of local taxation is as much a burden and an impediment to industrial recovery as the taxes levied by 1 arliameut It is both these items, and not wages, that should be reduced. It is not the place of the banks to endanger thenposition by maintaining an excessive de-

valuation of the pound. The first duty of a bank is to its depositors, who supp y by far the largest portion of its funds. The financing of industries and individuals should be done by the moneylender Failure, loss of confidence, and class legislation have already undermined the Coalition and has so scattered sand into the bearings of that machine fo grinding wind ” that it has now come to I standstill and, like Micawber is wai. fngto see what will turn lUirow. January 14. .rLAio.

TO THE EDITOR. \ Sir —Your leading article of this morning is an interesting one, in that, thiough your exposition of the complications of the bankers’ movement, which has forced the -Government into mobilising export credit and of the protests made by deputation's to the Prime Minister, people are beginning to study whether scheme, or natural courses are the wisest. There is no doulpt whatever that the natural course in affairs generally is the only practical course. Any scheme to affect or delay natural movements creates doubt oi its being sound or wise. For years interferences by Government legislation and regulation with business movements and initiative have taken place, and in some cases it has taken years to learn that such interferences have lead to greater trouble than that whicli they proposed to avoid_ or remedy, in this case the plain fact is that, under the regulations, the Government has the ngnt to make use of the proceeds of exported goods and to cut down, or even stop, importations. It is a short step from t present position to a capital levy on exP °if e the financial position of the Dominion is so desperate that resort has to be niado to “pegging” exchange rates and mobilising exported funds for Government use, what will the position be in 12 month, whether values of produce improve or from Customs obviously will.be seriously affected— probably to as great an extent as the estimated saving the Government is trying to effect in remitting funds to London to meet its obligations there if exchange is allowed to take its natural course. . The effect locally will be a shortage oi Government revenue involving increased taxation, while borrowing by the Government will bo utterly impossible in the Dominion, and not possible m London, until funds accumulate there. If accumulations do arise in London the Government here will need to borrow or commandeer them for transfer here, which will interfere with their use for tradeis requiring goods for importation to hie,. Zealand; as it must be borne in mind that, by the present regulations, the Government has the first call on funds in London and the final say whether they can be used for any other than governmental purposes. Snell a view must interest and influence importers more than exchange being subject to the laws oi supply and demand. That importers’ businesses would he affected by a widening of exchange rates ..oes without saying, but such increase m costs would come from natural causes, whereas the possibilities are now that costs can be seriously affected by unnatural restrictions. Granted that the community is ot more importance than the individual, the present proposal is not placing the buiden squarely on the community, hut on ceitain portions of it, which portions in the conditions existing need all the help obtainable for the benefit of the whole. The banks, viewing their own comparatively sound positions, cannot, and do not, know the disastrous state ot affairs actually existing and are not the best judges to be placed in entire charge ot what surplus funds shall be made available for purchases overseas, and what class of goods the moneys shall be used for. Obviously their leaning will be towards their own profitable accounts and in this regard one cannot help wondering whether there is not behind the present movement a desire by banks in controlling exchange. to block any exchange market outside themselves, which has undoubtedly existed since rates were raised. That'the banks have felt the effect ot traders selling goods in London and using the funds for purchase of their requirements there is well known, and they will probably find some difficulty in convincing the public as a whole that the present move is legitimately for the benefit of the community generally than for

theirs in controlling the handling of all funds, even to the extent of those over which, in ordinary circumstances, they had no interest whatever. Control of anything has been found by experience, both here and abroad, to be illegitimate and illusory. No one has made a success of a big control yet and no one raised more objection than the banks to attempts by farmers in, this country to interfere with the ol supply and demand, when they had the idea of controlling the prices of their produce. „ „ If there is a prospect that New Zealand may not be able to meet its obligations, the present interference is not going to enable us to continue to supply requirements. It may delay readjustment for some months, but it cannot do so for any appreciable length of time. Automatically a wide rate of exchange will encourage export and restrict nnports, and this must be the effect on Argentine finance, where the exchange has risen to practically 60 per cent, without any attempt by South American banks and Governments td “peg” the rate. Under the control that is being established here the Government will be forced to restrict importations unnaturally, regardless of its Customs revenue and perhaps regardless of legitimate requirements. One cannot come to any other conclusion than that the proper course is not to interfere, but, exercising all economy, to let events work themselves out naturally. Commandeering moneys as is indicated by the establishment of this exchange pool is surely a doubtful use ot trust funds even though it is the Government which is taking them.—-I am, etc., Fiat Justitia.