THE RATE OF EXCHANGE

Otago Daily Times, Issue 21598, 19 March 1932, Page 5

THE RATE OF EXCHANGE

PROFESSOR GREGORY’S VIEWS ENDORSED BY SIR OTTO NEIMEYER. (Per United Press Association.) WELLINGTON, March 18. The Secretary of the Treasury (Mr A, D. Park) has received from Sir Otto Niemeyer a personal opinion expressing complete agreement in all essential points with the views recently expressed by Professor Gregory on New Zealand financial questions and exchange. Sir Otto says there is a possibility, and some sign of a change in tendency of world’s, prices, which strongly suggests the inadvisability' of a hasty change of exchange policy at the present moment. Professor Gregory, an eminent, economist, who was associated with Sir Otto Niemeyer in the investigations made into the Australian Federal and State finances, and later came to Wellington in advance of Sir Otto Niemeyer as the guest of the Government, recently furnished to the National Bank of New Zealand an opinion on the question of advancing the rate of exchange, New Zealand on London. His attitude is made plain in the final sentence from his opinion as cabled out: “Even if it affects his (the farmer's) receipts more favourably than it affects his cuts unfavourably, the influence on the Government, on wages generally, and on the credit of New Zealand has also to be taken into serious consideration, as well as the danger that a movement of this kind, once initiated, may be difficult to check.”

Professor Gregory began by agreeing that since primary production in New Zealand is carried on for export there can be no question that the direct and shortrun effect of raising the premium on London money in New Zealand must be to increase the receipts accruing to the primary producer. How this immediate benefit to the primary producer means an eventual, and permanent improvement in his position is another matter, for, even if it can be shown that part of the increased receipts can be permanently retained by the farmers, this does not dispose of the matter finally, for other aspects must also be taken into account.

Professor Gregory then went on to show how the wholesale prices in the United Kingdom have begun to rise, and can be expected to continue rising. He remarks that under the combined influence of the tariff and the suspension of the gold standard, to the extent that sterling prices rise, he holds that the position of the New Zealand primary producer would improve, even without a change in the exchange rate. On the wholesale price levels index of both Great Britain and New Zealand the margin is appreciably narrowed, and he suggests that it would appear not unreasonable to defer action in the immediate future in order to establish more clearly than is possible at the moment the trend of British prices. Caution in this respect is especially necessary in view of the fact that a rise in the premium exchange rate is bound in any case to affect the level of import prices. Pursuing in detail the many issues involved, Professor Gregory makes the point that while there might be a fall in wages they would eventually rise, as from a number of considerations there must be a rise in price levels. He says the Customs revenue would fall also, and that New Zealand securities would decline in value, making conversion or new loans either impossible or extremely expensive to finance. If the exchange rate is allowed to rise further it must be recognised that it will ultimately prove impossible to revert to the old parity between sterling and New Zealand money, for if the rise in sterling lags behind the movement in exchange it would be impossible to regain parity with the British pound except by means of a drastic deflation of New Zealand prices. If, on the other hand, British prices did not advance after the exchange rate had been allowed to advance an equally difficult problem presented itself, for unless such exchange rates was at once forced down the primary producers’ receipts must expand and all the conditions for a sharp rise in land values and local over-expan-sion would be created. He directs attention to New Zealand's trade balance for 11 months of 1931, which shows a cumulative balance in favour of the Dominion of £7,000,000. That was a fact that robbed of a good deal of its force the argument that the present rate of exchange seriously overvalued the New Zealand pound.