EXCHANGE POLICY

Otago Daily Times, Issue 22326, 28 July 1934, Page 10

EXCHANGE POLICY

TO THE EDITOR. Sib, — In an attempt to defend the New Zealand exchange policy. Professor Tocker, of Christchurch, endeavours to call to his aid the functioning of the gold standard and the abolition of the principle that the supply and demand of currency, like any other commodity, affects its price, and draws comparisons between London funds in 1920 and the accumulated London funds of to-day. The professor could not have drawn the attention of the people to three more important points to denounce definitely the policy which he attempts to defend. His suggestion that a large gold holding is evidence of a sound monetary system is ridiculous in the extreme. No monetary authority of any note would accept this as correct. It would be just as ridiculous to say an extremely high blood pressure was a sign of good health. The gold standard, if permitted—and it is very important that it should be permitted —to function properly without the interference of politics, is like a gyroscope compass of_ a vessel; it checks her deviation and brings her back on to the proper course. Professor Tocker’s denial that the over-abundance of accumulated London funds would bring down the value of those funds would be on all fours with a denial that the supply and demand of a commodity has no bearing upon its price, and such a suggestion, coming from a professor of economics, is somewhat astonishing. London funds to-day, it allowed to go free, are worth less than 1 per cent., and the proof of this is that the Government is not getting more than 1 per cent, for them. Professor Tocker then tries to draw some aid in referring to the London funds held in 1920, and I think 1 am right in saying these funds never exceeded £23,000,000. He seems to forget, however, that for five years prior to 1920 imports from Great Britain were imposr sible, while exports from New Zealand were rushed forward on every available vessel. Ships were leaving all the ports of New Zealand laden to the Plimsol mark with most valuable cargoes of food for the Allied Powers. The sale of this food, along with the flotation of war loans in London, was responsible for the accumulation of these London funds. Professor Tocker tells us these funds disappeared within a year, and that their disappearance was no embarrassment at all to New Zealand. Perhaps he was not in New Zealand during the period of 1921-2, otherwise he could not have forgotten the awful crisis which' so suddenly struck this country, driving ninny excellent farmers off the land and bringing about a state of bankruptcy to some of our leading commercial Houses. This crisis was also caused by the interference of the New Zealand Government witli London funds. It is one of the saddest stories of New Zenlands monetary history, and her difficulties then were due, not to a deliberate policy of misbehaviour on the part of the Government, but to ignorance as to the con--1 sequences of permitting those funds to j be lent in London while they were so urgently needed in New Zealand. It Is too long a story to go into at this stage, but the effect of it is reflected in the balance sheet of the Bank of New Zealand at the end of 1922-3. It was this crisis which drew the attention of students of monetary affairs to the necessity of the establishment of a Central Reserve Bank in New Zealand. If New Zealand had had a Reserve Bank at that date under the guidance of its able Governor, his knowledge of international finance would have saved this country a heap of trouble. Professor Tocker next tells ns that the New Zealand exchniige policy has a great advantage over the gold standard, because, he says, the London funds are earning assets. Yes, he is quite right in this. They do earn the large sum of ? per cent, to 1 per cent, on £24,000,000, but they also earn liabilities of 5 per cent, in New Zealand, making a loss to the Dominion of 4 per cent to ii per cent, on this huge sum of money. Professor Tocker then tells us that the greater the amount of London funds held by New Zealand the greater will he their earning capacity. Quite so, and the greater will be their liabilities in New Zealand by 4 per cent. loss. It is well to remember that Professor Tocker was one of the professors who urged the exchange inflation upon New Zealand. He is also one of the same band of economists who have condemned the Douglas credit theory, and, while 1 myself do not see eye to eye with Douglasisni, it would be difficult for Professor Tocker, or any of his brother professors, to draw a distinction between his exchange inflation policy and Douglas creditism. He lias, I believe, changed his opinion on the , question of a Reserve Bank in New Zealand since his visit to London, and we hope that ns time goes on he will change his views on the fallacy of exchange in- , (lation.—l am, etc.. J. lIISLOP. Auckland. July 25. , In the article to which the above letter refers Professor Tocker said that If under a gold standard a large gold holding was evidence of soundness in the monetary system, then under New Zealand's standard the greater the amount of London funds held, the sounder was the basis of onr i system. The opinion had been widely held that a large accumulation of funds , in London would force the reduction of ( the exchange rate, and It had been said that, given another favourable export season and a further accumulation of ' sterling, the rate must be lowered. At ; the present time the surplus funds accu- 1 mulated by the Government in London i

were said to exceed £20,000,000. In 1920 the Bank of New Zealand alone held more than £26,000,000 in London and suffered no embarrassment. The following year most of It had been used. Under the exchange standard operated by New Zealand the accumulation of sterling funds meant exactly the same thing as the accumulation of gold under a gold standard. In the case of. New Zealand, a very favourable balance of overseas payments had led to an accumulation of bank assets abroad, balanced by an expansion of liabilities (mainly deposits) and a contraction of advances assets In the form of advances at home. But New Zealand had one Important advantage over the gold standard countries. Their gold was not an earning asset; New Zealand’s sterling funds were earning assets. They must be kept in " liquid ” form, (or they might have to be realised at any time, and, at present London rates, their earning power was low. But they were Invested In the London money market, and the greater they became the greater was their earning power, and the larger the reserves held against bank liabilities In New Zealand.