THE EXCHANGE RATE

Otago Daily Times, Issue 22738, 26 November 1935, Page 8

THE EXCHANGE RATE

TO THE EDITOR.

Sib,— Speaking at Ashburton, the Prime Minister is reported to have stated that the Democrat Party's scheme of subsidies can be carried into effect only by a svstem- of taxation and borrowing that would impose a heavy burden on the community. He contrasted the disadvantages of their scheme with benefits accruing from the pegged exchange rate, the burden of which on the community he did not mention. Mr Forbes was wisely reticent in the matter, but when we remember that the £24,000,000 which the Government acquired from the trading banks under the Indemnity (Bank) Act in August, 1934, was handed over to the Reserve Bank, and that the banks held at the end of last September a sum exceeding £16,000,000, part of which has still to be liquidated, it may be suggested that the exchange operations will also represent a "burden on the community." How much of that £16,000,000 remains to be purchased from the banks is not known, but it would not be an exaggeration to state it as approximately £10.000,000. When the of the coming export season are visualised the position is portentious. Increased prices for our primary products are indicated, and as they rise our exchange liabilities will soar in correspondence. Before we are finally.free from the exchange octopus an outpouring of between £50,000,000 and £60,000,000 is a total that, I think, may be accepted. as a moderate estimate of taxation raised for this purpose. Importers are notoriously shy during inflationary periods, excluding little more than the past average absorption of credit funds in London. Mr Forbes carefully ignored a vital distinction when he failed to mention that subsidies can be withdrawn when prices reach profitable levels. The exchange, on the other hand, is to be our disturbing bedfellow for some time, and represents a definite menace to our financial stability. Paradoxically, a substantial rise in primary products, which should mean general prosperity to the country, will result in increasing the crushing burden of taxation. The country's obligations in regard to these funds is disturbing to future budgetary equilibrium, but probably the Coalition's experience in implementing taxation devices will be. sufficient to extricate it from any dilemma. I am sceptical regarding our balanced Budget. The accidental revenue from deceased estates and the profit from the sale of the banks' gold, together with the absence of any provision for exchange obligations respecting surplus funds held by the banks, do not permit an accurate estimate of the national finances. Too many fortuitous circumstances have assisted the revenues to justify an unquestioned acceptance of our apparent good fortune. —I am, etc., Free Exchange.