HIGH EXCHANGE

Poverty Bay Herald, Volume LX, Issue 18207, 30 September 1933, Page 2

HIGH EXCHANGE

CRITICISM OF POLICY ‘•GETTING OUT OF, HAND” the indemnity liability A- critical statement of views on the Government’a exchange policy, prepared by the importers' section committee of the Auckland Chambei of Commerce, has been adopted by the council of the chamber, and it ha. been decided to send copies oi the statement to all members of iailm

ment. . The statement referred to the view expressed recently by the Ihmster oi Finance, the let. Hon. G. toaces, that the Government s policy m > .-reusing exchange was entitled to general suppori, even from those who disagreed with it. H added that criticism from those who opposed the policy had been most restrained, and thSt although the .Minister might luu v l,oMi expected to support his appeal with relevant facts and figures justilyj, lf r~ the Government ’s policy, He hail note done so. H appeared that the exchange experiment was last getting out of hand, and that Mi. Coates apnea! was born rather of concern at the difficult position in which the Government now found itself.

SURPLUS LONDON FUNDS. Under the Banks Indemnity (Exchange) Act, 1933, said the -statement, Ike Government undertook to purchase from the trading banks any surplus of London funds which had been purchased by the banks above the rate ruling at January 20, 10 per cent., and up to 25. per cent. In the financial Statement for the quarter ended June 30 last, it was disclosed that the Government paid over to the trading banks for surplus London Hinds taken over. during the June quarter Af-lmPOn In his review of the Financial fetatemont for the June quarter, the Minister of Finance stated that the whole of the London credits purchased did not represent surplus, for out of it had to be taken approximately £7.500,000 required to meet interest and other normal requirements in London. It would have been necessary to purchase exchange to this extent in any case. The net suiplus to June 30 was thus £1,715,000. The amount of London credits taken over during the quarter was large, but it should not bo taken as an index oi the amount likely to bo purchased during the balance of the financial year, for June was really the end of the export season.

< ' SURPLUS NE ARER £7,000,000. ’ ■’ “The Minister of Finance,” continued the statement, “apparently was so concerned over the enormous amount of London funds which had accumulate I during the June quarter tl at he offset against; this amount the whole ol tho Government's requirements foi interest and other normal requirements for the full financial j ear, and by this method reduced the surplus of the accumulated London funds for the June quarter to £1,715,000. Had the Government set against the London funds that had accumulated in the June quarter only the interest for one quarter, the resultant accumulation of London funds left on He Government’s hands would a "proximate more closely to £7,000,000 than u £1,715,000. “Treasury bills issued under the Banks Indemnity (Exchange) Act and outstandine on June 30 last amount to £9,821,250 Against this amount £1.000.000 is held irT the New Zealand Government Exchange Indemnity Account, London. It" will "be apparent that the enormous obligations thrown upon the banks to finance the Government’s exchange policy must restrict the. credit available through the normal channels oi the commercial community. Admittedly credit undei the Government’s exchange policy is being injected into the commercial system by means of increased monetary returns to the primary producer, but the feeding is artificial, ami the credit injected is "failinsr to lubricate or service many vital orgaius of the commercial system, with the result that they are languishing for want of nourishment. There is a grave danger that if the normal methods of feeding credit to the commercial community are not soon resumed, the whole commercial system may be endangered. ISSUE OF TREASURY BILLS

Reviewin'; the statutory authority for the issue of Treasury bills, tlie statement points out that the Act of 192 b provided that the amount of bills outstanding should not exceed £4,OCO,GC[). Ju 1931 the. amount was amended to £6,000,003. Later in the same year the following was substituted: —“Onethird of the estimated expenditure for the then current financial year.” By the. Finance Act, 1932-33, No. 2, ‘‘onethird” was amended to “oner-half.” “The amount of Treasury bills outstanding at June 50 uuder the Banks Indemnity (Exchange)' Act was £9,821,£50,” continued the statement. “It will be noted Horn the Act that the Government has power to borrow from the banks or other persons money up to one-! half of the estimated expenditure for the current financial year. Surely this provision is altogether too loose? It would he much more reasonable if the Government took power to issue Treasury hills up to one-half of the estimated revenue for the then current financial year. Under the present authority a> spendthrift, Government could continue issuing Treasury bills ad infinitum, in effect, the Government has been given a blank cheque which permits of unlimited inflation. This apparent flaw in the Act requires correction. CORRECTIVE MEASURES URGED “So as to camouflage the huge accumulation of London funds that the Government was obliged to take over in the June quarter, Mr. Coates disingenuously charges against the surplus London funds that accrued in the first quarter, the Government’s London requirements for the whole of the financial year, iri the hope that in the September quarter imports ,vill exceed exports and thus to some extent redeem the position. The hope) however, appears to he a forlorn one. particularly when importers know that the present, exchange position is artificial ami likely to prove beyond the capacity of the Government to sustain. Mr. Coates’ hope, is the more forlorn as, under the Ottawa agreement, this country is committed to reduce its tariff. /As it will he March before the reduction can be given effect to, imports ju the meantime will naturally be reduced to a minimum.

“As Mr. Coates suggested, stocks held may he lower, but the Minister should know that demand is also at a particularly low ebb, and, in fact, almost entirely confined to essentials. Furthermore, as higher prices are now being received for our exportable products, and the new export season has commenced, the accumulation of London funds in the three remaining quarters of the financial year promises to be even higher than for the first quarter. As

the year progresses, the position w'fll become even mors acute. “Unless immediate measures are taklen to correct the position of the accurrmlated funds in London, the buiTJen thrown upon the banks of financing the Government’s high exchange policy will become intolerable. In the meant ime, the resultant contraction of credit normally available to the commercial! community is having a serious effect <cn unemployment and business gener p ajly.”