LONDON FUNDS

Poverty Bay Herald, Volume LXV, Issue 19808, 9 December 1938, Page 15

LONDON FUNDS

AUSTRALIA AND N.Z. TRENDS COMPARED RESULTS OF EXPANSION Some time ago it was suggested in these articles that the expansionist policy in New Zealand might be inconsistent with the maintenance oi juondon balances and exenang stability, writes professor D. B- P ianu m the ayuney Morning Herald. When the present Government assumed olhee m 1980 it held the view mat the exchange rate ought. to tenticed, and there was eomnduable pressure irom London lor a return towards parity with sttiluifcm New Zealand itseit the policy currency depreciation created acute controversy.

In 1931-32 the Government endeavoured to prevent depreciation; m 11)33 it reversed its policy and de liberate ly depreciated trie currency to the same level as Australia, 111 * a new Government 'held out illusory nones ot another change of policy, but immediately entered upon a programme ot public works, lncteusea Jamal services, guaranteed prices, a d Higher wages that necessitated a uu[her depreciation ot the currency unless export prices kept at, a high love .

Meanwhile the opponents of currency depreciation who had embuirassod the previous Government now began to adopt an attitude calculated io create the very situation they deplored— namely, low sterling balances and a higher rate of exchange.

By exporting capital for investment in Australia and elsewhere, and maintaining a constant five of criticism of the Government’s policy, doubt, were roused concerning the ultimate stability of the New Zealand pound. The result, was a very serious toss ot London funds.

London funds of the Reserve Bank and the trading banks fell nearly £20,000,000 from July, 1030, to .July 01 this year. The movement in expoit prices was not sufficient to accoun for this substantial loss of sterling assets. *

11, was, in fact, a flight of capital, and every country that has experienced such a movement kuows how difficult it is to allay fears ol' currency depreciation when such a niovemen takes place on a large scale.

Balance of Payments

Unfortunately, the prospects ot a rise in export prices in New Zealand are not favourable at present. For 1037-38/ export prices were 139, compared'with 167 in 1928-29, and _ the minimum depression level ol 80 in 1932-33, but the deficit in the balance of payments catised by a fall in export prices can not be greater than £5,000,000. A deficit of 'this order could easily be financed from surplus London funds were it not for the export of capital.

Even >at their level in July, London funds at £23,000,000 would be adequate to meet a deficit of this order Cor two years. One of the difficulties in the situation is that London lunds were abnormally high after the depression, and many people place emphasis upon the fall from this high point rather than on. the present level of London funds. Nevertheless, the position is vulnerable, and the Government may have to choose between pursuing its present policy and establishing some form of exchange control. London funds held by the Australian banicing system were relatively low in January, 1930. This was the result of unfavourable export prices at a time when economic recovery in Australia had increased imports. The rise in export prices in 1937 brought a considerable 'increase in London funds. Unfortunately, the export pi’ice level has fallen substantially below 'the 1937 level, and there has been some loss of London funds. But in the ease of Australia a heavier fall in export prices was accompanied by the inflow of capital for industrial development. If we consider the relative population and trade position of Australia and New Zealand we might accept, for purposes of comparison, a level of London funds for Australia from, three to four times as great as that for New Zealand. On this basis New Zealand funds would be adequate if we regard Australian funds as adequate. But in these matters the current movement: is more important than the level of sterling balances at any moment. A conflict of policy between the Government and a powerful section of business .might be more damaging to exchange Stability than a movement of export prices and the balance of payments on income account. This, at least, is the fundamental difference between the position of Australia and New Zealand at the moment.