EXCHANGE & CURRENCY

Southland Times, Issue 19276, 21 June 1924, Page 6

EXCHANGE & CURRENCY

THE STATE NOTE ISSUE. AUSTRALIA AND NEW ZEALAND COMPARED. Discussing various aspects of the financial problems of to-day, Mr William Watson, acting-chairman of the Bank of New Zealand, yesterday touched on exchange and currency, the effects of the State Note Issue in Australia and the dangers of an Empire Note Currency. He declared that owing “to the fact that gold had ceased to function as currency and to the existing export and import conditions, the difficulties of the exchange position between London and New Zealand, and New Zealand and Australia, had become intensified. The present rate of 2 per cent, for purchasing sight drafts on London was unusually heavy for the Dominion, although light compared with the exchange burden borne by many countries —the Australian rate, for instance, was 17/6 per cent, higher. It was fortunate that the better prices now ruling for most lines of produce much more than counter, balanced the adverse exchange. “The transfer of surplus funds from London to Australia, where money is greatly needed to settle the adverse balance of our trade with the Commonwealth,” Mr Watson went on, “has of late been effected on extremely unfavourable terms to us, so that the purchase in New Zealand of exchange on London is by no means so profitable as some critics appear to think. The question of exchange is so interwoven with that of currency, and the two are so complicated, that those who have lately expressed impracticable views may perhaps be excused. “The highest authorities have stated that, in England, currencies are necessarily limited, and I have told you in my remarks on Note Circulation that the currency is here regulated to the necessities of the position, but in such a way as to avoid inflation. Had the suggestion for an Empire currency been adopted it is difficult to see how inflation could be locally controlled; this is but one of the objections to that measure. “While in New Zealand the exchange question alone presents difficulty, Australia has for some time past experienced even higher exchange rates than the Dominion and has also suffered from a shortage of currency. The note issue there is in the hands of the Commonwealth, being conducted by the Note Issue Department of the Commonwealth Bank under a special Board of Directors. The Note Board has recently decided not to make any further issues of notes even in exchange for an equivalent of sovereigns. It is understood that the reason for this is a belief, or fear, that such an increase in the Note issues would lead to inflation. A restriction of production, commerce and trade is the natural outcome. That the Board has adopted this policy in what it believes to be the best interests of the Commonwealth is not questioned, but the point is this:-- Have the members of the Board the information at their command to enable them to determine what amount of currency is required from time to time to satisfy the needs of commerce and production? Surely the Joint Stock Banks, with their intimate and detailed knowledge of financial conditions, should be the better judges. Hitherto the control of credit in Australia has been mainly in the hands of the banks, but the measure of control which they exercised has now, through the attitude adopted by the Note Board, virtually passed to the latter. “It is quite apparent from the quarterly banking returns that the cash holdings of the banks in Australia necessitate a policy of extreme restriction. The returns at December, 1920, show that the banks held 48 millions in coin, bullion and legal tender notes against 215 millions of deposits, whilst for the same quarter of 1923 they held 6 millions less of cash resources, although deposits had increased within the three years by 17 millions, and advances by 14 millions. These figures go to prove that the supply of ready money is insufficient, and, consequently, if Australia is to progress, it is evident that steps must be taken to increase the currency sufficiently to meet the legitimate requirements of the country. The banks possess the necessary funds for meeting the demands of their customers, but, unfortunately, a considerable portion of these funds is in London, and no means exist for transferring an adequate amount to Australia or otherwise making the money available at the latter point. It has been publicly stated that, as a result, a borrower would find it difficult, if not impossible, to obtain in the Commonwealth an overdraft of, say, £20,000. against gilt-edged securities worth £50,000. Another consequence of the shortage of currency is that the average rate of interest on overdrafts is higher than in New Zealand, despite the much heavier income tax paid by the banks in the Dominion. “A prominent bank director in Sydney, in discussing the position recently, publicly suggested that the Note Board should issue ten millions in notes in Australia to the banks in exchange for an equivalent cash payment in London, and it is not easy to understand why some arrangement of this

nature should not be effected. The legal restrictions binding the Note Issue Department are that one-fourth of the amount of notes issued and not redeemed shall be held in gold coin and bullion, and the Board may invest the remainder or any part thereof: (a) on deposit, with any bank, or (b) ‘in securities of the United Kingdom, or of the Commonwealth, or of a State; or (ci in Trade Bills of a currency of not more than one hundred and twenty days. Now, the balance-sheet of the Note Issue Department at December 31, 1923, showa that the notes issued and unredeemed were £52,182,093, and against them were held gold coin and bullion £24,882,157, debentures and other securities £25,216,356, and other assets £2,083,580. Since then £4,200,000 more notes have been issued to Pay debts of the Federal Government to the banks, but that amount will not nearly ‘ii C 5 t 0 bring al)out an equilibrium. The Board could legally issue against British securities even four times the amount sugby J be Sydney bank director. The fact is, that State issues of note® from their very nature tend to run to one extreme or other; either they are not elastic enough to meet the varying requirements of a country, or, in the hands of reckless Governments, become the instruments of inflation. If Australia abolished the State Issue and allowed the banks to issue their own notes, making the circulation legal tender and a first charge on assets, with the special security of one-third of the amount of issue to be held in gold and two-thirds in Government securities, the financial stringency would be ended. No note-holder could reasonably question the safety of his holding if thus safeguarded; and by taxation of the circulation, the State could derive as large a profit as it does under the present system. “This Dominion is very much interested to see a satisfactory solution of the difficulty, because stringent monetary conditions in Australia are quickly felt here. Considerable sums of Australian money have in the past been invested in New Zealand, and the remittance of these fundi helped in a measure to minimise the effect! of adverse trade balances between New Zealand and the Commonwealth, but now the shortage of money in Australia haa caused a cessation of such investments. The result is that the trade balance, to a considerable extent, has to be settled by remitting funds from New Zealand to London, and thence to Australia—this being not only a costly proceeding but somewhat difficult to arrange. How the Australian manufacturer who ships, in competition with the British exporter, to New Zealand suffers from this state of affairs may be gauged from the fact that in the matter of exchange he is handicapped to the extent of 3A per cent, as compared with the position in 1921. “Should Australia's exports in the next few years largely exceed the imports, and should its Government borrow extensively in London otherwise than for conversion purposes, the position, without provision of further currency, would become still more embarrassing. There has been lively controversy in the Commonwealth as to whether or not steps should be taken to increase the Note Circulation there. Opponents argue that extension would lead to inflation and consequent increase in the cost of living. It would seem, however, that this is not even good theory, much less practice, for the highest authorities on finance and banking in England have declared that there can be no inflation in a country where the currency is properly adjusted to its real needs, ’in New Zealand the banks see to this, and having both theory and practice to guide them, the currency question presents no difficulties here. It is worth mentioning that the notes in the notes in the hands of the public in Australia are less on a population basis than in New Zealand. Development of the country and extension of its trade are beneficial to the banks ,but inflation is not, and is therefore not encouraged.

“Can the same stability, combined with elasticity, be expected from a State Note Issue controlled by a political party? Our Australian brances, as well as the other banks and the public there, and to a certain extent here also, have felt the effects of the restrictions of the Commonwealth currency; while, on the other hand, ex amples are only too common in other coun tries of changes in Government leading tc excessive State Note Issues with all tbeii concomitant evils. Banks, more than the public, suffer from an excessive State Note Issue, for the public retain in their possession only as much cash as is needed for pocket money, the surplus being paid into the banks. Therein lies the danger of such an issue in the British Empire, the only remedy for which would appear to be that, failing repayment in gold by the State, the banks as Note-holders should have the right to demand British Government Securities of an equivalent market value in exchange for surplus notes. It would, of course, be no safeguard against an excessive issue if the State could redeem its notes in exchange for its own bonds.”