The Southland Times. PUBLISHED EVERY MORNING. Luceo Non Uro, MONDAY, JANUARY 18, 1932. PROBLEMS OF EXCHANGE

Southland Times, Issue 21605, 18 January 1932, Page 4

The Southland Times. PUBLISHED EVERY MORNING. Luceo Non Uro, MONDAY, JANUARY 18, 1932. PROBLEMS OF EXCHANGE

Although many ingenious attempts have been made to explain lucidly and simply the system of exchange rates, to a great many people the subject appears almost as involved and elusive as the differential calculus. Nevertheless the exchanges have been so prominently before the public in the last few weeks that at least a superficial knowledge of the subject is desirable. It will be readily understood even by the layman that, if the bank rate for the exchange of money between New Zealand and London is £lO, then for every £lOO to be paid in London £llO has to be found in New Zealand. In other words borrowers in New Zealand remitting interest or repaying capital would have to add ten per cent, to the amount they require to send to London, as would importers who are paying for the goods they have purchased. On the other

hand the primary producers of the Dominion would, at the rate above mentioned, receive a premium of ten per cent, on the wool, frozen meat, dairy produce, fruit and honey which was exported to Great Britain. To understand this is by no means to have grasped the basic problems of the exchange question, but it is sufficient to bring enlightenment on the attitude of the farmers of New Zealand regarding the credits pool and its effect on the exchange rate. The institution of the credits pool did not have as its primary object the fixation of the exchange rate at a low level. Through the closing of the London market to the Dominion the Government was forced to find internally this year the sum of £12,000,000 to meet requirements. To be assured of securing this sum was the Government’s first consideration; hut clearly, since the money had to be found at this end and since every £1 increase in the exchange rate meant the raising of an additional £120,000, the exchange question was most seriously involved. The Government approached the banks who after a conference announced that they would meet requirements provided exchange were put through them. Mr Forbes in replying to the deputation from the primary industries which waited on him last week made it clear that it was still open to the banks to fix the rate of exchange as in the past, but he also added that the banks considered that 10 per cent, was the correct rate. That is where the shoe pinches the primary producer. When the London lending market was closed to New Zealand, farmers naturally expected to see an alteration in the exchange rate which would be highly favourable to them. In the opinion of Mr W. D. Hunt and other producers’ representatives on the deputation the rate would have gone to 30 per cent, if complete freedom had been allowed to exchange. This would represent a bonus of close on £10,000,000 to primary producing interests. It is small wonder, therefore, that the credits pool has not found favour with the farmers, though they have emphasized the fact that they are heartily in accord with the Government’s efforts to meet all its obligations. Tn the course of his remarks to the Prime Minister Mr W. D. Hunt quoted from a recent article by Professor D. B. Copland who on the exchange question stated: —

A low exchange rate pegged down by the concerted action of the banks and the Government certainly keeps down the money cost of making interest, payments and of importing, but at whose expense? Clearly at the expense of the exporter whose income is kept down to the level of the overseas price of his exports. Such a pegged rate of exchange is, therefore, a special tax upon the exporter in order that the Government may keep down its cost of paying interest and that importers may obtain overseas goods at relatively low prices. The exporter bears an undue burden of the loss of national revenue. That loss was brought about by conditions over which he had no control. The added costs of importing and of paying interest overseas incidental to a high exchange falls on the whole community. This part of the loss to export producers is spread widely over all other producers.

But there is certainly another side to the question, for a high rate of exchange must have injurious effects in a number of directions. Import prices would be higher, interest charges would be higher and it might be found necessary to impose higher taxation to counteract a falling Customs revenue. The views of the primary producers on the one hand and the banks and importers on the other are naturally divergent as regards exchange rates. Perhaps the conference which has been suggested between these interests will elucidate much which lias not been made clear regarding the extent of the restrictions on exchange rates, even if it does not result in the bonus which fanners are anxious to receive through a substantial rise in the rate.