N.Z. CURRENCY

Southland Times, Issue 21650, 11 March 1932, Page 5

N.Z. CURRENCY

FUTURE DISCUSSED QUESTION OF WAGE REVISION 10 PER CENT REDUCTION INDICATED The question of the future relationship of the New Zealand currency with sterling is dealt with in Section IX. of the economists’ report, and is followed by a section on wages. The committee states that to bring wagee down in conformity with the fall in real income a reduction of a further 10 per cent, would be necessary. SECTION IX.—THE FUTURE OF NEW ZEALAND CURRENCY The question of the future relationship of the New Zealand currency with sterling is a matter for consideration. It has always been recognized as a normal function of government to prescribe by law the basis of the unit of currency, and in fact every currency is so established. Thus under the gold standard a British pound-note was convertible into a sovereign containing about 123.27 grains of standard gold. The New Zealand.pound-note was convertible into a British pound-note and thus indirectly into a sovereign of the same value. As long as the value of the British currency remained fairly stable, this arrangement had great merits, because it gave stability to New Zealand exchange, and sustained an internal price level free from mujor fluctuations. At a time when British prices have been subject to a violent- fall it is legitimate for New Zealand to consider whether parity with sterling should be restored, and, if so, when, though naturally no final decision on this question would be made without consultation with Great Britain. A return to parity would at present involve the Dominion in a general deflation of its internal wholesale-price level to at least the level of British wholesale prices. In Section 111. (paragraph 22) reasons have been given for the belief, that, with a reduced amount of overseas borrowing, the New Zealand wholesale price level might fall even further if parity of exchange is to become again the natural as well as the official rate. The Future Legal Basis. In Section VIII. the general economic effects of different rates of exchange with sterling were considered. From the analysis given in that section it may reasonably be assumed that under present conditions a rate above parity has net economic advantages. If this rate were fixed at, say, 10 per cent., the question arises whether it should be revised downwards gradually until parity is restored, whether it should be raised, or whether the rate should be stabilized at this level. It is impossible to come to a definite conclusion at present upon these alternatives. The influences to bo considered in arriving at an ultimate decision may, however, be considered. It is the purpose of this section to draw attention to these influences.

The heavy fail in export prices is the main reason for concluding that a rate above parity has economic advantages. It may therefore be assumed that the future of export prices in relation to internal costs will determine the advantage or disadvantage to be derived from maintaining a rate parity with sterling. At the present 10 per rent, rate export prices are 40 per cent, below the 1929 level. Costs, whether measured by the index number of farm costa, wholesale prices, or the coot of living, have fallen about 10 per cent. Let us take an increase in the rate, say, 25 per cent., purely for the purpose of illustration. This rate would raise export prices in the proportion of 125 to 110. That is from 60 to 80. They would still be much below crests. If, however, the adjustments in fixed ’charges and wages (see Sections X. and XI.) and the fall in import prices brought costs down from 90 to 80, the disparity would be reduced to 18 per cent. It would not be necessary to bridge the whole of this gap because exporters must expect to sutler a loss of real income proportionate to the loss suffered by the community as a whole. In these circumstances a rise of 15 per cent, in export prices might be sufficient to restore a balanced economic structure. If this improvement in export prices did not take place, further reductions in money costs or an increase in the rate of exchange, or some movement in both these directions, would be necessary to restore economic equilibrium. If international prices rose by substantially more than 15 per cent., it would be possible to reduce the exchange rate without causing internal disturbance, unless world prices, and with them New Zealand export prices, fluctuated more violently than at present seems possible, the variations in the exchange rate around the assumed rate would in these circumstances bo slight. Temporary Stability. The question arises whether such a rate could be maintained. Bankers are dealers in exchange, and they would naturally be averse froni accumulating funds in London if. they thought a fall in the exchange rate was inevitable. Hence the normal seasonal accumulation of funds in London during the export season would tend to drive the rate down, though there might be an upward pressure later when the ex port season was over. These seasonal flue tuatrons in London credits did not exert a disturbing influence upon the exchange rate before the depression, because it was the practice to stability with sterling. In these circumstances an accumulation of funds in London did not cause any difficulties. The sterling holdings of the banks had a relatively stable value in New Zealand currency, and could be sold off later as the demand for London funds increased for imports, interest payments, or other financial transactions. There was thus a stabilizing influence. This is absent when the exchange is substantially away from parity and there is a general presumption that it will return to parity. If a rise in the rate occurred, a temporary accumulation of funds in London would be likely, but with exports valued at £32 m. sterling and Government and local-body demands as low as £8.5 m. (the minimum that would be required, even though the floating debt can be funded in London), imports would have to settle at £23.5 m. to balance funds. Accumulation would then occur only to the extent that imports fell below the level or other loans were raised. Insofar as accumulation took place, it would be reflected in rising bank deposits and higher spending power in New Zealand. This in turn would lead to greater trade activity and more imports, payments for which woukl diminish funds in London. In these circumstances an easy credit policy in New Zealand might stimulate this process. Any temporary accumulation of funds in London might be used for loan repayments in London or alternatively for the transfer to New Zealand of debts held overseas. These operations would be required only during a transition period, and the cost to the Government would be slight. The practical difficulties in the way of such operations emphasize the need for a central bank. Stabilizing the Rate. When stabilization has been achieved, such transactions would no longer be necessary. If it were decided that a permanent rate of 20 per cent, above sterling were desirable, .it would be sufficient to fix the value of the New Zealand unit of currency at an exchange of 1.2 New Zealand pounds equivalent to 1 British pound. The normal control of exchange would then operate, because banks would- know that their funds in London . would retain a fixed value in terms of. New Zealand currency. Such an arrangement, is a proper exercise of the functions of Government. Before it is necessary to take any such step in New Zealand, Great Britain will probably have stabilized her own currency at a new parity with gold. In-that event if New Zealand should find it economically beneficial to fix

her currency at a rate above sterling, she would then merely be following the example set by Great Britain in changing from her parity with gold. The whole question of exchange and currency is one that doubtless will be discussed at the Imperial Conference. SECTION TEN. — FIXED CHANGES, INTEREST AND KENT In a period of rapid price changes interest and rents fixed under contracts lag far behind other price movements. Though the lender or the lessor suffers a loss of real income during rising prices, the lower’’relative burden of fixed charges on the community increases profit margins and promotes general economic prosperity. Indeed the rigidity of fixed charges is a contributory cause of the rapid upward swing of business conditions during a period of rising prices. It would probably promote economic stability if fixed charges could be made subject to periodical adjustment in accordance with price-movements. During periods of rising prices profit margins would expand less and there would be a less powerful stimulus to overtrading. On the other hand in a period of falling prices the reduction in fixed charges would diminish losses in enterprise and thus mitigate the severity of depression. f Fixed Charges and National Income. Unfortunately, fixed charges are still expressed in terms of a fixed amount of money, and this fixity is an obstacle to rapid recovery in a period of acute depression like the present. Interest on the public debt, interest on mortgages, bank deposit, savings bank and other deposit interest, dividends on preference shares, rents and other fixed money claims—all these become an increasing percentage of a declining national income. The burden of these charges tend to keep up costs in industry, increase the share of the national income going to the recipients of fixed money claims, and thus reduce the real income of wage-earners and salaried workers in employment, and generally increase the degree of the adjustment to be made by other sections of the community. We have estimated the national income to have declined from £l5O m. in 1929 to £llO m. at present. The decline is still in operation, and with a 10 per cent, exchange it may fall as low as £9O in. unless export prices rise or production increases. Should exchange be raised to, say, 30 per cent, the income would tend to settle ultimately at about £lO5 m. At 40 per .cent, it would be approximately £ll2 m. Whatever the rate, it is clear that a community cannot pay the same amount in fixed money charges when its income has declined so heavily without imposing an intolerable burden upon debtors. Adjustments are, of course, being made. Interest and rents are not being paid in full over the whole field of industry because at present, prices industry as a whole cannot afford to pay the fixed amounts. With regard to the national debt, the internal interest and debt-reduction charges amount to approximately £9 m. This was 6 per cent, of the national income in 1929. It is now over 8 per cent., and will rise towards 10 per cent, as national income fails towards £9O m. In these circumstances some adjustment in interest on the internal debt, and on interest generally, is inevitable. What could be paid without strain at the higher level of prices now becomes such a burden on industry as to reduce terprise and retard economic recovery, bee also Section XI. Real Income from Fixed Charges. Another aspect of the situation should be mentioned. Since 1929 the cost of living has fallen by 11 per cent. It was comparatively stable over the whole post-war period from 1920 to 1930. The fall in world prices and the economic adjustments to be made in New Zealand point to a furtner substantial fall in the cost of living in New Zealand. In these circumstances an adjustment of interest, whether by a special duty, a special income-tax, or a reduction in interest rates, would not impose undue hardship upon the lender. As the cost of living falls a given sum from interest payments represents more and more purchasing power. In other words, the real income of the recipient is increasing. Thus at present a reduction of interest of the order of 11 per cent., apart from the effects of the special taxation of interest, would be merely an adjustment to the fall in the cost of living. It would not reduce the real income of the recipient of interest. But some interest is not being paid and the total income from interest is lower now than it was in 1929. Hence the bondholder and the mortgagee are adversely affected by a fall in national income, though the net effect upon them may be less serious than upon other sections of the community. Their welfare will be best safeguarded by the restoration of sound trading-conditions. This necessitates a reduction in all costs. It is both socially equitable and economically sound that the recipient of interest should make a contribution towards the reduction in costs and bear a due proportion of the loss of national income. Extension of Mortgagors Relief Act. For these reasons a reduction in fixed money claims would have beneficial effects.. Provision is now made under the Mortgagors belief Act for a downward revision in certan conditions of mortgage interest and principal. An extension of this principle to all fixed payments under private contract would assist in the reduction of costs aid the more equitable spreading of the lost of national income. The adjustments in other incomes required for restoring Bidget. equilibrium and maintaining industrial output are serious. The exemption of my income element from the general public lolicy would raise the objection that a particular class of income was receiving specially favourable treatment. Any general adjustrient in private interest should be allinclusi’c, covering interest on all debts against which chattels have been pledged and ilterest upon goods'sold under the time-piyment system, as well as interest on all mortgages, urban and rural. If tie borrower who is unable to secure relief from the lender after recourse to an Adjustment Commission then has the right, to approach a tribunal, the adjustment could proceed on a sound constitutional >asis. It would then be open to the lenderto show why a reduction in interest or other fixed charges was inequitable to him, and » convince the Court that no reductirn should be made. We deal with the problon of interests on deposits, and advances of banking and other institutions in Seition XIV. Interest on the internal debt of the Governmsnt and local bodies is considered in Sectims XII and XIII. Any revision of fixed charges should be confined to internal interest pending an all-round adjustment of eonomic conditions to the new situation. It is the responsibility of the people of the Dominion to meet the position by a common sacrifice among themselves. We draw atteition to the fact that the fall of 40 per tent, in export prices has increased the burcbn of external payments by two-thirds. Some relief has already been granted throigh the Hoover moratorium. If this be mide permanent, the money burden of the p’esent external-debt charge will be reduced 1 by nearly 15 per cent. Rents. The same arguements apply to rents as to interest. Indeed, a reduction of interest on mortgages offers a suitable basis for rent-teduction. According to the Government Statistician’s index number for rent, in twenty-five towns in the Dominion the fall ii rent from 1929 to November, 1931, has teen approximately 6 per cent. Thus, the Recipient of rent, wherever it is paid in full,(is receiving a greater real income now that he was in 1929. Unless a rapid downwail revision of rents occurs, the reduction in wages will fall with special severity upett wage and salary earners, and costs in commercial and retail businesses will reman high. It is important that these costs be reduced, and it is equally important tha! the wage-earner should be placed in a poslion where he can take a lower money wap without making a greater sacrifice than the rest of the community. Hence the else for revising rents is not less strong than the case for revising interest. In any legisltion it would be advisable to treat rents on a uniform basis with interest, ,

Such a revision of fixed money contracts, even though made from the paramount consideration of the general economic welfare, might raise important questions concerning contract. In normal times the community’ would not be justified in passing legislation involving a capricious interference with contract. Conditions, however, today are far from normal, and the revision of fixed money payments is a reasonable measure of further economic readjustment. Moreover, contracts are expressed in terms of money, and money itself has a variable value. To-day its value in New Zealand, according to the movements in the cost of living, is 12.5 per cent, greater than in 1929—that is, a fixed amount of money will purchase 12.5 per cent, more goods in general than in 1929. Hence the real terms of a contract, when brought into relation with these new conditions, would not be modified in terms of purchasing power to the extent that may appear at first sight. A final question arises regarding the revision of contracts in fixed money terms. What rate should be applied in making a revision ? If parity of exchange is restored, the export price level will under present conditions, be 45 per cent, below the 1929 level. Farm-costs as a whole have fallen by approximately 10 per cent. There would thus be a wide gap between export prices and farm-costs. This gap would be narrowed by a higher exchange-rate, or some other process that transfers real income to the farmers. Reasons have been given in Section VHI for stating that a higher rate of exchange will bring but a slight increase in farm-costs in the immediate future. With a corresponding fall in import prices these additional costs will be reduced. Thus the gap between farm-costs and export prices would be narrowed by substantially the whole amount of the rise in exchange. This should be considered in relation to Sections XI and XII. A reduction of 20 per cent, in fixed money claims would make a substantial contribution towards bridging the gap between costs and prices. SECTION XI.—THE REVISION OF WAGES It was shown in Section 111 that the community had incurred a loss of real income of the order of from 10 to 15 per cent. This loss must be spread throughout the community if sound economic conditions are to be restored. Hence it is necessary to consider what revision must take place in wages. Tire argument of Section X applies just as strongly to wages as it does to fixed money charges. It need not be repeated here. According to the official index number, money wages were high during the period of prosperity, with a slight tendency to rise from 1923 to 1930, though when at their peak in 1930 real wages were only 6.6 per cent, higher than in 1914. From 1929 to September 1931, money wages have fallen by 11.5 per cent, compared with a fail in the cost-of-living index of 11 per cent. Thus, apart from the effect of the special unemployment levy on wages, real wages for workers in full employment are approximately the same as in 1929 despite the adjustment in money wages made by the Arbitration Court in 1931. To bring wages down in conformity with the fall in real income a reduction of a further 10 per cent, would be necessary. The necessity for any subsequent adjustment could best be judged by the general progress of economic recovery and the reduction in unemployment. Wages and Spending-power. An objection frequently made to a reduction in wages is that it decreases the spending-power of the people and thus intensifies the depression. This argument may have some force during the period of readjustment, but it cannot be true in the long-run. Indeed, it may be shown that it is a fallacy. The spending-power of the people as a whole depends upon the moneyvalue of the national income. If a reduction in wages helps to restore national income, it must ultimately increase real spending-power. In the present circumstances of New Zealand, national income, both money and real has fallen, and the former level of wages cannot he sustained for the whole people. Some will remain permanently out of employment unless costs of production can be brought down sufficiently to expand the margin of production and reemploy workers at present displaced by the depression. The fall in wages must be considered along with the reduction in other incomes and in the cost of living. Moreover, the wage-level bears a close relationship to unemployment. Tile maintenance of wages at uneconomic levels increase unemployment. Any increase in unemployment throws additional weight upon the Budget for unemployment relief. In the existing financial position it is important to avoid any increases in public expenditure if a sound Budget position is to be reached. It is therefore inevitable that a fall in wages will take place. At the same time it is desirable to consider whether undue restrictions on industry cannot be removed in order that costs of production may be lowered. In some cases working-conditions exert a more powerful influence in keeping up costs than does the level of money wages. At a time when all sections of the community are revising standards that were economically possible only in the period of high export prices and heavy overseas borrowing, a revision of regulations governing workingconditions in industry is appropriate. It is not suggested that free competition without any intermediary regulating authority should be restored. What is required is a relaxation of the rigid conditions that the community could afford in the days of prosperity, but cannot afford now. Reason For Fall in Wages. It may be appropriate here to restate briefly the reasons why a reduction in real wages in New Zealand is inevitable. Export prices have fallen much more than import prices, and the same quantity of exports will purchase a substantially lower quantity of imports. Overseas borrowing is declining and will continue to do so. Flic real income of a community from the point of view of the consumer is the goods and services available for consumption. These goods and services are made up of home-product-ion less exports plus imports. The volume of imports has fallen substantially, and for the present home-production in factories and other non-farm products has declined. The latter may be restored, but the former cannot until import prices fall relatively to export prices. Hence the community has less real income. W’ith the fall in internal prices the reduction of money income is much greater. It has been estimated at £4O m. at present, and the decline is still going on. In these circumstances it is clear tjiat a decline in wages both money' and real is inevitable at least for a time.