FALL IN LONDON FUNDS

Southland Times, Issue 23648, 25 October 1938, Page 6

FALL IN LONDON FUNDS

CAUSE OF COMMENT IN LONDON EXCHANGE FLUCTUATIONS MENTIONED The drain on New Zealand’s London funds, which is a source of uneasiness in financial circles in the Dominion, has been the dominant note of comment in London since the return of the Government to office, says The New Zealand Herald. In the past few weeks the Reserve Bank of New Zealand’s sterling balances have fallen below £10,000,000 for the first time and, with the value of exports at a low level and the flow of imports still high, fears are entertained that a recovery is impossible without some arbitrary adjustment. The fall of funds in London is indicative of large overseas commitments on behalf of New Zealand, and, or, a movement of capital from these shores. Balances are built up in London by the sale of the country’s produce, by the raising of loans in Great Britain, and from interest and dividends accruing to New Zealand shareholders from British companies. Calls on the funds arise from importers to finance purchases of the goods they import from Great Brittain, from interest' payable in London on Government and local body loans, from the payment of interest and dividends to British shareholders in New Zealand companies, and for the repayment of maturing Government and local body debts. Total debt service requires about £10,000,000 annually. In addition, London funds are augmented by the expenditure of tourists visiting the Dominion from Britain, and similarly are depleted by New Zealanders travelling abroad.

The sterling balances held in London and the net overseas assets of the six trading banks at the end ( of September each year since the Reserve Bank came into operation are compared in the following table:— . Last Reserve Trading Banks’

It is important to remember that the amounts are in New Zealand currency. In terms of sterling, they would be approximately one-fifth less. The trading banks’ assets are not all held in London, but the greater proportion normally represents London funds. CHANGES IN THE RATE Before .1930 the supply and demand of New Zealand funds in London was reasonably balanced, and the New Zealand pound was on a parity with the British pound, or in other words, £lOO New Zealand bought £lOO London. When export prices declined in 1930 the reduction in the funds accruing in London caused the banks to raise the rate to £llO New Zealand equals £lOO sterling a movement calculated to discourage imports. Meantime, an unbalanced economy in Australia caused by a flight of capital from the Commonwealth, and an abnormal demand for funds by the various Governments in consequence of a cessation of borrowing, resulted in Australia raising the rate of exchange on London early in 1931 to £l3O Australia equals £lOO London, the rate falling later the same year to £125. The eventual result of this movement was a demand from New Zealand exporters that the New Zealand rate should be lifted and, finally, in January 1933, the rate of £125 New Zealand equals £lOO London was established to place the New Zealand primary producer on an equal footing with the Australian farmer. The effect of the change was to build up funds in London to a very high level, so that in August 1934, when the Reserve Bank took over exchange purchased by the Government under the scheme it acquired approximately £20,000,000 sterling. With the operation of the Reserve Bank, rates were stabilized on the basis of £125 selling and £124 buying equals £lOO sterling. This action had the effect of establishing confidence, and considerable sums of money were moved, .including the repatriation of large amounts which had been waiting for the rate to fall. The trading banks’ rates, which were raised at the end of last week to parity with those of the Reserve Bank, were originally fixed at £124 buying and £124 10/- selling. Some adjustments followed the inauguration of overseas air mails owing to the saving in time, but the £1 margin in the Reserve Bank’s rates was expressly provided to allow the trading banks to operate between those limits should they wish to accelerate or to discourage purchases of sterling from their customers from time to time, according to the state of their London funds. The chief complaint of the banks recently has been that they have been obliged to buy sterling from the Reserve Bank at £125 and sell to their customers at a loss of 10/- per cent.

Mon. Bank net overseas in Sterling assets Sept. (£N.Z.) (£N.Z.) 1934 24,501,000 15,766,000 1935 19,689,000 14,690,000 1936 16,836,000 . 17,193,000 1937 19,066,000 10,919,000 1938 9,118,000 6,190,000