FINANCE AND EXCHANGE

Taranaki Daily News, 23 March 1932, Page 16

FINANCE AND EXCHANGE

THE FARMERS’ VIEWPOINT ECONOMISTS’ DIFFERING IDEAS. EFFECT OF CURRENCY CHANGE'S. The question of freedom of exchange was discussed at some length on Monday nio’lit in an address to farmers at Normanby by Mr. G. A. Duncan, secretary of the Hawera Dairy Company. The questions of international exchange and the money system had. been very'thoroughly discussed, said Mr. Duncan, an outstanding feature having been the sharp difference of opinion between the various economic schools. There was general agreement that the forces operating would eventually bring about commercial stability, but there .was much doubt as to whether the stabilisation process could be assisted, by Government action calculated to re-establish internal economic relationships and more speedily bring about a return to prosperity. Those brought up in the old pre-war school were ehy of artificial attempts to make the community prosperous, believing that juggling with, the rate of exchange and the law of supply and demand as affecting money and other commodities was. a “get rich quick” system doomed to failure because it was fundamentally unsound. The new school believed that the world’s economic troubles, being caused by a breakdown in the financial system and method of adjustment of various community interests, eould best be met by radical changes in finance, including the adjustment of internal relationships by the fixing of the exchange rate m accordance with a standard price index figure, wfiich would be varied from time to time. SYSTEM BEFORE WAR. During the twenty years prior to the war the gold standard was operating in almost all the countries of the world, and no exchange complications arose. The currency of each country was convertible into gold, and the comparative value and rate of exchange was a matter of calculation. If dealers in exchange asked a rate which was excessive when compared with the gold conversion value, those wishing to buy exchange would purchase gold in their own country and ship it in payment of their obligations. Thus the exchange rate was always governed by the cost of shipping gold. The world war upset this commercial equilibrium, and inconvertible paper became currency and legal tender. The backing for this paper money was the credit of the respective countries, and the ultimate prospect of a return to the gold standard. Britain returned to the gold standard in 1925, but by this time new elements were operating. The war debts and reparations led to a steady flow of gold to France and the United States. In prewar times these settlements in gold had a definite relationship to trade and were a means of settlement of international balances. The war debts and reparations had no relation to trade. France and the ■United States quickly saw that settlement of these huge debts by. the receipt of goods and services caused internal upset and unemployment. Consequently gold was demanded in settlement of these debts, and it accumulated, and was “frozen” in the France and the United States. There was not enough gold in use to support world trade, and abandonment of the gold standard in England in September last was the result. EFFECT OF PRICE FALL. The precipitate fall in prices of the Dominion’s exports, wool, meat, butter and cheese, had thrown the burden of the present bad times unequally upon the community. The primary producers were carrying more than their share, in comparison with other sections of the community, and New Zealand’s problem was to find ways and means of distributing the burden more equitably, and placing the primary industries on a payable basis. The fall in export prices reacted immediately on the primary producers. The reaction was more gradual on other sections of the community whose incomes for the time being were fixed, or whose profits submitted more slowly to the inevitable decline. Of course when export prices suddenly rose during the war years the same factors operated to the immediate advantage of the farmers, and only later to the advantage of other sections of the community, but in that case no disastrous results ensued. Without doubt the brightest spot on New Zealand’s commercial horizon was the forthcoming Ottawa Conference. Great Britain was going to the conference prepared to negotiate trade agreements and treaties giving definite preferences to the Dominions, which shoiild go far towards putting the primary industries again on a profitable basis. It was pleasing to note the general recognition of the necessity for the New Zealand delegates to the conference being in a position to offer concessions in return for the preferences the Dominion might receive. “My remarks on finance and exchange will be concluded, with a short reference to the export of dairy produce and the operation of the exchange rate in regard to income accruing to the farmers from produce shipments,” continued Mr. Duncan. “When dairy factories ship butter and cheese to Great Britain, they draw drafts on the merchants to whom the produce is consigned, such drafts representing ■ an advance from the merchant against the ultimate proceeds of the sale of the produce. At time of shipment these drafts are “negotiated”; that is, they are sold to the banks. The bank pays the dairy factory straight away in New Zealand a certain sum for the draft, which then becomes the property of . the bank. Upon arrival of the shipment in Great Britain the bank collects the.face value of the draft from the merchant in return for the bills of lading for the produce. It will be. seen that the effect of this transaction is that the bank has paid out a sum of money in New Zealand and in return has received a sum of money in London. Thus the export from New Zealand of wool, meat, butter and cheese leads to the accumulation of money in London. LAW OF SUPPLY AND DEMAND. “It has been shown that money is a commodity which is governed by the law of supply and demand in the same way as ordinary goods. That is to say, when money in London is in short supeply there will be a demand and the price or rate of exchange will rise. When London funds are plentiful the price or rate of exchange will fall. The main factors operating to determine the price of New Zealand funds accumulated in London are (1) the Government requirements for interest and principal payments, and (2) the requirements of New Zealand, importers of British goods who require to make payment in London. “Much publicity has been given to the advocacy by the Dairy Board and other farmers’ organisations for a free mar-

ket for the London exchange made available from the export of butter and cheese, and the stand taken by the farmers is that the effect of the existing pooling arrangements is to eliminate all competition for farmers’ London funds, which is leaving the matter of the fixing of the exchange rate entirely in the hands of the banks. Whilst there is no doubt that the farmers’ representatives in 11r ging a free market presuppose that upon a free market the exchange rate would go up, it should be lemembered that there is a degree of authoritative opinion that the lifting of the restrictions would not result ill a higher rate. The difficulty is to prove the matter. It seems reasonable to expect that with the cessation of London borrowing by the Government the exchange rate would rise, and the farmers are entitled to any rise which would take place under a fiee market. The need for funds to be available to meet Government requirements in London is not overlooked, but in securing to itself these funds the producers should not be penalised by the arbitrary fixing of the exchange rate below the normal rate which would result from a free market. . “The banks’ present buying rate tor the dairy factories’ drafts on London is £8 10s per cent, premium; that is to say, the dairy factory sells a draft on London for £lOO for the sum of £lOB 10s. Rises in the exchange rate do not, of course, create additional wealth. They merely affect any internal adjustments between the farming and other community interests. The most unsatisfactory delay and unsettlement caused by the failure of the government to make up its mind upon the exchange question and the monopoly regulations have now been ended, temporarily at least, by the announcement of the Minister of Finance that the Government intends to take no action by way of alteration of the regulations. . , “The additional income accruing to the dairy farmers from the present exchange premium of £8 10s per cent is as follows: With cheese at 62s fid per cwt in London the exchange premium adds Jd per lb to the f.o.b. value, and increases the payout per lb of butter-fat by approximately IJd. With butter at 110 s per cwt in London the exchange premium adds .9d per lb to the f.o.b. value, and increases the payout per lb of Jautter-fat by approximately Id.”