THE RATE OF EXCHANGE

Taranaki Daily News, 10 June 1932, Page 5

THE RATE OF EXCHANGE

INCREASE NOT WARRANTED

HARMFUL TO COMMUNITY. HIGHER COSTS AND TAXES. In a studied review of the argument for and against increasing the exchange rate, a prominent banking authority stated at Auckland on Wednesday that' it was argued in support of an increase that it would enhance the income of primary producers, and this was much needed. This 'benefit, however, would be secured almost entirely at the expense of the rest of the community, since the mere increase-in the rate does not' bring' more money into the country. There would be more money in circula- ' tion, certainly, but each pound would have less purchasing power. ' “It might be argued,” he stated, “that, even if the only result of the higher rate was a redistribution of the national income to the benefit of primary producers, this in itself is desirable, because the country’s well-being depends on the prosperity of primary production. But' this argument gives rise to two problems.

PENALTIES AND COMPLICATIONS.

' •Firstly,lt involves the problem of ascertaining whether the primary producers, are genuinely entitled to part of the already much reduced income now received by the rest of the community. This is a very difficult question, and no one can presume to make dogmatic assertions one way or the other. A most careful and exhaustive expert investigation would have to be made. “The second problem is more amenable to ‘ logical reasoning. Even if it were decided that the primary producers

should benefit at the expense of the rest of the community, it is practically a cer- < tainty that the benefit secured by a ; higher rate would be merely temporary and ultimately harmful to the community as a whole, for the following reasons: An. increased rate would cause a ' measure , of inflation; New Zealand prices would thus rise; and the part of the community directly penalised by the higher rate would thus be further penalised. < “Since this part of the community employs much labour, difficulties and complications would arise as to payment of wages and unemployment. Costs of production would rise and the burden of taxes would have to be transferred to those who benefitted by the rise in the exchange rates. The total taxes levied would have to be increased, because each pound spent by the Government in the Dominion would go less far and a greater total of New Zealand money would ba required to meet Government debt service abroad.

PREJUDICING COUNTRY’S CREDIT.

“Thus, little, if any, of the benefits •ecured, by primary producers could in the long run be retained. Also, the raising of the rate would, by prejudicing our credit, lessen our chances of renewing maturing loans abroad and raising new loans. It is argued that since primary producers would have more spending power on account of a raised rate, importers would benefit about as much as they would lose. Such a benefit, however, would be illusory, since the increased*Wpending power of. primary producers would be secured at the expense of the rest of the community. “Primary producers claim that as an offset to all the foregoing, the increased rate would stimulate production and exports. In some marginal cases production might be increased, but this effect is not likely to be at all general or permanent. The high rate might even have the effect of-’ curtailing exports, since the banks might hesitate to swell their London funds by accepting exporters’ bills, if the exchange rate iso damaged our im-

port trade that the banks could not dispose of such funds to importing inter- , fete. Such a situation almost arose in Australia.

.... NO “PEGGING” BY BANKS.

•~*An oft-repeated assertion is that the 'banks have ‘pegged’ the exchange rate at ' an artificially low rate. This is not the case. Tho present rate is ruling because T tjje banks deem it the true rate on the balance of trade and London funds position. The banks avoid artificial exchange manipulation, which would dislocate the balance, of trade, with harmful results. . “It is asserted by many that the Government should not have interfered by bringing in the export licensing order, and that the operation of' a ‘free exchange’ would automatically have assured the Government’s requirements and also have assured a proper balance of trade. If the Government’s requirements and the balance of trade were secured by a high ‘natural’ rate of exchange, the inflationary reactions mentioned would •till have to be contended with. The aim was to avoid this in the country’s best interests. “An oft-repeated argument against preserving the present rate is that, if freed, the rate would at once begin to rise. This does not prove that the rate should rise, or that a rise would be in the ultimate interests of the whole comwhose duty it is, is the country’s best vision should be removed and the exchanges left to the mercy of every ‘economic wind’ that blows. It may well be maintained that in disordered times like these a wise control of all matters of finance, including exchange, by those whose dut yit is, is the country’s best protection against financial and credit demoralisation.

ELOQUENT TRADE FIGURES. *A comparison of our trade figures eleariy indicates that no increase in the exchange rate is warranted. The latest available figures, for the ten months to April 30, show: 1031: Exports, £30,063,000; imports, £30,035,000. 1932: Exports, £29,825,000; imports, £19,508,000. Thus, bn the present rate of exchange, the favourable movement in the balance of trade for the latter period is no 'less than £10,290,000, or £7,335,000 in sterling, which is due entirely to the fall in imports. Any rise in the rate would further curtail imports and cause serious difficulties as to the disposal of London funds accumulated by surplus exports. “If a rate of £l4O came into force as has been recommended, the exchange cost of. the Government’s annual debt gervice of £8,000,000 abroad would be increased from £BOO,OOO at the present rate to £3,200,000. Repayment of existing Government loans domiciled in London, approximately £150,000,000, would require £210,000,000 New Zealand money instead of £165,000,000 at the present rate —an overwhelming increase in the debt burden, which would be attended by a disastrous loss of the Dominion’s credit. “Therefore, not only would repayment of maturing loans be much more burdensome, but such repayment would be much more likely to be insisted upon by our creditors. Moreover, Government securities, whether held abroad, or in New Zealand, would show a decline in value commensurate with the extent of, exchange inflation.”