HIGH EXCHANGE EFFECTS

Taranaki Daily News, 21 November 1932, Page 9

HIGH EXCHANGE EFFECTS

SOME FINANCIAL OPINIONS

SERIOUS RESULTS FEARED.

ACCUMULATIONS IN LONDON.

That the raising of the exchange rate to an artificially high-level will produce far-reaching and serious effects on Government and local body finances and in trading and commercial houses is the considered opinion of leading financial and banking authorities, when interviewed in Wellington. It is pointed out that if the exchange rate is raised to £125 or £l3O, the banks will not take responsibility for surplus funds which will accumulate in London as the result of a contraction of imports. As the export season is just commencing, the funds which will be available to importers in London will soon be piling up, and the effects of any hindrance of the import trade will be quickly felt. It thus follows that it will not be long - before the banks will be embarrassed by an accumulation of bills off exchange, and their legitimate course of action in the interests of their own stability will be to refuse to purchase further bills unless the Government guarantees to take over unrequired surpluses. Bills of exchange are one of the principal stocks in trade of the banks, and naturally they must safeguard themselves absolutely from anything approaching a perilous situation. FLOATING DEBT DANGER. With a 25 per cent, premium on exchange, the Government will be asked to find £250,000 for every £1,000,000 of accumulated bills which the banks deem they cannot dispose of. The effect of this on the budgetary position would be far-reaching. Already the Government is budgeting for a deficit of nearly £1,000,000, and the Minister of Finance had intimated that the taxable capacity has reached the point when the law of diminishing returns has set m it appears obvious that the Government could not raise additional taxation to meet the premiums on surplus bills of exchange, but it is possible that it will adopt the Australian policy of borrowing the money from the banks and creating a floating debt. The floating debt of the Commonwealth now amounts to something like £100,000,090, and a large part of it is due to exchange. It is anticipated that the New Zealand Government would be required to meet at least £5,000,000 yearly in accumulated surpluses. This money could be used for the repayment of overseas debt service, but for every so purchased, a premium of £1,250,000 would have to be paid. Should the Government not be able to meet the premium out of taxation, it would have to make arrangements to liquidate the amount, of borrowing, as Australia has done. In the case of the Commonwealth, the money borrowed has been into a floating debt on which interest has naturally to be paid. . ’The suggestion that a high exchange would have an expansive effect on the volume of internal credit is rejected by the financial authorities already quoted, who hold that, in fact, the result would be in the opposite direction. As a result of a high exchange, the exporting farmer would naturally _ receive a bonus on his exports and it is assumed ‘by the high exchange advocates that he would pass this money into circulation. This procedure would no doubt apply if the farmer were free from debt, but as the great majority of farmers have to face commitments with banks, stock and station agents, and other financial institutions, the additional money would go to those people who had the first call on the farmer s income, namely, his mortgagees and creditors. The effect would be that the farmers’ “bonus” would not reach him at all, but would go to liquidate his debts. This would mean a contraction, rather than an expansion of credit. INDUSTRIES AND TARIFFS. Naturally, a high exchange will act in the same way as an increase in the tariff and tend to stimulate secondary industries. It is contended by the exchange inflationists that the result will be an increase in the avenues of employment and a general expansion of internal commercial and industrial activities. It has to be remembered, however, that the country will have to face ; a severe shrinkage in Customs revenue, which accounts for the major portion of the revenue of the State, and, in addition, there will be the extra burden of the overseas debt service. These . factors will more than cancel the inflationary effect of the artificially high exchange. Although the advocates of high exchange contend that the 25 per cent, premium will not contravene.- the Ottawa agreement, it is pointed out that the Dominions are pledged to stabilise . exchanges as far as their trading position warrants. The trading balance in New Zealand on a free exchange basis would be very little, if anything, above parity, and a high level would be a reaction against' the Ottawa pact. Furthermore, it is pointed out, New Zealand has pledged herself to place the English manufacturer on the basis of a domestic competitor, and if that pledge is carried out tariffs must accordingly be reduced in proportion to the exchange increase. The high exchange may also have a detrimental effect on the trade relationships between the Dominion and her principal market, Great Britain. It. has to be remembered that Great Britain has a farming community which is seeking increased protection, and should New Zealand’s action in exchange manipulation be considered to be detrimental to the welfare of British trade, the advantages the Dominion enjoys on the Home market may conceivably be subject to review by the Imperial authorities.