HIGH EXCHANGE

Timaru Herald, Volume CXXXVII, Issue 19374, 24 December 1932, Page 2

HIGH EXCHANGE

NATIONAL BANK VIEW. “Uncertainty regarding the exchange position has affected trade throughout the Dominion,” reports the National Bank of Australasia, Melbourne, referring to business conditions in New Zealand. It states that buyers are unwilling to place orders ahead and wholesalers and indent agents have been very much handicapped in not being able to quote with any degree of certainty. “The general feeling (in New Zealand) is that no marked improvement is likely to take place until the position of international debts has been cleared up by a general agreement amongst the national most affected.” High Exchange, Low Prices. Dealing particularly with exchange and its effects on prices from its Australian experience of a high rate, the National Bank states: “Our contention that exchange depreciation lowers prices is supported in authoritative quarters. For example, Henry Clay, in the course of a lecture delivered in London about two months after Great Britain’s departure from the gold standard, said:—The fall in sterling exchange altered the position of all the ‘unsheltered’ industries, in which the depression in British industry has for years been concentrated. When the pound fell to 3.80 dollars, they were able to export for 380 dollars goods that cost £IOO to make, whereas formerly they had to demand 486 dollars . . . .Price-cutting by British exporters must tend to send world prices down further, and the restriction of British imparts to intensify the difficulties of the agricultural and other countries depedent on the British market. Inevitably, therefore, other countries have been forced off the gold standard, and the exchanges are back in the fluctuating state of 1924. What with the obstacles to trade caused by exchange difficulties and the inability of a depressed world to take more British experts even at reduced gold prices, British export industry has so far been disappointed of its anticipated expansion.”

Professor Lionel Robbins, another well-known English economist, is quoted on the subject of “The Ottawa Resolutions on Finance,” as referring to the adverse effects of “isolated inflation.” This authority stated in Lloyd’s Bank Review that “there are other. dangers to be feared, which, if transitory in their incidence, would be highly damaging while they lasted. I refer to the deflationary effect in the world at large of an exchange which is depreciating. There can be little doubt that the present depreciation of sterling has had considerable deflationary influence in the gold standard countries, and that this influence has had injurious repercussion on trade activity here. There can be equally little doubt that a further fall in the exchanges would intensify these difficulties .... In some such way—and the picture is not imaginary—in the short run, the depreciation of ohe currency tends to produce deflation and depression elsewhere. Such effects are bound to have further injurious repercussions on the country of depreciating currency itself.” A Two-Edged Sword. The National Bank points out that the maintenance of the sterling price level since the end of July above the level recorded at the time of the departure from the gold standard is, so far as can be gathered, an outcome of a momentary policy designed to that end. On the other hand, the Serious decline in sterling vis-a-vis to gold is not the outcome of any planned exchange policy, nor is the exchange movement to any marked extent related to recent changes in the internal price structure in Great Britain.

It is not suggested by the National Bank that Australian exchange on London should be fixed for a long period at its present rate, regardless of the balance of payments and other factors which normally enter into the determination- of exchange rates.

“On the other hand, we feel that an arbitrary increase in the premium on sterling—made regardless of the true exchange relation between the currencies—while it would bring some immediate advantages to certain sections of the community—would set up adverse and continuing reactions, more than offsetting the temporary and sectional gains.”

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