STATEMENT WANTED FROM BANKS ON EXCHANGE POLICY

Star (Christchurch), Volume XLIV, Issue 43, 20 February 1931, Page 7

STATEMENT WANTED FROM BANKS ON EXCHANGE POLICY

Commercial Men Feel That Reason For High Rates Should Be Explained.

COMMERCIAL CIRCLES in Christchurch strongly endorse the remark made by Mr Malcolm Stewart, the retiring president of the Auckland Chamber of Commerce, that a frank statement regarding exchange policy would be welcomed from the Associated Banks. The matter of the high exchange rate between New Zealand and London is at present engaging the attention of a special committee of the Canterbury Chamber of Commerce, and the report of the committee’s investigations is being awaited with interest

Professor A. H. Tocker, Professor of Economics at Canterbury College, said this morning that it was widely believed that while both Australian New Zealand exchange, rates were close to parity with sterling, the banks were accustomed to pool their exchange funds in London. Owing to the Australian financial difficulties, however, the Australian pound had become considerably depreciated and the New Zealand pound had also been depreciated, though to a less degree. Value of the Pound. “ There is nothing apparent in New Zealand’s balance of overseas payments,” he added, “ to explain the depreciation of the New Zealand pound, and no satisfactory reason has been given for the present rates of New Zealand exchange.. “It is generally thought that the value of the New Zealand pound has been pulled down mainly by the influence of conditions peculiar to Australia. “ At the same time it must be admitted that the present rates of exchange mean a premium of approximately 10 per cent received for all New Zealand exports, and a similar premium to be paid in all imports to the Dominion. The exchange movement has, therefore, lessened somewhat the severity of the recent fall in export prices, and acts as a corrective tendency to redress the balance of trade. The banks, too, have given significant indications of their intention to regard New Zealand and Australian exchanges as separate. “ Arbitary fluctuations in exchange rates, however, introduce the factor of risk into overseas trade transactions, and so tend to impair security and confidence. A plain statement of exchange policy would at least let traders know what to expect and would tend to remove the element of speculation from transactions, which, under present circumstances, are already quite risky enough. Outside Influences at Work. “ It would, of course, be quite wrong to suggest that the fixation of the exchange rates is a matter of bank policy alone. The exchange rates are determined broadly by factors which the banks cannot completely control. In addition there is a variable amount of exchange dealing, which way become considerable in times of exchange difficulties —transacted in the open market outside the banks. But the banks probably always undertake the major part of exchange edalings and hence give a lead which the open pocket is likely to follow closely. Horeover, the exchmange policy of the banks must be closely associated with this fixation of the bank rate and with the limits they set on their advances. “ Obscurity regarding this policy matters little while the exchange rate remains near to par, but when the rate departs from its accustomed parity with sterling the community is surely vitally interested in the meaning of the change.” New Policy Advocated. Proposals to establish on a permanent basis a banking and currency system for New Zealand that would be “absolutely sound, very economical, elastic

in operation, and particularly well suited to our economic requirements” are contained in an article contributed by Mr B. C. Ashwin, of Victoria University College, Wellington, to the November issue of the “ Economic Record.” Mr Ashwin explains that the banking system of this Dominion is not selfcontained, in that the banks normally hold a large amount of funds in London. In fact, these London balances are the real regulative factor and the key to the whole banking system. In New Zealand there is no bullion market, no bill market, and no short loan market, in the full sense of the term. The all-important work of the banks is the financing of the Dominion’s external trade, which, per head, is one of the highest, if not the highest, in the world. Furthermore, a very large part of our trade is with Great Britain, wherein is situated the premier international money market of the world. Australian Influence.

Dealing with the influence of Australian banking conditions on New Zealand, Mr Ashwin refers to the fact that four of the six banks carrying on business in New Zealand, from the point of view of their operations, are primarily Australian institutions. Although there have been indications in recent years of an attempt to change over to a self-contained gold standard, Australia has up to the present been operating on a sterling exchange system very similar to that of New Zealand. The London balances to finance the trade of both countries, so far as these four banks are concerned, really form one fund, and the six banks in association have been in the habit of fixing practically uniform rates of exchange for both Australia and New Zealand, presumably based on the average economic conditions and outlook of the two countries conbined. For the purposes of exchange on London the two countries have practically been regarded as one. As Australia is a much larger economic unit than New Zealand, this country is much more affected by Australian conditions than Australia is by New Zealand conditions. The practical result is that the rates of exchange New Zealand on London and vice versa are governed to a preponderating extent by Australian conditions. Unfair to New Zealand.

Australia has been suffering from a heavy adverse trade balance, accentuated by a cessation, or at any rate a severe restriction of London borrowing, and from the fact that exchange on London is definitely and openly being rationed in Australia, it is clear, states Mr Ashwin, that the London balances of the Australian banks, including the four operating in New Zealand, are practically exhausted. The London credit balances built up by these banks from the good trading years of New Zealand have apparently been used to support the Australian exchange. This arrangement works out quite unfairly to the people of this Dominion, and at a time like the present is prejudicial to the interests of the country. The remedy, he adds, is simply to give due recognition to the fact that New Zealand and Australia are separate economic units, and to fix rates of exchange for each country, according to its trade position and outlook.