GOLD EXCHANGE?

Wanganui Chronicle, Volume 74, Issue 112, 14 May 1931, Page 5

GOLD EXCHANGE?

A FINANCIAL PROBLEM CENTRAL BANK PROPOSAL MUCH SPECULATION The announcement of the arrival of Sir Utto Niemeyer’s report on the New Zealand banking system, and his recommendation that the Dominion should establish a central bank, has naturally given rise to much speculation as to what will be the extent of I the proposed new bank’s powers, especially in the matter of exchange, i states a contributor to the Evening Post. For some time past now the exchange rate on England has been against the Dominion, and the position does not seem to be moving towards stability. One of the compensating factors is that the adverse exchange has benefited the primary producer, who has suffered severely by the fall of prices on the world’s markets, but on the other hand it has had a serious effect on the import trade and the Government finances. An adverse exchange against importers naturally means a falling off in imports and a higher cost for the article imported, and at a time when all are looking for a fall in the cost of living consequent on the reductions or proposed reductions in salaries and wages, the position is not altogether satisfactory. Furthermore, the farmer’s exchange “bonus” is partially offset by the dearer price he has to pay for imported articles, so that while he may benefit In the short run his position is not as good as it would appear at first glance. More serious still however, are the Government finances. The falling off in imports is followed by a shrinkage in the Customs revenue, which provides a very substantial portion of th ■ Consolidated Fund. Furthermore, the Dominion pays something like £8,200,000 annually in interest on Government and local body loans raised in London, and an advert exchange naturally swells the bill. In spite of the assurances of some banking authorities, there seems to 1/j an impression among several economists and financial critics that it is undesirable that New Zealand should be on the same basis of exchange as Australia, especially as four out of the six banks operating in New Zealand arc branches of Australian institutions. When the Australian exchange rates first started to move up, the New Zealand rate followed, although at the time there did not seem to be any valid reason for coinciding movements. Later, however, the Australians left New Zealand behind, and their position is the much more unenviable to-day. Still the impression remains that Australian conditions exert too big an influence over our own, and even the bankers have supported this contention. Transfer of Gold One of the first to criticise the exchange position was Mr B. C. Ashwin, M.Com., who in Juno last said that there was nothing in New Zealand economic conditions to justify a rate of adverse exchange and that we must look across the Tasman Sea for the cause of the trouble. He added: “Four of the six banks carrying on business in New Zealand, from the point of view of operations, are primarily Australian institutions. Although there are indications in recent years of an attempt to change over to a self-contained gold standard, Australia has 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 the four banks are concerned, really form one fund, and the six banks in association have been ir the habit of fixing practically uniform rates of exchange for both Australia apd New Zealand, presumably on the average economic conditions and outlook of the two countries combined.” Mr Ashwin advocated the establishment of a central bank, and the transferring of the gold reserve held by the banks, about < £6,600,000, to London, where it would I be placed on deposit and made interestbearing. His contention was that prac- - tically all our external payments are in the final analysis cleared in London, i and that the gold could be used as an exchange reserve to be brought into < action in times of stress when London balances had become exhausted. The effect of Mr Ashwin’s proposal : would be to place New Zealand on a I gold exchange standard, and this would stabilise our exchanges, because whenever ordinary credits were exhausted and the exchange rate commenced to climb above par the gold would be called up, as is done in the case of countries on the gold standard. Thus the exchange rate would not oscillate beyond the gold points. Australian Influence. In October last the Department of Economics at Canterbury College held that there was nothing in the financial relations between New Zealand and London to justify the abnormal rates of exchange, and definitely stated that “New Zealand exchange has been pulled down by the influence of Australian conditions.” The Department also expressed the hope that as an outcome of the visit of Sir Otto Niemeyer “a new and effective regulation will safeguard our currency against depreciation, stabilise our exchanges, and at the same time secure the maximum of economy and banking system.” It was contended that New Zealand required a regulation which would maintain her currency at parity with gold, and so lix her exchanges within narrow limits and at approximate parity with the English pound sterling. Wastefully Large Reserves. , Another critic of the present banking system is Professor B. E. Murphy. Professor of Economics at Victoria . University College, who states in the second edition of his “Outlines of Economics”: “The fact that so much . of our banking business is done by , Australian banks makes the Dominion somewhat sensitive to the financial ) difficulties in Australia.” Later he ■» says. “The gold reserves of the banks '' ot New Zealand are wastefully large, and at their present figure serve Mttie useful purpose. The volume of note issue is not in theory or practice dependent on the amount of gold reserve, and the movements of specie are also to a great extent independent of the foreign exchanges, and depend on the need of the banks for coin, since th ire is no mint in the Dominion. It would seem the part of wisdom to transfer the bulk of this reserve gold to Lon-

don. One would think that it might very well be sent to London to form the basis of a gold exchange standard, and to earn interest.” Need for More Data. The cudgels are taken up on behalf of the banks by Professor D. B. Copland, of the University of Melbourne, who contends that transfers of New Zealand credits in London for Australian purposes would be shown in the balance-sheets of the banks, but this is not necessarily so. When the American banks, prior to the establishment of the Federal Reserve, transacted business in a similar manner the results could not be gleaned from the balance-sheets. A bank’s balance-sheet does not always give an indication of domicility of assets or liabilities, and furthermore it is not a history of transactions but the position of a bank at a certain date. Professor Copland, perhaps for lack of suscient data, does not, actually prove that New Zealand’s position is adverse . It is a pity that all the cards are not laid on the table so that the real position can be ascertained. The point which might be cleared up is the extent of invisible exports. This is an urgent, need for exact, numerical and statistical data to confirm, or disprove, or otherwise throw light on the conclusions made by deductive reasoning. Until such data is available, the problem may continue to be the storm of inexact controv • y. On the facts, as disclosed up it the present, the weight of opinion anrngs ; economists and students of linant seems to be in favour of a gold sta i dard exchange not only in order t ■ stabilise our foreign trade but, to ei us adrift from any Australian in lb , ences, ■ and it is no secret that S > Otto Niemeyer supported this pri ? ciple when he was in the Dominio » As the exchange rate will be perha] ' the biggest problem o fthe propose 1 central bank, the announcement of h r proposals on this question* is boh - oawaited with great interest.