EXCHANGE RATE

Wanganui Chronicle, Volume 74, Issue 143, 19 June 1931, Page 5

EXCHANGE RATE

ECONOMISTS DIFFER AUSTRALIAN INFLUENCE TRANSFER OF FUNDS The view held by Professor D. B. Copland, of the Melbourne University, that the Australian situation is not a factor in accentuating tho present tight ness of the banks in New Zealand oi the present adverse exchanges against the Dominion is not accepted by Pro fessor H. Belshaw, of the Auckland University College. In dealing with the mechanism of ex change, Professor Belshaw, in an article in the “Auckland Chamber of Commerce Journal,” states that the importer finances his obligations by reducing his deposits or increasing his advances in New Zealand, and they are paid for from balances held by the banks in London. Imports, therefore, reduce deposits or swell advances in New Zealand and reduce London bal ances. Payments for New Zealand exports are made into the London bal ances, and the New Zealand exporter receives the amount to the credit of his account. Exports, therefore, in-

crease the London balance and increase deposits or reduce advances in New Zealand. An excess of imports will be a factor increasing the ratio of ad vances to deposits in sympathy with the decrease in the London balances. Loans raised by New Zealand companies, local authorities, or tho Govern meat abroad will be paid into the London balances, and will increase their deposits in New Zealand, unless the , whole of the proceeds are expended abroad in the purchase of goods. Interest payments on loans or loans repaid will have a converse effect. So, there is a tendency for tho ratio of advances to deposits to move in sympathy with the London balances. This tendency is automatic in so far fis transactions of the above sorts are concerned, but it should be noted that th? exchange position, while it is of great and normally paramount importance, is not tho only factor affecting tho ratio of advances to deposits in New Zealand. Deposits or advances may increase as the result of conditions within tho country, apart from the direct influence of the exchange position. Professor Copland’s Argument “Professor Copland appears to argue, though his argument is not altogether free from ambiguity,” writes Professor Belshaw, “that the transfer of funds from the London balances on New Zealand account to support Australian exchange would encourage an accumulation of funds in New Zealand. The only way in which the transfer could be made, he contends, would bo by transferring deposits from New Zealand to Australia. He supports the contention that such a transfer has not taken place, by pointing out that ' deposits in New Zealand increased from £54,600,000 in 1925 to £58,800,000 in ' June, 1930. and by referring to the ' close coincidence between the visible ' trade balance and the banking position ‘ in New Zealand. Af a further test showing that funds have not been < transferred, he states that, if the major items in the balance of payments are considered, it is found that ‘over the period 1924 to 1929 only £6,500,00 of a surplus was realised. That is 1 to say, that exports from New Zea- t land and the net increase in the Public 'J Debt provided little more than the funds required for paying for imports and 1 meeting interest on the external debt.

“Professor Copland’s arguments may be stated briefly: “(1) A transfer of funds from the London balances could only take place through a corresponding transfer of deposits from New Zealand to Australia. “(2) This would destroy the coincidence between the balance of trade and tho banking position in Now Zealand. “(3) The fact that deposits have increased and that the two ‘tests’ do not reveal such a lack of coincidence shows that such a transfer has not taken place. “Tests Irrelevant” “It is my opinion that Professor Copland’s major arguments are incorrect, ajid that his tests are mainly irrelevant to the present situation. The crux of Professor Copland’s position is to be found in the statement that tho practice of transferring funds from Now Zealand balances to support Australian exchange would increase the difficulties of the banking situation in Australia while ‘encouraging an accumulation of banking funds in New Zealand,’ and that the only way in which a transfer could be made without this result would be the transfer of deposits from New Zealand to Australia. Individual transactions, involving the payment or receipt of funds from abroad, cause a sympathetic movement in London bal ances, and in tho ratio of advances and deposits in New Zealand. Tho movement is automatic, though the effects may be masked by banking policy in respect of purely domestic transactions. In the case assumed—viz., tho transfer of New Zealand balances in London to support Australian exchange, no such automatic, sympathetic movement takes place, and the transfer has no direct effect on individual accounts in Australia and New Zealand, since holders of such accounts have not initiated the transactions. In so far as additional funds transferred to the Australian balances from the New Zealand balances in London were used to finance addi tional imports, this would increase the ratio of advances to deposits in Australia, and, while facilitating the financing of exchange, might cause the banks to restrict advances in respect of domestic trade. In this sense the situation might be regarded as becoming more stringent. But for a given volume of exchange and domestic Transactions together, an increase in the volume of funds available in the Lon don balances by means of a transfer such as is assumed, would ease the situation rather than make it more stringent. In other words, the increase in the London balances through the cause alleged would improve the bank ing situation in the sense that, it would make it easier to increase total Aus tralian advances by a given amount than if the transfer had not been made. It is by no means clear, therefore, that the transfer would lead to a more striagent banking situation in Australia. Il seems likely that a transfer could b<‘ made to ease a banking situation al ready stringent. London Balances “Professor Copland’s view that such a transfer as is assumed would lead to ‘an accumulation of funds in New

Zealand ’ is equally ambiguous. There seems no reason to suppose that the transfer of funds from New Zealand to Australian balances in London would increase deposits in New Zealand, since the transaction has no direct effects on individual accounts in New Zealand. If Professor Copland means that the ratio of deposits to advances would bo increased by the curtailment of advances to purchase exchange, the result could scarcely be described as an ‘accumulation of funds.’ As I see it, tho situation is rendered more stringent for exchange and domestic transactions taken together than would bo the ease if the London balance had not been depleted. The argument of those who believe that some such transfer of London balances has taken place is precisely that their depletion has caused a greater exchange movement that would otherwise have occurred, and that it has been a factoi leading to a somewhat greater difficulty in financing domestic transactions than would otherwise have occurred through the reduction in the total of fuml> available for exchange and domestic transactions taken together. “Though the major effects might be expected to take place in the form of a restriction of finance for imports, yet it would be difficult to avoid some restriction of local finance unless the whole of the burden of restricting imports were thrown on tho exchange rates. The fact that tho ratio of advances to deposits is at present higher than is usual is not, O n the other hand, valid evidence that no transfer has taken place; for it. is not inconsistent with the above argument to suggest that the effects of the exchange situation are not inevitable ami inelastic and that, the banks have increased tin* ratio of advances to depositu boyom. that normally considered desirable to meet a serious domestic situation, even though their difficulties in doing thimay have been enhanced. The normal relationship may have been masked by banking policy in respect of domestic transactions.” The concluding portion of Professor Belshaw’s article wili be published later.