PAPER CURRENCY ORDINANCE. DESPATCH FROM EARL GREY TO GOVERNOR GREY ON THE COLONIAL BANK OF ISSUE.

Downing-street, August 1, 1848. Sir,— l have received your despatch of the 25th of November last, transmitting a copy of an ordinance passed by the Governor and Legislative Council of New Zealandi on the 16th day of October, 1847, intitled, " An Ordinance to authorise the establishment of a Colonial Bank of Issue by the Government of New Zealand, to make and issue a paper currency, and to prohibit- the making and issuing of paper money by private individuals."

Having referred that oidinance, together with your explanatory despatch, to the Lords Commissioner! of the Treasury, I transmit to you, for your information and guidance, a copy of a letter from the AssistantSecretary to that Board, pointing out those modifications to which their Lordships consider that the act should still be subjected. You will propose to the Legislative Counc 1 the alterations there suggested': but as they apply rather to matters of detail than to the general principle of the Act, which is entirely in accordance with the recommendation of my despatch of the 2nd F bruary, 1847. I have not thought it necessary to defer submitting it to the Queen for Her Majesty's confirmation : and I have now to inform you that her Majesty lias accordingly been pleaded to confirm the ordinance. You will observe, that the Lords Commiisionern of the Treasury have recom-< mended that the investments of the banks should be made in the public securities of this country, instead of by means of loans ia the colony. To the adoption of this amendment I attach the greatest importance, not merely on account of the grenter security which it will give to the paper currency thus issued, but stil! mote on account of ils being calculated to carry into more complete effect the principle laid down m my despatch already referred to, of avoiding all interference with private enterprise, in the busineis of banking pi operly so called. By this alteration the transactions of the Government bank will be greatly simplified, and will be reduced, at originally intended, to the mere supply of the paper money required by the colony— an advamage which will more than compensate for the lower rate of interest which will be received for money invested in the British funds as I compared with, that which would have been obtained I from sums advanced as loans in the colony. | The following are the principal heads of the arrangei ment by *bich I conceive thut these views may be moit ailvuntagrously carried into effect : — Ist. That portion of the cash received by tl c J/ank which it may not be necessary to retain for re-excliange of «he bank paper is to be paid over to the commis-sa-y, who will grant a certificate to the colonial officer ma* ing the payment of the amount thus received into the chest under his charge. 2nd. This certificate ie to be transmitted by, or on behalf of, thn Colonial Government to this couutry; and on production of it here, the Treasury Board will direct the issue of a corresponding amount for investment in public securities. 3rd, The investment will be made ir such a manner, and in the names of such trustees as the Secrctay of State and the Treasury Board nrnf appoint, or as may be approved of by the Secretary of State a»d the Treajury Board on the recommendation of the local government, on which point I should be prepared to receive any suggestion from you. 4'h. The payments to the commissary should be made to the principal officer at head quarters, and not in the subordinate chests at out-stationa, unless with the consent, and by the authority of, the principal officer, by whom nil certificates to be forwarded to this couirry must be signed. sth. The sums invested will be held on behalf of the colony; the Coloni.il Government mil be permitted to draw against them if it should become necessary to raise sp-cie tor the use of the bank ; and -.hould any advames of cash be obtained by 'he bank from the commissariat chest, the Treasury Board will retain power to due t tie repiytoent of such advance out of ties-} investments. 6'ii. Tl c commiisary will be authorised to pay over . t any tune to the bank, on application from the Colonial Government, such specie as may be in the ches's of his department in the colony, and not immediately required for the usual commissariat payments. 7*h. The vouchers for any iuuh so paid over will be forwarded by the Commissary to the Treasury Board ; and upon receipt of these vouchers the Treasury Board will direct the realizition of a lufficient amount of the investments on account of the bauk in this country to repay the advances. Bth. No interest will accrue to the bank on the suing paid into the commissariat ch'ht until they are invested here. Neither on the other band, will any interest be demanded from the bank on such advances as may be ma ie from the commissaria^ chest. 9tb. The specie advancf-s from the commissary are not in any case to exceed the amount of iha payments that may have betn made to the commis'aiiat chest on account cf the bank for investment alf r the deduction of any sums that may have been otherwise drawn for by the Colonial Government against such investments, and of which drafts the Cnmmisaary wou'd be instructed to require a certified statemeut before making any advance. As I fi \d, upon inquiry, that it will be the most economical plan that the hank notes should be printed as well as engraved in this country, measures will be taken, in order that they may be forthwith prepa-ed and foi warded to the colony. I have, &c, Grbv.

Treasury Chambers, May 20, 1848. Sir, — In reply to your letter of the 15tli ultimo, I am commanded by the Lords Comnvssioners of her Majesty's Treasuiy to reque->t you will state to Earl Grey that my lorJs have had under consideration the despatch from the Governor of New Z -aland with the ordi lance for the establ. aliment of a colonial bank of iseni', therein forwarded, and have at the »arne time refened to the Instructions conveyed to the Governor by his Lordship's despatch of the 2nd February, 1847, on thit mbji'ct. My lords observe that the provisions of the ordinance am in general accordance with those instructions: but it has appeared to my lords to be desirable that in tin respects hereaf er specified, those provisions should bo in some respects modified and improved. 'iVW^ Ist. It is proposed that ouc-fourth only of the specie received, and for which the bank ii to issue note?, is to be retained in the offices of the bank for the purpose o 1 meeting the demand* for coin in exchange for notes. My lords consider that this amount is too small to be safely adopted, more especially in the earlier period of toe existence of the bank, and until the native population shall have become habituated to, and have confi; dencc in, its operations, end the paper it may put into circulation. The establishment a'so, as proposed of two or totre offices of the bank, with the power given by el,ut'<, 16 to the holders of notes, to demand payment of iliem in cash "at any of the offices" so es ab'iihed, wherever the notes m\y have been issued, will probably lead to deposits with a view to save the expanse and risk of remitting coin from one part of the colony to another ; Hnd thi-> will naturally produce some uncertainty in the demands for specie at each establishment. Under all these circumstances my lords conceive that it would he advisable that a larger proportion than one-fourth of the specie receiveJ should be retained at the different establishments of the bnnk. In the Mauritius, directions have been given to retain half of the coin deposited ; and mj lords would have preferred, that the same proportion, or at any rate not less than one third, should have been, in the first instance, retained in the bank of New ZealanJ. 2udly. My lurds n uu<ier.stand that the transactions of

g*f . — 7 the bank are to be strictly limited to the issuing o r notes in exchange for specie, and specie in exchange for notes: and that the amount received in specif, beyond what it may be necessary to retain as a reserve m the b nk, shall be invested on sufficient and, if possible, well-defined security. They cannot, however, approve of the general discretion regarding the mode of investment given to the Governor by the 20th clause, which seem to constitute the bank a general Loan Bank, and to devolve on the Governor the responsible duty of selecting the mode of investment, and the invidious task of approving and rejecting applications for loans, and deciding upon the sufficiency of each security that may be offered. # My lo< <*s would therefore suggest for Lord Grey s consideration, whether it may not be advisable that all investments on the part of the bank should be made in fop public securities of this country. In that case no J/sh. would be incurred from the possible failure of the •arties to whom advances may have been made, or from their inability to provide punctually at the specified time for the repayment of these advances. If this course were adopted, my lords would be prepared to direct that aid which the commissariat chest on the eta'ion might be able to afford, in the event of an extraordinary demand on the bank, should be rendered to that establishment on the recommendation of the Governor of the colony ; the Home Government having the power of selling an adequate portion of the government securities, in which the investments of tlie bank may have been made, to repay the amount of assistance so rendered. 3rdly. Unless the terra " cash," which is n«ed m the ordinance, be fuly understood to mean coin legally current in New Zealand, the provisions of the oidinance should be made explicit in this respect. And in further connexion with this point, my lords, observing that reference is made in the despatch of 2nd February, 1817, to the receipt or issue in exchange for the bank paper of coins of d'ffetent nations, deem it neces* sary to remark tbat they apprehend such coins can only be legally current in a British colony, under proclamation issued by order of her Majesty in Council, or under colonial enactment which lias received tba assent of her Majesty in Council : and as it is of the utmost importance to guard against uncertainty as to the description or exchangeable value of coins to b^ received or issued at the offices of the bank, it would be advisable that the Governor should be deBired to take the necessary measures for providing in this respect, for the currency of any foreign coins which it is th^u^ht advisable to admit to legal circulation in New Zealand at propeilv regulated values, and lay lords deem this the more necessary, us they have observed that in a Blue Book R-turn from New Zealand for the year 1844, the rates at which coins, other than those of the United Kingdom, are stated to be current, ere inconect, the foreign coins, with the exception of the doubloon, being rated too low, but the East In iia Company's rupee considerably too high. 4thly. My lords have to remarl that Uie express provision of the 6th clause of the ordinance for empow«ring sureties for persons filling offices in the bank to withdraw from then liability, though unusual in similar Pises, may not be unadvisable ; but it must be obviouc that the release from liability can only be contingent upon a sufficient suicty in institution being provided. I have, &c, C. E. Trhvelyan.