THE RESERVE BANK

Ashburton Guardian, Volume 53, Issue 285, 13 September 1933, Page 3

THE RESERVE BANK

ITS OUTLINED.

MISCONCEPTIONS DEALT WITH. THE GOVERNMENT'S PROPOSALS. The final article in the memorandum published by the lit. Hon. J. G. Coates on the subject of a Central Reserve Bank is as follows: Much of the criticism of the proposal to establish a Reserve Bank in New Zealand is undoubtedly due to a misunderstanding of the functions of such an institution, but it is hoped that the articles preceding this one will clarify the position and thus disarm criticism of this nature. Some of the objections that have been raised, however, are more general in character, and it is perhaps advisable to deal with them specifically. For instance, it is said that tho setting-up of a central bank means placing the control of our currency under the domination of the Bank of England. This idea is fallacious. The bulk of our trade is with Great Britain and we have large debts payable ill sterling. In addition, we are also linked to Great Britain by strong ties of ancestry 'and sentiment. As is only too evident at present, tfto prosperity of the Dominion hinges to a great extent on the course of events ni Great Britain, and it is useless to pretend that we can be indifferent to tho monetary policy of the Mothercountry or do other than work in close consultation with the British authorities. We do it, however, because it is in our own interest to do so, and not because avc are dragooned into it by pressure from the Bank of England. This great institution is always ready to give up the benefit of its experience and knowledge, but that does not alter the fact that we are' quite free to manage our own affairs as we think best. Wo lay down by Act of Parliament the basis of our monetary system and appoint a New Zealand'Board of-Directors to manage that system in. tho best interests of the Dominion. If we take care to appoint men of upright and resolute character to the Board there js surely no reason to suppose that they would allow the interests of the Dominion to be sacrificed at the bidding of anybody in or out of New Zealand. Monetary Independence. In fact, our monetary independence is much more likely to be obtained under a sound and well-managed central bank than under the present haphazard arrangement. Consider the present position. All matters pertaining to our currency and credit are at present largely in the hands of six trading banks carrying on business in the Dominion. These banks are commercial institutions and as such are naturally primarily concerned with earning profits for their .shareholders. The banks act together in fixing rates for deposits and exchange and in other matters conducive to their common welfare, but otherwise there is strong competition between them for business. In such circumstances, they cannot have any defined or conscious policy relating to the volume of money and' credit as a whole or takft into consideration tho effect of their united transactions on- the price-level of commodities in general. This is particularly the case when only one of the six hanks has a Sow Zealand Board of Directors and lour of the remaining five are predominantly Australian institutions with much larger interests in the Commonwealth than in the Dominion. Another statement given wide circulation is to the effect that to establish a central bank means bringing our people within tho ambit of a vast conspiracy alleged to be operating through central banks for the economic enslavement of the world in general. The whole idea is fantastic, but if there wore anything in it we could not hope to avoid our full share of the consequences unless we could make ourselves economically independent of the rest of the world, and that, of course, is impossible, hi fact, we are more dependent than most countries on international trade, and our present position is eloquent testimony or the effect on this Dominion of a fall in the overseas prices for primary products whatever may be the cause of such fall. ( If we do need any defence on the monetary side, should wo not organise and properly equip our forces? Well, the way to do this is to coordinate and consolidate our banking system under the control of a national institution in the form of a central bank. On broad issues the responsibility for monetary policy rests with and caunot bo taken away from Parliament, but any policy decided upon cannot be effectively carired out without the machinery of a central bank.

A Banker's Criticism. The Chairman of the Bank of New Zealand in his late annual report to shareholders offered certain criticisms, his main points being as follows:(a) That the bank is being set up at the direction of London financiers. (b) That it ,is not reasonable to require trading banks to hand over to another proprietary bank 7 per cent, of their demand deposits and 3 pe/ cent, of their fixed deposits. (c) That a. restriction of credit would bo imposed on tho trading banks.

(d) That the South African Reserve Bank had failed to meet the situation, and had lost a largo part of its capital. (e) That tho Federal Reserve system of America was unable to avert the rot occasioned by the dosing of some .5000 banks, neither was it able to prevent America having to go off the gold, standard. (f) Quoted British Chancellor of the Exchequer as saying at Ottawa. "This is no time for rash experiments in monetary matters."

As to "these points, the first is definitely incorrect. The proposal is> being undertaken because it is considered to be in the best interests of the Dominion. The idea originated in New Zealand, and a British expert was invited to come, here and advise the Government on the matter. It is true, however, that practically every

monetary conference since 1920 has re- | commended the stop to all countries that have not already got a central bank. The Monetary Sub-Commission of the recent World Economic Conference unanimously adopted the following resolution: —■ "The Conference considers it to be essential, in order to provide an international gold standard with the necessary mechanism for satisfactory working, that independent central banks, with the requisite powers and freedom to carry out an appropriate currency and credit policy, should be created in such developed countries as have not at present an adequate central banking institution." On the second point, tho description of the Reserve Bank as "another proprietary bank'' is hardly appropriate; and, as to the alleged hardship on trading banks being required to keep minimum deposits with the Reserve Bank, the following extract from the leport of the "Macmillan Committee" on Finance and Industry is fairly conclusive : "It is to the interest of every commercial banker that, in the short-run, his reserves should be as small as possible consistently with safety. It is equally to the advantage of each banker that there should be one institution carrying a large reserve available for the use of all in moments of emergency, provided that this institution is willing to utilize its reserve for the common safety when the emergency does arise. Hence the one-re-serve system, the foundation of all central-banking practice, arose in this country to meet a practical need and found its organ in the Bank of England. The immense importance of this system has had to be recognised, in newer areas in which commercial banks preceded the institution of central banking, by the system of compulsory reserve deposits at tho central bank." The Question of Credit. As to the suggestion that the set-ting-up of the Reserve Bank involved a restriction of credit, there is no justification whatever for such a statement. With the gold and sterlingassets available the trading banks will have no difficulty whatever in meeting all their commitments to the Reserve Bank for notes and reserves against their present volume of deposits. In fact, the assets handed over when pooled in the hands of the Reserve Bank will be sufficient to form the basis for an expansion of credit if such is necessary or desirable. The bank will be required by law to keep a minimum reserve in gold or liquid sterling assets of at least 25 per <;cnt. of its demand liabilities, but when ?t commences operations the reserve will probably bo treble that percentage. Concerning the references to the South African Reserve Bank, inquiries addressed to the Government of that country brought the following reply : "The ability of the central bank to function as intended was.proved when South Africa remained on the gold standard and Great Britain abandonef! it and also when it was deckled to link Union currency with sterling. The central bank has performed successfully its primary function of maintaining the country's currency, as by law established. The central bank affords machinery for giving effect to the Government's currency policy. Ine central bank,was called upon to face losses on sterling balances when Great Britain left the cold standard and South Africa decided to remain mi gold. The Government has stood aside from participating in profits of the bank ponding the restoration of" the bank's position which is now almost complete. Tho bank is covered under Act of Parliament against losses in maintaining parity between South African pound and sterling in a similar manner to that in which the Exchange Equalisation Account operates in Great Britain."

Position in United States. As to tho position of America, it is well known that the United States Government departed from the gold standard as a deliberate act of Government policy and not from necessity. Furthermore, all the information received shows that while many member banks of the Federal system failed, by far the largest number were non-mem-bers. In fact, it is recognised that the fundamental weakness of the Amer-. ican banking system is the existence of a large number of small independent banks outside the Federal Reserve .system. Authorities agree that otherwise the Federal Reserve system is sound and beneficial, and it is difficult to say what would have happened. during the recent crisis if it had not been m existence. Similarly, when Great Britain was forced off the gold standard, tho Bank of England was not able to prevent it, but a disaster of much greater magnitude would probably have happened if the bank had not been there to control the situation. On the last point being referred to tho British Chancellor of the Exchequer, he stated, that Ins remarks in question had no reference to the proposal to establish a Reserve Bank m New Zealand, but, as tho context shows, were, directed to policies of a totally different character. In tact, his remarks were directed at novel am. untried monetary systems such as are being urged in this and most otlmr countries to-day.