THE NOTE ISSUE

Ashburton Guardian, Volume 56, Issue 79, 15 January 1936, Page 8

THE NOTE ISSUE

SCOPE FOR EXPANSION. RESERVE BANK POWERS. It has been suggested a number of times by members of the Government that the Reserve Bank will be employed in giving effect to the monetary policy that will be pursued. The present powers of the bank to increase the volume of credit and currency available are therefore of some moment, as are the limitations placed by law on those powers. The exclusive .right to issue banknotes is one of the most important privileges possessed by the bank. This is limited by the necessity to maintain a statutory minimum reserve; but it is not possible to calculate exactly at any moment the unutilised noteissuing power of the bank, because the reserve must bear a ratio, not to banknotes in circulation alone, but to the sum of the note issue and tho other demand liabilities of the bank. These consist of Government deposits, deposits of the trading banks, and a miscellaneous item "other demand liabilities."

The reserve to be held against these items consists of gold coin and bullion in the unrestricted ownership of the bank, sterling exchange, and one or two other items of no immediate importance because as the weekly returns have shown, nothing has -been held under these classifications since the bank began business.

To take the position disclosed in the last available return of the bank, that compiled on December 30, banknotes were on issue to the value of £10,720,004, while the other demand labilities totalled £13,737,109. The amount to be set off against the reserve was, therefore, £24,457,663. Tho minimum reserve necessary for these obligations is £6,114,416. At that date the bank held gold to tho value of £2,801,733 and sterling exchange valued at £21,398,949, a total of £24,200,682, or £18,086,266 more than the statutory minimum. Instead of the 25 per cent required by law, the reserve was 98.948 per cent of the obligations it covered.

With its present reserve, the bank could carry demand liabilities amounting to or £72,345,0a5 more than tho sfim of its note issue and its various classes of demand deposits. This indicates the magnitude of its power to issue additional notes, while still keeping within the limitations at present imposed by law. The lowest ratio of reserve to demand liabilities in the history of the bank was 96.56 per cent on September" 2 last. For the greater part of the time since it opened tho figure has been above 99 per cent. Consequently it ha* always had an enormously higher power to issue notes than that utilised.