EXCHANGE AND CURRENCY.

Auckland Star, Volume LVII, Issue 143, 18 June 1926, Page 12

EXCHANGE AND CURRENCY.

A BANKER'S VIEWS.

NOTES AS LEGAL TENDER.

(By Telegraph.—Special to "Star.")

WELLINGTON, this day

In his address in Wellington to-day to shareholders of the Bank of New Zealand the chairman of directors, Sir Geo. Elliot, dealt fully with the vexed questions of exchange and currency so far as New Zealand is affected thereby. He said: Amongst those whose views are entitled to respect, therd is still an acute uinerence of opinion as to whether or not the reversion to the gold standard was premature. Be that as it may, this at least we do know; that since the removal of the restriction, exchange difficulties in New Zealand have disappeared and primary producers have materially benefited.

Selling rates on London are considerably less than the cost of shipping gold; the same remark, to a lesser decree, applies to exchange on Australia.

lt was hoped that one important result of the reversion would be the cheapening of money. So far, however, this has not been effected, although the Bank of England reduced its rate by stages from 5 per cent to 4 per cent; but, owing to the outflow of gold it was found necessary to again advance the rate to 5 per cent.

There is no getting away from the fact that as long as Great Britain is heavily indebted to the United States, the latter country must dominate the London money market. However much the British Government may desire to reduce money rates—not only with the object of cheapening the cost of its own loans, but also of benefiting Britain's large industrial interests—it must be inliuenced by the rates prevailing in the United States. This state of affairs is, of course, of considerable importance to this Dominion, and to all other parts of the Empire that look to the London money market to supply their loan requirements. To some extent overseas banks can help the situation by the maintenance of funds and investments in London, but, as far as New Zealand is concerned, this can only be done while bank notes continue as legal tender in the Dominion.

Should notes cease to be legal tender, this bank would require to make provision for a reduction of two millions in its note circulation. This would necessitate the realisation pf British Government securities, and the importation of two millions of sovereigns, otherwise our holding of gold in the Dominion would become unduly low. A change over to a gold currency would not make any material difference to the profits of the bank, but it would mean a considerable loss of revenue to the country. As I have.said the bank would require to sell two millions of its investments in British Government securities, the average return on which is about 4J per cent. This would mean a reduced income to us of £85,000, but British income tax approximating £17,000 would be saved. The net loss of profit to. the bank in London would, therefore, be £68,000. On the other hand, in New Zealand we would save: Note tax of 3 per cent, on £2,000,000, £60,000; saving of income tax on reduction of liabilities by £2,000,000, £6750; net gain to the bank in New Zealand, £66,750.

L Of course, there would be the expense of importing the sovereigns, hut that would be non-recurring and would be offset, apart from taxation, by lower working expenses of the note circulation. Neither in Great Britain, nor in New Zealand, is any one worse off because sovereigns are not in circulation. It .might not be of great moment to Britain if she lost the £17,000 of taxation which the bank* pays on the two millions invested there, but New Zealand cannot afford to disregard the revenue of £66,750 derived from this bank alone in respect of two millions of its note circulation, to say nothing of the additional loss in connection with the circulation of tho other-banks trading in the Dominion.

From the figures I have quoted you will see that, while the note circulation is without doubt a convenience to the banks, it is not the profitable privilege so many people suppose it to be.