CENTRAL RESERVE BANK.

Auckland Star, Volume LXI, Issue 122, 26 May 1930, Page 4

CENTRAL RESERVE BANK.

AUSTRALIAN INSTITUTION. PROPOSALS EXPLAINED. The Federal Treasurer (Hon. E. G. Theodore) recently explained to the House of Representatives the provisions of the ■bill providing for a central reserve bank of Australia. "The proposal in this measure is to establish an important new financial institution," said Mr. Theodore. "The intention is to enable the institution to operate for the purpose of maintaining the stability and security of our monetary credit systems. I am aware that the proposal has been received with somewhat mixed feelings. There seems to be apprehension in some quarters. This is not very well founded. There is no sinister motive behind the bill. Australia will merely be following the practice adopted by other countries. The central reserve banking system has been a notable feature of the financial world for the last ten years. The only three countries that have not accepted the system are Canada, Australia, and the Argentine. It is a somewhat remarkable commentary upon what can be done, by a central reserve system that iti the three countries mentioned there have beeD serious financial disturbances in the last few years. Some of the critics have questioned whether the time is opportune, but my own opinion is that the time was never more opportune for taking this action. The contentions of the critics might have some foundation if the establishment of the bank created confusion or in any way disturbed the financial relations of tho industry and business of Australia, but there can be no sound belief that such confusion or difficulty will arise. "Mobilising our credit resources constitutes one of the methods that we have in preventing the deflation of credit. A central bank can be of great help in assisting a country through financial stringency by bringing about a concentration of reserves in the possession of the trading banks. The United States Federal reserve system was created after the financial crisis of 1907, and it has prevented a repetition of such a calamity.

The Commonwealth Bank. There ane some people, who, while approving the idea of a central bank, think that we should allow the Commonwealth Bank to evolve gradually into a central reserve bank. The Commonwealth Bank attempted to assume the functions of a central reserve bank, but it has never been successful in evolving those functions, and it cannot be regarded as a central reserve bank to-day. The principal obstacle has been the attitude of the private trading banks. They declined to deposit a considerable amount of their reserves with the Commonwealth Bank, realising, as they did, that those reserves might be used to further competition against themselves. Realising this, we have brought forward this measure. We do not desire to encompass the destruction of the Commonwealth Bank, and I do pot think any person wants to see it abolished or retired from the competitive field, but we must recognise the rights of the trading banks. Therefore, the central bank must be an institution apart from the Commonwealth Bank." Mr. Theodore continued that the practice of Australian banks was to keep from 16 to 18 per cent of their deposits against liabilities. In the aggregate these reserves amounted to a large sum. Under the central reserve system a, considerable amount of these reserves could be utilised without impairing the safety or security of the banking investments or of the depositors with the banks. It was estimated that if the trading banks deposited 10 per cent of their current accounts and 5 per cent of their fixed deposits, the Central Reserve Bank, at the outset, would have a minimum reserve of £20,000,000. It was believed that from £16.000,000 to £18,000,000 would be represented by deposits from the trading.banks, and from £2,000,000 to £4,000,000 by the current accounts of Governments doing business with the central bank.

Fifty Per Cent fn Gold. The Central Reserve Bank, Mr. Theodore explained, would have to hold 2-5 per cent in cash against the liabilities of depositors. Of that amount 50 per cent must be in gold, and the I'emaininf portion might be in British Government securities, or first-class trade bills, negotiable ou the overseas market. The duration of the trade bills must not exceed 120 days. There was provision also for the transfer of £2,000,000 from the Commonwealth Bank to th-e Central Reserve Bank as the initial capital. Mr. Hughes: Will the Federal Reserve Bank consider that as a loan? Mr. Theodore: That will be an absolute transfer from profits., and it will be justified because profits have been made from central reserve functions. No one can cavil at the transfer. Continuing, Mr. Theodore explained that it was not proposed to accept deposits ■bearing interest, except from one or two limited classes of depositors. There were certain firms that would become recognised as operators in a particular field, and the trade mark and test of recognition of these firms would be that they were depositors with the Central Reserve Bank. No doubt the bank would require to hold substantia] deposits 'before they could operate. It will discount bills of other banks and financial institutions and those dealing in the money market.

In explaining the management of the bank, which would consist of a governor and directorate of eight persons, including the Secretary to the Treasury, Mr. Theodore said it had been suggested that the governor shoull jiot be chairman of the board. He claimed that the governor should be the principal executive and controlling officer of the bauk. Referring to the provision imposing an obligation on the banks to transact Government exchange business free of charge, Mr. Theodore said that it was ja reciprocal proposal, under which the transfer of notes would be directed throughout the Commonwealth for the trading banks. WHEAT AND WOOL FREIGHTS. In an advertisement directed to the farming community, Messrs. H. Matson and Co., well-known Christchureh auctioneers, refer to what they describe as -"the serious matter of freight," and state: — "On local rates, to ship wheat by the ton from Lytfcelton to London the price is 40/ per ton. To ship wool by the ton it costs £10 9/. In face of the above comparison it would look that the earning power was being carried on the backs of the sheep."