RESERVE BANK BILL.

Auckland Star, Volume LXIV, Issue 30, 6 February 1933, Page 4

RESERVE BANK BILL.

RISKY EXPERIMENT. ANALYSIS OF THE MEASURE. REMARKABLE PROVISIONS. (By A. N. FIELD.) The most striking thing about the Reserve Bank of New Zealand Bill now before Parliament is that it is entirely external in its origin. The next most remarkable thing is that under it the money of New Zealand will be under rigid external control. And another remarkable feature of an altogether remarkable measure is the nature of the reserve to be held by this bank. In no quarter within New Zealand has there been agitation for the establishment of a central reserve bank as planned in the bill. The public have never asked for such an institution; the banks have never asked for it, and the politicians have never asked for it. Nobody had thought of it until Sir Otto Niemeyer visited this country in the latter part of 1930, as representative of the Bank of England, ard recommended the establishment of a reserve bank. The bill is before Parliament not because anybody here wanted it, but because an external institution, the Bank of England, apparently desired it. In his report, published in 1031, Sir Otto Niemeyer explained that the object of monetary control in his opinion should be to maintain a stable exchange. The ideal to his mind was that a New Zealand pound note should always, in theory, be convertible into a fixed_ and invariable amount of gold. The maximum amount of fluctuation allowable should not exceed 1% per cent either way, which roughly represents the cost of shipping gold between New Zealand and London. As second best, the New Zealand pound note should bo maintained at parity with the British pound. A Reversal in Policy. At the present moment the Government of New Zealand is committed to a policy totally at variance with that enunciated by Sir Otto Niemeyer. The New Zealand pound in 1931 moved away from parity with sterling to the extent of 10 per cent, as the result of action by the Associated Banks. It was stated at the time that this 10 per cent exchange rate had been fixed somewhat above the natural level of exchange, as determined by demand and supply, with a view to discouraging imports. On January 20 of this year the exchange rate was raised to 25 per cent, the banks "reluctantly" yielding to Government pressure in the matter. The position thus is that the principal objective urged by Sir Otto Niemeyer in recommending the establishment of a central reserve bank has tbeen discarded by the Government—for the time being, at any rate—but nevertheless the Government is apparently bent on establishing the bank. This leaves for consideration the secondary objectives advanced by Sir Otto Niemeyer, the originator of the bill. These were:—First, that a central reserve bank here would provide "an instrument for co-operation with the central banks of other countries —a co-operation which is becoming of increasing importance, and which at present finds no suitable point of contact in New Zealand;" and, secondly, that it would result in "incidentally transforming into an earning asset the present dormant holding of gold" in the bank vaults in New Zealand. Sir Otto Niemeyer was entirely silent as to' the precise advantages to be gained by the establishment of close contact with the central banks of the world. The most powerful central bank in the world is the United States Federal Reserve System. This was established at the end of 1913: It was advanced as an institution to prevent financial stringencies and panics. Despite the fact that it possesses a greater power over world monetary conditions than any other institution ever established, there have been greater stringencies and panics since it was established than were ever known before. As the result of pressure from the United States central banks have been set up in many other countries. Fipancial advisers were sent to these countries, and they were proffered gold loans to induce them to set up central •banks and tie their currencies to # gold. These steps have done nothing to induce any revival of prosperity so far. No evidence has been advanced to show that the setting up of a central bank in New Zealand would revive prosperity here. To Whose Benefit? The principal argument remaining for the bill out of the three advanced by Sir Otto Niemeyer is thus, that the £5,000,000 odd of gold now held 'by the hanks can be transformed from a dead into an earning asset. At 4 per cent per annum this means that an income of over £200,000 per annum can be secured by selling this gold; at 5 per cent, over £250,000 per annum can be secured. This gold," however, is not the property of the people of New Zealand, but of the trading banks. Only a portion of the profit to be derived from this gold sale would go to the reserve 'bank, and only a portion of that bank's profit would go to the Government. Before the Government gets any profits from the reserve bank the shareholders in that institution must first get a dividend of 5% per cent on their money, then half of .what remains goes to the general reserve fund of the bank, and the Government gets the other half. After the reserve fund reaches a certain figure the Government's share increases, but the sale of the gold would probably take place before this point has heen reached. It does not appear that the people of New Zealand would derive any considerable 'benefit from this transforming of the gold in the bank vaults into an earning asset. Nevertheless, while the advantages to he derived by tho _ citizens of this country might 'be negligible, there would be clear and quite positive advantages to be derived by the external financiers buying the gold. They would receive this metal, and in return for it would hand over a certain amount of paper, of greater or leßs value. So long as the gold standard obtains in certain great countries, and so long as huge debts payable in gold are owing hy other nations, gold has a very definite value in controlling the economic life of the world, and to the financiers every little bit is worth mopping up, even New Zealand's five or six millions. The Basis of Regulation. The need of the world is for money stable in purchasing power over commodities —money that is an honest measure of human effort. The Reserve Bank Bill does not provide anything of the sort. It provides that our money shall be kept at parity with sterling. In his Rhodes Memorial lectures at Oxford University last year, Professor Gustav Cassel, the European monetary expert, said: "England is on a 'sterling' basis, but nobody knows what 'sterling' means, and official circles continually refuse to give a clear and definite answer to this most important and .most natural queation. Other countries look in vain to England for a lead in monetary policy .. ." "Sterling" today is an inconvertible paper currency; it has ceased to be maintained at any fixed parity with gold; it is not maintained at any fixed parity to anything else. Our Government lias abandoned the idea of maintaining the money of New Zealand at fixed parity with sterling: it -has not accepted the idea of maintaining it at any fixed parity with anything else. It adopts a high exchange policy, and at the same time is committed to proceed with the establishment of a money-controlling machine, the chief object of which is to prevent the exchange ever getting away from parity by more than 1% .per cent. The Reserve Bank Bill provides all the machinery needed for maintaining a low exchange rate; it provides none at all as it stands for maintaining a high exchange rate. If the low exchange rate is not wanted, what object is there in j roceeding with the bill? Having discarded the monetary policy recommended by Sir Otto Niemeyer, why persevere with the erection of the machinery to effect that policy? These points deserve elucidation; >o far they have not 'been elucidated. ■ (To fee €oz>tiane£3