A CENTRAL BANK.

Auckland Star, Volume LXIV, Issue 160, 10 July 1933, Page 4

A CENTRAL BANK.

PROPOSED FOR CANADA.

WHY BANKS ARE ADVERSE

EXISTING FACILITIES SUFFICE

Proposals for a central bank for Canada have been made from time to time of late years, and the I'rime .Minister, Mr. l<. B. Bennett, has suggested establishment of such an institution. But the great weight of banking opinion in Canada is against a central'hank. The "Financial limes," London, of April r>, lias flcvoteil a leading article to the subject. It observes that in the ordinary way the Dominion Bunk Act of Canada was duo for revision this year, but consideration of such revision has been postponed until after the World Economic Conference to be held next month. The ''Financial Times" thinks that the opposition shown by the leading Canadian bankers to a central bank does not proceed from selfish motives, but is because they do not think credit, currency and exchange control call for tho intervention of such an institution in Canada. On the other hand their views would appear to crystallise in the conviction that under the present banking system of Canada ii greater degree of elasticity is provided than the most modern central bank could provide.

.Mr. Jackson Dodds, general manager of iho Bank of Montreal, was recently interviewed on the central bank proposal for Canada, and his remarks form the substance of comment in the leading article above referred to. Sir. Dodds could hardly 1 bo expected to refrain from pointing to the United States, where the Federal Reserve system was first hailed as marking the dawn of a new era in which hank failures would cease, credit would always be adequate, and price levels would never fall. Example of United States. "Notwithstanding all such optimistic predictions," he said, "the world depression indicted probably more havoc in the United States than in any other country in the world. "Since 1921, allowing for banks reopened, the net suspensions in the United States were 936(5 banks, involving total deposits of 4,271,000,000 dollars. During March last the whole banking system, including the Federal Reserve, suspended operations temporarily.

"In Canada there had not been a single bank failure since 1023—in other words, not one -depositor had lost a single dollar."

Mr. Dodds referred to the suggestion that perhaps a central bank could improve conditions in Canada by affording the banks greater and more elastic rediscount facilities than were available under tho Finance Act of Canada; but lie explained the creat difference existing between conditions in London and New York and in Canada in regard to rediscount facilities. In London and New York—the greatest money markets of the world—the rediscount rate is used chiefly to control the flow of funds in and out of the country. But Canada, lacking a money market comparable in the smallest degree to that of London or of Now York, could utilise a rediscount rate to a very limited extent.

What Benefits? Again, another principal instrument of a central bank was open market operations, i.e., the purchase or sale of couud securities and commercial paper to increase or decrease the volume of money in the money market. '"Here again," Mr. Dodcls remarked, "as there is no money market in Canada there would be a very limited scope for such operations."

He asked the question: "Would complete control of the currency issue of Canada by a central battle be of any advantage?" Ho answered his own question in the following terms: The whole purpose of central control of currency is to charge it, with the responsibility of furnishing sufficient currency to meet the commercial and other demands of the country. Canada has what is perhaps tho most elastic system of currency circulation in the world. It is a combined system of Dominion and bank notes.

"The Finance Act meets our needs in Canada, and the establishment of a central bank would be a needless expense and would weaken the banks, which would have to supply, the capital and deposits free of interest.

The Question of Cost. "Tho cost of setting up a central bank would bo very considerable, and much of it would have to be furnished by the banks." Would a central bank be able to control credit? This question was briefly dealt with by Mr. Dodda, who remarked that "in spite of the strenuous efforts on the part of the Federal Reserve system of the United States, and the bringing into being of various finance corporations, demand for credit in the United States continually shrank, and wholesale commodity pricee for the United States showed a drop on the basis of 100 for 1913 from 150.5 in July, 1929, to 80.3 at the end of January 1933—a decline of 46.6 per cent. "In 1926 to 1929, inclusive, while the quantity of currency in circulation in Canada increased 12 per cent, and rate of turnover of demand deposits increased by 22 per cent, the price index of wholesale commodities steadily dropped from 100 in 1926 to 95 in 1929.

In 1932, when the wholesale price index in Canada declined to 67, demand deposits were turning over at a velocity of 52.8 times per year—the same rate of turnover as in 1025, when the average ivholesale price index was 102. Average demand deposits in 1932 were but 2 4 per cent below those of 1925. "The inference is obvious that Canadian pricee for the most part are set in world markets, and that neither the quantity of money nor the volume and use of credit in Canada has aDv material bearing.

Certainly the establishment of a central bank in Canada would have no effect °5 world prices, and would only be an added expense to the country at large while providing no need that is not already met by the Finance Act."