WHAT IS THE CENTRAL BANK?

Auckland Star, Volume LXIV, Issue 257, 31 October 1933, Page 11

WHAT IS THE CENTRAL BANK?

The man in the street wants to know what is meant by centralising the banking system. So to strip the question of all technicalities, let us make the following explanation. To do 60 we would use a very elementary illustration: — Take a community that had no banking system at all; each citizen in such a community would be compelled to keep in some secret place all the money he saved. Then, when he wanted to buy anything, he would have to take actual coins to make the purchase. Now the danger, risk of loss, and the inconvenience of such practice is obvious, and such a state of things would be impossible to-day. Into this community comes a banker, and he establishes a bank, by which means he actually centralises the financial resources of that , community. His bank gives security, eliminates loss, and provides the people with cheques and notes, bills of exchange, which enable them to buy goods in any part of the world. The great benefit that such a bank can bestow on that community is obvious. Again, by experience the banker knows that he will not be called upon to keep in reserve for banking requirements more than a small percentage of the total deposits. The balance he can lend out to those whose business it is to carry on the development of the country's industrial life. Now, in New Zealand we have reached the position where we have six private banking companies. Each has centralised the financial resources of those with whom it does business. Each, however, has a separate note issue; each holds a separate amount of gold, which to-day in a decentralised form is of no use to the bank or the country. Each has separate London agents with whom it arranges to buy for its customers the goods of other countries by means of the bills of exchange. It is- clear to the man in the street that if so much benefit has,accrued to the community by the centralisation of their individual financial resources, much greater will be the benefit to the banks, and through them to the community, of the centralisation of the resources of the banks. To do this' we employ the machinery of a central reserve "bank. Such a'bank becomes the sole note-issuing authority, the banker for the banks,.the custodian of the gold reserve, and the discounting house, for the trade'bills of the country's commerce. As with the trading bank, so with the reserve bank. It increases the credit facilities of the country, and, what is much more important, it increases the velocity with which the credit circulates. If, instead of sending our export bills to different bill brokers in London for rediscounting, we can do this in Wellington in a day at our reserve bank, we not only add to the velocity of turnover, but we do the business at less cost. To explain this: We all know that a credit instrument, such as a cheque, a promissory note, a bill of exchange, a trade acceptance, is valued according to its backing; eo, if our bills of exchange go forward to the London market for rediscounting accompanied by our shipments, of produce, endorsed by the producer, his trading bank, and, in.addition, the. endorsement of the New Zealand Reserve Bank, which represents the centralised financial resources of the Dominion itself, then their value as a credit the discounting ie greatly increased/and the saving to the producers of New Zealand on £40,000,000 -£50,000,000 of bills a year can be added to the estimated saving to the taxpayers for this year of £040,000 —making it over a million pounds a year. This, of course, is contingent • upon the Reserve Bank being in a position to grant facilities more attractive than the present methods, and it should experience no difficulty in doing this. This also emphasises the great importance of loyal co-operation between the Reserve Bank and the trading 'banks. The position has been aptly stated by the Rt. Hon. Reginald McKenna, who eaid: "A reserve bank is a well, from which springs the water of life. The commercial banks are the pipes that carry it to a thirsty economic system." Let us, therefore, dispel from our minds the illusions which seem to envelop this great question,, and judge it in the ltoht of international experience and the benefit of our country. J- HISLOP.