TRADING BANKS.

Auckland Star, Volume LXVI, Issue 214, 10 September 1935, Page 9

TRADING BANKS.

REPLY TO CRITICISM. FUNCTIONS EXPLAINED. THE RATE OF EXCHANGE. The functions of the trading banks and the much-discussed question of exchange were explained by Mr. P. K. 11. Hanna, chief inspector National Bank of New Zealand, Wellington, in an address on "Banking" which he delivered at the annual meeting of the Wellington Chapter of the New Zealand Institute of Secretaries. In general terms, said Mr. Hanna, a reserve or central bank, in addition to handling the business of the Government, was a bank for bankers. Under the Statute, the trading banks were required to maintain deposits with the Reserve Bank to the extent of not less than 7 per cent of demand liabilities in New Zealand, and 3 per cent of time liabilities in New Zealand. So far as the National Bank was concerned, this meant on the basis of present figures, that the sum of approximately half a million pounds was tied up and nonrevenue producing. The banks settled their daily exchanges with one another throughout New Zealand per medium of their accounts with the Reserve Bank. Before leaving the subject of reserve or central banks. Mr. Hanna referred to the Bank of England, the outstanding financial institution of the world; in fact, he said, it might not be going too far to say that the Bank of Kngland was the pivotal point of the financial system of the world. Functions o'f Trading Banks. Mr. Hanna referred to the functions of trading banks, of which there were six operating in New Zealand. The two main departments of their business were, firstly, the borrowing and lending of money; and. secondly, the buying and selling of foreign exchange, i.e., currencies. Of course, the banks undertook many other services, such as the collection of cheques, bills of exchange and promissory notes; remittance of funds from place to place; money changing and money storing; provision of facilities for safe custody of valuables; and numerous other services individual to the private and business affairs of their customers. It was to its depositors that the bank looked for its trading capital; indeed, deposits were the very life blood of banking. A banker's primary duty was to his depositors'; he was trustee, for the funds placed with him, and it was his foremost duty to care for them in such a manner as would ensure their return to the depositors intact, when called for. A tank's second duty- was to earn for its shareholders a reasonable profit from its operations. Mr. Hanna next dealt with the counterpart of bank deposits, namely, bank advances. The proper scope of a bank advance waa to finance trade and industry by means of temporary accommodation for seasonal or other purposes. Character, capacity and capital were major considerations to a banker when dealing with a would-be borrower. The oreatest of these was character, wnu-n was a man's best asset; but, whilst a banker appreciated that, lie naturally insisted upon lending with knowledge; that was to say. he required to know the reason for the suggested advance, and with it the customer's position, including the means of repayment. Foreign Exchange. Speaking of foreign, exchange, that was, the transference of funds country to another, Mr. Hanna said that the related term "rate of exchange might be defined as "the cost of one country's currency on a.given date of an equivalent amount of another country's currency." Prior to 1933, Ne\v Zealand was long accustomed to stability of exchange at rates enabling £100 New Zealand to exchange for approximately £100 sterling and vice versa. Supply and demand was such as to create no serious scarcity or surplus of funds in London, and the exchange position was easy. From early in 1930 onwards New Zealand, in common with other primary producing countries, experienced a severe drop in the value of her exports—prices fell without a decline in volume. There was consequently a growing deficiency in the supply of funds in London, and the banks were forced to endeavour to correct the position by raising the rate in steps to £110 New Zealand equals £100 sterling, thus encouraging exports and discouraging imports. In January, 1933, the New Zealand Government took, action by passing the Banks Indemnity (Exchange) Act, which arbitrarily raised the New Zealand-London rate to £125 equals £100 London. On August 1, 1934, the Reserve Bank of New Zealand commenced operations, and assumed control of the exchange rate New Zealand on London, announcing its rate as £125 for cable transfers from New Zealand to London, and publicly' announcing that it aimed at maintaining the rate unchanged for a long period, unless there was a marked alteration in conditions — an intention which the governor of that bank again confirmed in June, 1935.

Uncertainty Removed. Therefore, to a very large degree, ttie uncertainty regarding the future course of the rate was removed, and importers commenced to replenish their muchdepleted stocks, iiuch money that had been held in New Zealand temporarily to avoid the. high rate was remitted, and exchange business developed to more healthy and more normal proportions. In addition, the Government was relieved of its burden of sterling accumulations, for the Reserve Bank purchased approximately £20.000,000 sterling from the Government at the current rate, upon the condition, however, that any appreciation or depreciation of asset's of the Reserve Bank due to any alteration that might thereafter be nuide in the exchange rate while thevalue of New Zealand currency was not fixed by statute, was credited to or borne by the Consolidated Fund. "High-sounding Phrases." The banks were at present the target for all types of criticism, and it was a popular pastime .to blame them for the depression. One heard much of highsounding phrases such as "the restriction and issue of credit." "costless credit," "idle money in the banks," etc., but many using such phrases had little knowledge of what they meant of, indeed, a number of them had any meaning at all. The majority of monetary reform schemes that were being propounded were merely inflation ill one form or another. There were very defl- ! nite limiU and restrictions pertaining to ! the issue of credit, and these the trading 'lanke must respect. The banking system of the Dominion was founded on j the British system, and by strict adher- ' ence to traditional British banking methods th" hank.- operating in New Zealand had achieved such stability an.l strength that they lost nothing by comparison with banks in other parts of the Empire.