MONEY MARKET.

Auckland Star, Volume LXX, Issue 139, 15 June 1939, Page 8

MONEY MARKET.

RESERVE BANK'S POSITION.

NARROW WORKING MARGIN.

RESULTS OF STATE BORROWING

The latest bulletin of the Canterbury 1 Chamber of Commerce prepared in consultation with the Department of | Economics of the Canterbury University j discusses the banking position of] the Dominion and sets out the relationship between the Reserve Bank and the trading banks. ; '"Banking figures show no striking changes in the last quarter," states the ■bulletin. "Government advances from the Reserve Bank other than for dairy produce, which show most of the inflation that was the chief cause of over-importa-tion and of the depletion of overseas funds during the second half of 1038, have remained fairly steady at about £12,000,000 since the end of December last. Apparently the Government's need for money during the March quarter was met from normal sources, which should lie sufficient since receipts from income and other taxes are usually large towards the end of the financial year. lu the near future Government payments may be met iroiu the proceeds of revenue and from the internal loan. Consequently it appears that inflation has been checked for the time being at least. "But the heavy advances made to the Government in the latter half of 1038 have placed the Reserve Bank in an extraordinary and difficult position. The chief function of a reserve bank ie to hold the

ultimate reserves of a country's monetary system and to use those reserves to maintain the liquidity of currency and credit under its jurisdiction. The New Zealand Reserve Bank is required by law to maintain a minimum reserve ratio of 25 per cent of liquid assets, including gold and sterling exchange, against its demand liabilities.

Assets Frozen In State Advances. "Its working reserve, or that part of its total K'serves which it can use in day-to-day business, is therefore limited to the amount held in excess of the letfal minimum reserve ratio. On April '24. 1030, the reserve ratio of the bank was 23.1 per cent, and, since the legal minimum is 2.) jut cent, the effective working reserve was only .1 per cent of the bank's demand liabilities. This low proportion is a direct effect of the financing of Government expenditure by which a large part of the bank's assets became frozen in advances to the Government.

"The trading banks in New Zealand are required by law to hold 7 per cent of their demand liabilities and 3 per cent of their time liabilities on deposit at the Reserve Bank. This constitutes the legal requirements as to their reserves. The trading banks' effective'working reserves are also limited to any amounts held in excess of the legal minimum. But under a central bank system it is understood that trading banks can increase their reserves by borrowing from the Reserve Bank, whose funds should always be kept sufficiently liquid to permit such borrowing. On April 24, 1030, the demand and time liabilities for the tradinp banks were such that £3,.">00,000 was required by law to be held on deposit at the Reserve Bank. This represented 0.2 per cent of the demand liabilities of the trailing banks, and this amount was the legal minimum reserve.

Liquidity of Funds. Actua'lv the liquid assets of Ihe trading banks .it i hat date, including net overseas funds, Risevve li.mk uo',.-.. roin and halanecs at the Reserve Rank, amounted to £ 10.000.1NW1. or 40.X p-r .-. lit of their demand liabilities. Their elb elive winking i escrvcs, representing the excess over the legal minimum. Were thus more than 40 per eeiit, of the demand liabilities. This proportion may !«' compared with the effective working reserve of .1 per cent held by the Ki ■nerve Hank, whose function it is to safeguard the liquidity of trading bank credit.

"This coinpai ison shows that the tradin/_r banks, operating under private enterprise. have retained their hiifhjy liquid position, or perhaps it should he said that they have retained that position as far as lies in their power, and their assets would be highly liquid if the Reserve Bank were able immediately to provide sterling funds in exchange for its notes and deposits. But the Reserve Bank, operating under Government, control, lias failed to keen its assets liquid and has had an undulv large proportion of them fro/.en in

advances to the Government. Origin of Difficulties. "The position that has arisen demonstrates the validity of the prerequisite for successful reserve banking laid down by Sir Otto Xiemeyer, that the Rcv.-.'f Bank 'must be entirely free from both the actual fact and the fear of political interference.' As the facts of the situation which has led to exchange eontiol have become more familiar, it has become more obvious that present monetary difin-nlties are the direct result of the Government's borrowing from the Resei ve Bank, and that these ditlicult ii-s will not be overcome until the Government's advances I from that bank are repaid.