The Press FRIDAY, SEPTEMBER 35. 1933. Bankers and Central Banking

Press, Volume LXIX, Issue 20961, 15 September 1933, Page 8

The Press FRIDAY, SEPTEMBER 35. 1933. Bankers and Central Banking

Through its general manager, Sir Henry Buckleton, and its chairman oE directors, Mr R. W. Gibbs, the Bank of New Zealand issued yesterday s a reply to the pamphlet circulated recently by the Minister for

Finance setting out the case for the j establishment of a central reserve | bank in New Zealand. It is not necessary to discuss Sir Henry Buckleton's justification of the attitude of the Associated Banks in their recent dealings witli the Government. It is sufficient to note that, on his own showing, the relations between the banks and the Government have not been happy. And it would be surprising if they had been, seeing that in such important matters as the exchange rate, the conversion, and the overdraft rate the Government has had to negotiate, not with one bank, but with six banks. If there were no other question involved, it would be clearly desirable that the control of currency and credit in New Zealand should be centralised for the sake of convenience. It is no secret that in the last year the business of government has been seriously impeded by the necessity for protracted financial discussions with the bankers. It is not suggested that the bankers are to blame for these delays or that they have been actuated by anything more than a desire to protect their legitimate interests. The point is that delays have occurred and that they would not have occurred had the banking system been centralised. Sir Henry Buckleton's statement also shows that the relations between the State and the banks in New Zealand are most unsatisfactory. For instance, dealing with the charge ( that the rate of discount paid on Treasury bills is too high, he admits frankly that " the banks are willing to re- " duce the rate, provided the banks " are put on the same footing for in- " come tax as other joint stock com- " panics." Apparently Sir Henry Buckleton does not see anything wrong in a situation which enables the banks to demand profitable concessions from the Government in return for a more reasonable rate on Treasury bills. The incident shows clearly how undesirable it is that the business of granting financial accommodation to the State should be in the hands of a trading bank primarily concerned, and rightly so, with the interests of its shareholders. Sir Henry Buckleton next argues that the experience of other countries has shown that central j banking is a risky experiment. The United States, he says, has 12 central banks and " these banks failed to "regulate credit, to control interest "or exchange fates, to check the "wildest speculation, or to prevent " the United States from going off " the gold standard." It is impossible not to admire his boldness in using an argument the weakness of which is exposed ir. the following passage from the pamphlet he is criticising:—.

It is well known that the United States Government departed from the gold standard as a deliberate act of Government policy and not from necessity. Furthermore, all the information received shows that while many member banks of the Federal system failed, by far the largest number were non-members. In fact, it is recognised that the fundamental weakness of the American banking system is the existence of a large number of small independent banks outside the Federal Reserve system. Authorities agree that otherwise the Federal Reserve system is sound and beneficial, and it is difficult to say what would have happened during the recent crisis if it had not been in existence.

In any case, whatever mistakes or failures can be credited to central banking, the fact remains that it is long past the experimental stage and that it has been established in the great majority of financiallydeveloped countries. Finally, both Sir Henry Buckleton and Mr Gibbs choose to revive the well-worn legend that the proposal to establish a central reserve bank in New Zealand is the result of "dictation" by the Bank of England, thereby aligning themselves with the followers of Major Douglas. It would be interesting to learn from them just why a central bank would be any less independent than the existing banks.

up full sterling payment, if the board persists, and then take steps to reimburse itself. That is, there is threatened a very disagreeable and possibly damaging collision between local and central authority, in which the antecedent facts art? likely to be forgotten and the weight of the Government's hand to be bitterly remembered. The situation is unfortunate, also, because the board and Mr Coates are beginning to disagree upon too many points of fact about their negotiations, while the rising spirit of the board is provoking it to some absurd contentions. It is absurd, for instance, to say that any possible " moral obligation" to pay in sterling has been "nullified" by the English bondholders' refusal to grant a lower rate of interest; this is to say that a moral debt should be cancelled because the creditor believes it is a legal debt and wants to be paid. It is equally absurd to say that bondholders deserve no sympathy "who "can only receive exchange at the "expense of the people of South- " land." The bondholders, of course, do not " receive exenange" at all; they receive exactly what they have always received, but it costs Southland more to pay. It ought not to be di/kcult, even in Invercarp.ill, to imagine how the chairman of a meeting of London bondholders might reply to a proposal that they should receive £BO in sterling instead of £100: "There is no room "for sympathy with bend-issuers "who can only be saved exchange "at the expense of the people of England."' But all these unfortunate aspects of the situation are secondary to its worst. In spite of the Prime Minister's assurances in London, this long-drawn disagreement must unfavourably impress English lenders and react directly and indirectly upon the Dominion's credit. If local bodies have to be coerced by the Government into paying in sterling, lenders may consider the risk of a change of government; they will be slower to renew old loans or take up new ones. Even the certainty that all future loan contracts will be explicit and unshakable may not wholly satisfy them, because they may warn themselves that where a legal loophole is used to-day default may be recommended tomorrow. It is for these reasons that the Government's attitude is necessary as well as correct; but. every stand like Southland's against it diminishes its value. Obviously the power board's case is a hard one, though it is reckoning evils at their worst to set the cost of exchange at £20,000 a year until 1936, the date of the London maturities. These are precisely what the board should think of, as the Government is thinking of every New Zealand issue in London, of renewals, and of possible new flotations. The standing of all Dominion stocks and the terms of conversions and new issues are too important to be worsened by snatching at temporary advantages, even if (as is still doubtful) they are legally covered. The present progress of the Australian conversions would have been impossible, had not the threat of Mr Lang's defaults and repudiations been removed; and the analogy carries its own lesson. The Government's plain statement that, if it has to make up sterling payments, it will reimburse itself may seem harsh, for the reason urged in Invercargill; but nothing else could so effectively remove the temptation to local bodies to follow a bad example and throw their burdens on the Government.