The Press THURSDAY, JULY 28, 1938. The Reserve Bank Report

Press, Volume LXXIV, Issue 22465, 28 July 1938, Page 10

The Press THURSDAY, JULY 28, 1938. The Reserve Bank Report

The second annual report to Parliament of the directors of the Reserve Bank is remarkable for its cautiously-worded yet frank criticisms of certain aspects of Government policy. This independence of spirit is in itself reassuring. Since the present Government came into power amendments to the Reserve Bank Act have in theory brought the policy of the bank under the complete domination of the Minister for Finance and, by abolishing private share capital, have made all the directors Government nominees. It was feared at the time that these changes would make the public pronouncements of the bank’s directors mere echoes of Government policy; and since the governor of the bank and a majority of his directors are nominees of the previous Government, it is still too early to say that the fear is unjustified. But it is permissible to hope that the criticisms of Government policy in this report will be regarded simply as the impartial exercise by the governor and his directors of a duty imposed on them by their position and that all future boards will be expected to show a similar independence. The first criticism in this year’s report relates to the method of financing the activities of the Primary Products Marketing Department. The bank points out that in the past the overdraft in the dairy industry account has not been specifically secured, in that the dairy produce against which the advances have been made has not been hypothecated to or controlled by the bank. Since the bank is by law forbidden to make unsecured advances, it has probably been acting ultra vires in granting an overdraft to the Primary Products Marketing Department. The Government’s method of getting over this difficulty has been to insert a clause in the Finance Act (No. 2), 1937, declaring that this class of advances “shall not be deemed to be, or to have been, “ unsecured.” In other words, an unsound practice is solemnly declared by Parliament to be a sound practice. Naturally enough, the board does not accept this as a solution of the problem and affirms its belief that “ all borrowings “from the State, whether or not wholly or “ partly covered by other assets, should be “ secured on the Consolidated Fund in accord- “ ance with usual practice.” The board might have gone further and affirmed, what is certainly true, that it is not the normal or proper function of a reserve bank, which is the keystone of the whole national credit structure, to finance trading operations. The second criticism concerns public works policy and is remarkable because it conflicts directly with the public works policy laid down by Mr Nash a few days ago in his Budget speech. Mr Nash referred to, only to reject, the theory that public works “ should be used as a kind of balancing factor, to be extended in periods of de- “ pression and damped down during booms. His Government, he said, did not subscribe to the view that public works should be regarded as a palliative to be undertaken only in times of, severe unemployment; its policy was “to “promote or expand public works on their in- “ dividual merits as projects of public develop- “ ment.” The Reserve Bank board, on the other hand, “ regards it as highly desirable, on “ financial grounds, that the extent of such “works should be regulated as far as practic- “ able according to the state of employment “ in other directions, a slowing-down being ar- “ ranged when the demand for labour for other “ purposes is relatively satisfactory and an “ acceleration during periods of comparative “ business inactivity; ~ . It seems clear that among the reasons which have prompted the board to offer this advice is the desire to safeguard the position of the Reserve Bank. The board anticipates that in another slump the bank will inevitably be called on to finance public works for the relief of unemployment. Its capacity to do so safely will depend on the extent of its London funds; and it is therefore disquieting to find that London funds are at present declining. They are declining because credit expansion, for which the present heavy expenditure on public works is partly responsible, has led to over-importing. What the Reserve Bank directors are trying to tell the Government is that, by increasing public works expenditure at the present time, it is putting serious difficulties in the. way of expanding public works activity during the next depression. The Prime Minister’s reaction to the report is characteristic and pathetic. To slow up the public works programme, he says, would be to accept the inevitability of slumps; and in his view there is “no reason in the wide “ world why there should be a general slump “ or why there should be distress among any “ section of the community.” Moreover, the person who talks of slumps is “ rendering a dis- “ service to the country ” by creating a slump psychology. The Prime Minister might carry his reasoning a stage further and interdict umbrellas because they encourage rain.