The Press MONDAY, NOVEMBER 14, 1960. The Reserve Bank

Press, Volume XCIX, Issue 29361, 14 November 1960, Page 14

The Press MONDAY, NOVEMBER 14, 1960. The Reserve Bank

The amendment of the Reserve Bank Act in the closing hours of the session was a waste of Parliament’s time. The ostensible purpose of the amendment was to reassert direct Ministerial control over the bank, and thus to fulfil a promise made by the Prime Minister (Mr Nash) before the 1957 election. Ten years ago the National Party Government repealed the “ Nash “ clause ” in the amending legislation of 1939, which provided that the Governor and directors of the Reserve Bank should “ give effect to any decision of “ the Government . . . conveyed “ to the Governor in writing by “ the Minister of Finance ”. The National Party Government’s legislation provided that the bank should be required (in the event of disagreement with the Government) to act upon resolutions of Parliament. This clause has now been repealed. These attempts to formalise the relationship between the Reserve Bank and the Government are relatively unimportant. They were meant, obviously, to satisfy political concepts rather than to govern the practical discharge of the bank’s functions. It has been said that no written direction was ever given to the bank in terms of the “ Nash clause certainly no resolution of Parliament was ever necessary to resolve a dispute between the succeeding Government and the bank. And it should be clear even to the most rabid monetary theorists in the Labour Party that if the present Government had found existing legislation an embarrassment it would not have waited to the last week of its three-year term of office to assert a “ control ” over the Reserve Bank for which it obtained a mandate in 1957.

Unfortunately the debate on the amending bill could not have helped towards public understanding of the Reserve Bank’s functions; and it might be hoped that candidates during the election campaign would make some effort to clear up the confusion. It is little more reprehensible to depict the central bank as a sinister “ power “ behind the throne ”, imposing the dictates of foreign financial interests upon a help’ess government, than to offer the " inde- “ pendence ” of the bank as a guarantee that governments and the people who elect them will be saved from the consequences of their own financial folly. Clearly it is desirable for the bank to preserve, as fully as possible, its independence of the government in its day-to-day conduct of its business: but in the last resort, however the central bank’s charter may be drawn, it must be an instrument of government policy. It may restrain unwisdom by good

advice. It may minimise, by ! its skill in the use of mone-!’ tary techniques, the serious consequences of gross government imprudence. But it must/ in the end, give effect to the’ will of the sovereign parlia-i ment, which in New Zealand is the will of the government of I the day. The proper relation-1 ship of the central bank to its government has been well defined by Dr. M. H. de Kock,’ the noted South African expert on centra] banking; The great importance of the central bank’s functions to the material well-being of the nation makes it necessary that such a bank should be subject to State supervision and control, but not in such a manner as to render it subservient to the will, of the government and the legislature.’ . . . Where a central bank is . . converted into a State bank care should be taken that it does not become exposed to political pressure and so closely associated , with the government and the! legislature that it will lose its independence of judgment and its ; objective outlook on monetary and banking matters.

To hear New Zealand politicians—especially Labour politicians—discuss the question one would imagine that the control of the country’s currency and credit was the object of a continuous running battle between the government and the central bank instead of a smooth process of almost daily consultation and discussion between Ministers, bank, Treasury, and many other agencies concerned with national financial policy. Should a point be reached in this process where it appeared that political expediency could not be reconciled with financial; principle it is unlikely that the conflict could be resolved either by an order from the Minister of Finance or by a resolution of Parliament. There would, more likely, be resignations—either of bankers or Ministers. By its very nature, its resources of expert knowledge, and its close and continuous contact with financial institutions both in New Zealand and overseas, the Reserve Bank is pre-eminently the institution best qualified to advise the Government, on monetary policy. If this fact were more generally understood the National Party, instead of proposing an advisory monetary and economic commission, might more usefully have oromised to strengthen the Reserve Bank’s advisory services and to restore its proper measure of “ independence ” independence, that is, not to orverrule the Government but to advise the Government freely and to publish such advice at its discretion. And if this had been better understood we should not have had in the closing hours of the last Parliament the elaborate mumbojumbo addressed to no more serious purpose than to impress the monetary cranks inside and outside the Labour Party.