Monetary Policies Criticised

Press, Volume CVIII, Issue 31587, 26 January 1968, Page 16

Monetary Policies Criticised

“Major deficiencies” in New Zealand’s monetary and publicdebt policies were can- < vassed by Mr L. C. Bayliss, a Bank of New Zealand economist, in a paper to the A.N.Z.A.A.S. congress yesterday.

Reviewing the period from 1955 to 1967, Mr Bayliss said that monetary policy had been characterised by low and inflexible interest-rate policies, and by a widespread system of administrative controls on credit. “The reluctance to use flexible interest-rate policies stems partly from political objections to higher interest rates, and partly reflects the fact that both the Treasury, and to a lesser extent the Reserve Bank, have been somewhat lukewarm in their support for flexible interest-rate policies,” Mr Bayliss said.

The authorities had relied on an extensive and detailed system of administrative controls over trading banks, other financial institutions, and capital issues. Saying that such policies were in sharp contrast to those followed in other economically developed countries, Mr Bayliss proceeded to their detailed analysis, and the way in which they had been implemented. New Zealand’s policies were largely the reverse of those followed in the United States, where monetary policies had improved the efficiency of the United States financial system. “Financial institutions in

New Zealand, or rather those subject to control, have certainly not flourished,” said Mr Bayliss. “Nor have savers been assiduously courted, nor handsomely rewarded. The lending function of deposit intermediaries has had to be duplicated, which, besides involving a waste of scarce resources, has led to higher borrowing costs, and a decline in over-all standards of credit management.” Mr Bayliss saw three major deficiencies in New Zealand’s monetary and public-debt policies. “First, the authorities have failed to recognise the growing significance of direct

lending such as inter-company lending, trade credit, and personal mortgage lending,” he said. The second deficiency arose from the failure of the Reserve Bank to analyse correctly the causes of the periods of monetary "tightness” which New Zealand had experienced. “A serious shortage of funds has developed at the peaks of New Zealand business cycles—l9sB, 1961, 1966-67—a shortage mainly brought about by a sharp increase in the demand for funds from private-sector borrowers to finance increases in investment,” Mr Bayliss said. The continued reliance on

administrative controls on credit, he said, reflected not only a failure to analyse the evidence relating to changes in financial flows, and the causes of monetary “tightness,” but also a reluctance to review New Zealand monetary policy in the light of quite radical changes which had taken place over the last decade in overseas thinking, and practice, on this subject. Finally, the increasingly adverse Short and long-term consequences of the refusal to pay market rates of interest on public-sector borrowing had attracted insufficient attention in New Zealand. “Indeed, apart from the reports of the Monetary and Economic Council, public debt management has been virtually ignored, although it is an inseparable part of monetary policy,” said Mr Bayliss. It must be hoped that this neglect would not be continued in the Government’s review of monetary policy, he said.