Still Prejudice Against Banks

Press, Volume CVIII, Issue 31588, 27 January 1968, Page 36

Still Prejudice Against Banks

A considerable emotional prejudice against banks existed among some sections of the community, said the governor of the Reserve Bank of New Zealand (Mr A. R. Low) in a review of the country’s monetary policy given to the A.N.Z.A.A.S. congress in Christchurch yesterday.

He listed this as one of the reasons why trading banks had been subjected during the pact 20 years or more to an unusually severe amount of restriction.

“It arises perhaps from a feeling that banking is a rather mysterious subject and that the power of banks to ‘create credit’ is somehow improper,” Mr Low said. “One result is a popular preoccupation with bank profits.” The banks had some justifi-

cation for feeling that restraints imposed on them had been inequitable in their severity, and were harmful to the efficient operation of monetary policy. A policy which focused almost exclusively on bank advances did not now cover a sufficiently wide field to achieve its objects. The appropriate course was not to intensify the same policy. “It must be continued in the meantime, but this form of monetary policy has been pushed right up to the limit of its usefulness,” Mr Low said. “Additional measures are needed for the stability of the economy. “We need to look at the non-banking institutions, at the level of interest rates, and at the methods used to finance the Government sector.” Refering to interest rates, Mr Low said these had followed the market rather than led it

“Considering the strength of demand for funds relative

to supply, and the chronic tendency to inflation in New Zealand, interest rates generally should have been higher than they were over most of the last 20 years,” he added. “They should be a flexible instrument which can be expected to go down as well as up.” Mr Low favoured more freedom for the banks, but pointed out that inflation bred restrictions, and the banks would inevitably be among the victims. The banks therefore had a special interest in seeing the present effective control of inflation in New Zealand was sustained and that the balance of payments was brought back to a healthy condition. The banks considered the reserve ratio and target systems were irksome, detailed, arbitrary and unjust. But he saw no escape from some kind of target system for advances and limits, some kind of selective control of advances, and some kind of regulation of the free cash and liquidity of the banks.

c “The Government and the v Reserve Bank must take a ■- view concerning the appror priate level of bank credit, f and other forms of credit, to fit in with other aspects of e policy,” Mr Low said. Bank advances had recently s been within the targets, and there was no penal borrowing B by the banks, he added. t “This is an appropriate j occasion to look ahead and s to seek opportunities for giv- , ing the banks more flexibility, ’ more freedom to use their a own judgment, and to do all B the things banks normally do,” he said. s “One over-riding considera- - tion must be to keep monet tary policy still effective and avoid any resurgente of inflas tion. “Many of the difficulties ex- ‘ perienced by banks and by 5 monetary policy generally. - have arisen from the fact that I both internal and external ' stability have not really been j achieved in New Zealand for many years,” said Mr Low.