GOLD TO NOTES

Dominion, Volume 23, Issue 214, 6 June 1930, Page 15

GOLD TO NOTES

CHANGES IN CURRENCY POUND FOR POUND “DEAD ASSET” BULLION Some of the changes brought about by the Great War on the law relating to bunking and currency were dealt with by Mr. B. C. Ashwin, M. Com., in an address delivered last evening to a meeting of the Economic Society of Australia and New Zealand.

“Regulations under section 44 of the Finance Act, 1916, were issued from time to time from August. 1916, to December, 1920,” lie said, “The first lot of regulations authorised, the issue of 10/- notes and provided for an alteration iu the form of the statutory bank returns consequent upon the notes being declared legal tender. The second lot issued during the same month practically suspended the legislative restrictions on the note issue and credit expansion. Briefly these regulations provide in effect:—

“(a) That the note issue is to be limited only to tho total amount, of coin bullion and public securities held iu New Zealand with a proviso that the Minister of Finance may b.v warrant authorise the inclusion of nublic securities held in the United Kingdom provided the securities are hypothecated to the Crown. This regulation means that no gold at all need bo held. “(b) That the sections in tho several private banking acts limiting the debts and engagements to three times the coin bullion and public securities held iu New Zealand are extended to include public securities held In thA United Kingdom. These are the sections intended to control credit expansion, which are practically unintelligible under the existing banking practice. “(c) That the definition of public securities in the several Banking Acts previously restricted to New Zealand Government securities is extended to Include public securities of the United Kingdom or of tlie Commonwealth of Australia or any State of the Commonwealth.

“(d) That section 2 (2) of the Banking Amendment Act, 1914, is suspended. This subsection contains the condition precedent to the issue of a proclamation declaring notes legal tender already referred to. This suspension meant that the banks in question need not be solvent on the basis of their assets and liabilities in Now Zealand before their notes could be declared legal tender. The purpose of this suspension was evidently to allow the banks to accumulate assets abroad against liabilities in New Zealand.

“By additional regulations made in 1917 and 1920 the limit, of the note issue was extended by adding to the total of coin bullion and public securities the amount of the advances to customers to enable them to invest In war loans or discharged soldiers’ settlement loans, and also the amount of the advances against wool held in store at the time. Special returns of these advances had to be made to the Treasury. “In 1919 a section in the Finance Act removed the ban on the exportation of uncoined gold. In the following year it was deemed necessary to pass a further section in the Finance Act making it an offence to melt down or - use gold or silver coin except as currency. At that time gold was at a considerable premium, a result of the tremendous rise iu the price level. Gold had regularly figured in the Dominion’s exports since the very early times, but purely as a commodity being sold for its intrinsic value. The export of gold for exchange purposes had been absolutely negligible, and imports of gold had been confined to sovereigns for internal circulation, there being no mint in New Zealand. “A stock of gold coin and bullion has certainly been held by the banks In New Zealand for monetary purposes.” the speaker said, “but in fact —even in pre-war days—this gold was only used to support a gold circulation and provide for the legal requirements. Since 1916 the £7.000,009 or £8,000,000 of gold lying in the vaults of the banks has not been required at all and has simply been a ‘dead’ asset.”

- Gold Less Convenient. Declaring notes legal tender led to an ostensible change in the withdrawal of gold from circulation, but this in itself \vas of no real economic significance, as a pound note does tlie work just as efficiently as a sovereign. In

fact, in many respects the note is much more convenient than gold. A much more fundamental change was made when by regulation the legal restriction limiting the note issue to three times the amount of gold held wa removed. The volume of credit, however, is definitely dependent on credit conditions iu Great Britain, and the relaxation of the restrictions ou the note issue in no way contributed to such credit expansion as did occur in New Zealand during and immediately after the war. In fact, throughout the whole period of inflation, right down to the present, the note issue was practically covered pound for pound by the gold held by the banks. Removing the restrictions on the note issue thus meant little or nothing in the economic affairs of the country. A “Dead Letter” Law. “In fact,” Mr. Ashwin concluded, “none of the changes in the law that I have referred to had any real economic significance, for the very good reason that the original permanent provisions which were subject to amendment or were suspended by the war regulations had always been quite ineffective. To amend a law that is practically a ‘dead letter’ is obviously not going to make much difference to anybody.”