N.Z. RESERVE BANK

Dominion, Volume 26, Issue 301, 15 September 1933, Page 8

N.Z. RESERVE BANK

Views of Correspondents (Letters to the Editor.) Sir, —A careful analysis of the Governinent’s lengthy statement on the Central Reserve Bank shows that the Minister of Finance gives many excellent reasons why such an institution should not be given a place in our economic life. Mr. Coates shows that the Central Reserve Bank is to be State controlled. Even the shares in the first instance are to be allotted by the Minister of Finance. Again, the public is baited with the prospect of a lowering of Treasury bill rates. To Mr. Coates full credit must be given for his plucky attempt to bolster up the decayed foundations of a worn-out financial system, but to-day’s economics require a system of finance based upon the common wealth of the Dominion, not upon a paltry capital of £500,000, subscribed by a few private individuals. It is not reasonable to expect a privately-owned monopoly to be able to guarantee to the people of New Zealand access to the prosperity which has already been supplied by bounteous Nature. The office of Minister of Finance calls for vision of a very high order, but Mr. Coates-is intelligent, so, when he reviews the question of central banking, keeping in mind the paramount necessity for a powerful State bank, with an estimated backing of £640,000,000, with sole right of note issue, retaining the present trading banks for the facilities of trade and commerce, he may then elect to give to New Zealand and the Empire a lead for reconstruction so essential for the protection, development, and advancement of civilisation.— I am, etc., E. L. APPLEGARTH. .Masterton, September 13. Purposes to be Served Sir, —The Minister of Finance’s lengthy ’article in connection with the Reserve Bank of New Zealand is one which I have read with great interest. Mr. Coates makes many claims for the necessity of, and the advantages to be gained by. the establishment of the Central Reserve Bank. While I do believe in the necessity for central banks in the great financial centres of the world where trade and general conditions justify their existence, I do not believe they can serve any useful purpose here, but would only add an extra overhead charge. The present 5 banking system has parsed through boom conditions, and the reverse, and at the same time has always granted all legitimate needs of the public and the Government. The banks have undergone much-criticism for-being unduly conservative in the past, but affairs now show that if anything they were not conservative enough. Lower interest rates is among the advantages claimed (this appears to be a sop. to the commercial and farming classes), but as interest is fixed chiefly by supply and demand for money the reserve bank will be unable to make any great change. The note issue would not be any more Secure than the present issue, which by Parliamentary enactments and safeguards is made absolutely “giltedged,” while I cannot see how “a single control of the note issue is -an important factor in the maintenance of sound economic conditions.” At present notes are only issued in response to the needs of the public, but if issued by a central bank, to a greater or lesser extent under political domination, there is always the danger that if the Government gets really hard pressed for money it would force the central bank to increase the note issue, with all corresponding attendant dangers of inflation. In any case restrictions on the note issue are not really important, as in an economically advanced country like New Zealand with a total note issue of around £6,000,000 the notes play a comparatively small part in the finance of the country compared with yearly cheque clearing® of around £150,000,000 and advances of about £50,000,000, on which there are no restrictions bar the sound common sense of the bankers. There would certainly be an advantage to the public in having a uniform note issue, but this could just as easily be obtained by granting one of the present banks, say the Bank of New Zealand, the sole right to issue notes. Considerable mention is made of commercial bills and the bill, market, as if bills were an important factor in bur financial system. This is not so, as .the.total bills discounted in the country amount to under £1,000.000, compared with advances £50.000,000, and, beyond bills discounted, the amount of “sound commercial paper” is not great. There does not appear to be any advantage in organising a bill market insofar as the commercial community is concerned, as in the majority of cases it would appear to prefer to borrow by overdraft with its more elastic system of repayment and also with its considerable saving in the use of bill stamps and labour. The establishment of a clearing house for cheques' would be a definite disadvantage, as I understand that with only six banks operating in the country the present system is adequate and more satisfactory. for all concerned. Much is made, and rightly so, of the necessity for the central bank keeping its assets liquid, and although they would have no trouble in London with a well-organised short-term market they cannot do so in New Zealand. It is proposed to invest New Zealand funds in Government securities, commercial and agricultural paper, and Treasury bills. This appears to make the bank but a further means of easy Government borrowing. None of above . investments can be characterised as liquid, as in the event of a crisis all of above would be absolutely unsaleable. At present the commercial banks keep a large amount of, gold in New Zealand, nud this, forms a sound foundation for our system, but the reserve bank would transfer, all the gold to London and thus remove the very basis of our banking structure. Experience in other countries has shown that a central bank can only make it® interest rate effective by operating on the shortterm montey market, and the absence of this market in New Zealand removes their only really strong weapon of control over interest rates. An' essential feature of the system as outlined by Sir Otto Neimeyer was the maintenance of exchange on London within the limits fixed by cost of shipping gold—probably not more than lj per cent. This is now deleted, and in any case would be useless, as the balance of our London funds is governed'by our exports and imports, and control is exercised by use of the exchange rate, which to be effective must have very elastic limits. This has been clearly demonstrated in the last two or three years. Without this control—and there does not appear to be any other effective method of controlling London balances—the central bank, after say a couple of very bad export seasons, would probably be bankrupt of London funds, and thus ruined or forced to submit to the domination of English financiers.—l am. etc., MARS. Wanganui, September 11. Douglas Credit View Sir, —The article by the Minister of Finance explaining the Central Reserve Bank Bill culls for some comment. The adverse criticism of the Bill by the chairman of the Bank of New Zealand indicates that the representatives of the banking system consider the privilege of note issiue to be too valuable for them to lose. Doubtless if the various trading banks were allowed to tender for this privilege there would be keen competition for it. This valuable concession the New Zealand Government proposes to hand over to a company with half a million of private capital. The statement that, although the right of note issue is to be for a period of 25 years, the Bill can subsequently b. amended by Parliament, ignores the fact that onee the right is granted it cannot be withdrawn without compensation being given. The power of note issue at present exercised by the trading banks can be taken away when Parliament chooses, the proposed new semi-private Reserve Bank is to be given an inalienable right for 25 years. In other words, the Government. proposes changing the existing

separation between the pepple and money creation to a legal divorce. The claim for the measure that it will result in cheaper money for the Government, illustrates the sublime futility of the Government where finance is concerned. The New Zealand people are to pjoyide £1.000,000 as a ifeserve fund for the bank and pay interest upon Treasury bill finance, based upon this reserve and upon the taxation capacity (which is really the productive capacity of . the country). The setting up of a national credit authority would save the whole cost of Treasury bill financing, and lay the foundation of a scheme for the comparatively Costless financing of our producers. If the proposed Bill is passed, another rampart will have been raised which the people of New Zealand will have io scale before they can obtain control over their monetary system. - How “far and wide the shareholders will be spread among every section of the community” can be estimated from the fact'that a shareholder’s limit is to be £2500. Clearly they will be members of the same financial section, against whose operations protection in the form of legislation has had to be granted during the past two years. Providing one-third of the capital, they are to have—after a short time—the right to elect the members of the'board. Should this board decide upon a financial policy opposed to the well-being of the community as the deflationary policy adopted by the New Zealand trading banks during the past three years), this policy will be carried out. To call such a concern as this. Bill proposes to bring into being a “national institution” is a complete misnomer. The temptation to tie up New Zealand finance with the international financial institutions will be irresistible. This measure will place our activities as producers (both primary and secondary), and our interests as consumers, more completely under the domination of those institutions manufacturing and controlling currency and credit. —We are, e DOUGLAS SOCIAL CREDIT ASSOCIATION. Wellington, . September 12. Defence of Existing System Sir.—lt would appear that the majority of the farmers are against the establishment of a central reserve bank, and, according to Captain Rushworth's recent statement in the Town Hall, Wellington, the Douglas credit enthusiasts also appear to be agdinst it. Commercial and industrial interests are largely opposed to the establishment of a reserve bank, at any rate, at the present time. It would seem that the whole matter as far as the country is concerned is a cut-and-dried issue. . It is stated that the art of central banking has been evolved to control credit and currency in modern times; further, that it is certainly part of its job to hold the reserves of the trading banks. As a shareholder and depositor with one of the trading banks, I would not feel nearly as secure with that particular bank’s: reserves invested by the more or less amateur board of director® of a central reserve bank, as I feel to-day. It is absurd to suggest that the trading banks of this country, Canada, and Australia could not have maintained a reasonably sound financial system had it not been for the actions of politicians from time to time. I, personally, cannot see how future Governments are likely to be any more amenable to the advice of a central reserve bank than they have been in the. past to the advice of the trading banks. Mr, Coates must admit that the central reserve banking system of America has been an absolute failure from the point of view of doing those things for which he states a central banking system has been evolved. Further. he overlooks the fact of the failure of the Central Reserve Bank of South Africa to carry out these functions. The Commonwealth Bank of Australia has also not functioned successfully as a central reserve bank, and it is safe to aesume that the Bank of England, the greatest central reserve bank in the world, would also have failed, if it has not done so, had it not been for the support of the trading banks of the Empire. Mr. Downie Stewart made the statement, when Minister of Finance, that .the Bank of England demanded that the New Zealand banks should provide a million a month in London for its use, as a condition of the renewal of certain Treasury bills. No doubt similar demands have been made upon the big five in London and upon all other banks in the Empire. This form of dictatorship is not a thing which New Zealanders can welcome. For some unknown reason, groat pressure must have been brought to bear by the Bank of England, and it seems that they are insisting that a central reserve bank be established in this country, quite obviously to strengthen its position and not ours. The single control of note issue by the board of one bank cannot .to my'mind be nearly as satisfactory as the control by half a dozen banks, The present decentralised system of control by six different boards of director® gives one chance in six of being wrong, whereas the odds in favour of the decisions of the Central Reserve Bank Board being wrong are so much greater. It.is also absurd to suggest that the centralisation of the cash resources of the commercial banks would strengthen the whole banking system, and would offer greater support to the whole credit structure than is the case at the present time. Nobody probably knows the tremendous assistance the trading banks have been to'the Government of this country during the present crisis, and I would say, without fear of contradiction, that no Central ’Reserve Bank could have stood to the New Zealand Government as loyally and to the same extent as the trading banks have done. It is absurd to suggest that the trading banks of this country are not in just as close touch with the London money market as nny Central Reserve Bank in this country could possibly be. The information under the heading of “London Balances and the Sterling Exchange Standard” does not establish any 'case in favour of a Central Reserve Bank and is irrelevant in this matter. The Coalition Government are nice ones to criticise .the banks on their exchange policy, or on the matter of deliberate and disinterested control. The public know and appreciate the position and attitude of the banks toward our Government’s exchange policy, because it will be remembered that the chairman of the Bank of New Zealand stated that an increase in the rate of exchange to 25 per cent, would be profitable to that bank, but that it did not consider that such action was in the interests of the country. If the Government would let all the banks ship their gold to London and take advantage of the high prices ruling today, tax them on the profit thereon which might amount to about a million additional taxation to the Government, and allow the banks, to hold British Treasury Bills as a backing for their note issue instead of gold, the position which the reserve bank is supposed to create would be brought about immediately, incidentally with a profit to the Government of a very large sum by way of taxation.

If Mr. Coates will clearly set out an analysis of the advantages which other countries have derived from their Central Reserve banking systems, and can convince the public, there would be some excuse for the Bill. He states that there will be no disadvantages, but I would ask him to give the Government’s estimate of what the Government will lose in taxation from the trading banks by the establishment of the proposed Central Reserve Bank. There is no doubt that in its first year, the Central Deserve Bank might be exceedingly profitable if, by legislative action, the trading banks are forced to hand over the whole of their gold at considerably less than the current market price. The question of dealing with the banks’ present gold reserves is probably the nigger in the wood pile, and it seems that the Government or the Central Reserve Bank will take the whole of the difference between the mint par value and the present market value of the trading banks’ gold reserves. The Government is so hard up to-day that it could, not finance a Central Reserve Bank and is not likely to for many years. It would have great difficulty, and is not justified, in even raising its share of the capital, and where it would get the funds to retire its liabilities to the trading banks is not stated. This apparently means that the Government is going to force through as a party measure this Central Reserve Bank legislation to which they cannot give effect for

many years, have us committed to a system which they, themselves, do not understand, and which the leading bankers in the world have failed to operate successfully, and place upon the rising generation a burden of oppressive taxation which may take generations to lift. The deposits to be made by the trading banks look quite easy, but there is a catch about this which is probably not generally appreciated. Where are these funds to gome from? Some may come from the banks’ reserve funds which are shareholders’ money and which shareholders would not be confident: could be safely invested b.v an inexperienced board of directors of the Central Reserve Bank, and the balance would probably have to come from other assets of the banks, including advances. Tlie immediate establishment ofa Central Reserve Bank might necessitate a considerable liquidation of existing advances b.v the banks, and as legislation has tied up a large proportion of the banks’ advances (I am referring to rural advances aud the Mortgagors’ Relief Act), this liquidation could only be made from commercial advances. Any restrictions of advances to commercial and trading interests would be disastrous to-day, and manufacturers and importers should, on this account alone, oppose the setting up of a Central Reserve Bank with all the forces at: their command. SUSPICIOUS. JVellixigtQn, Sept, 12.