CENTRAL BANK

Dominion, Volume 27, Issue 16, 13 October 1933, Page 8

CENTRAL BANK

Cost of State Financing

TRADING BANKS’ POSITION

Regarding the statements recently reported that during the discussion of the Parliamentary caucus on the Central Reserve Bank proposal figures were given showing that “the cost of short-dated monetary accommodation for the Governments where this system (i.e. Central Banking) prevails is substantially less than that prevailing where recourse is had to the commercial banks,” “Scrutator” writes as follows: —

“It should not be lost sight of that the difference between the present cost of Government finance and the cost at which the Government may expect to obtain financial accommodation from a Central Bank cannot be fully explained by the difference between central banking as such and commercial banking as such. Any difference in the rates charged by a Central Bank on the one hand and trading banks on the other would to a considerable extent be due to:— “(1) The fact that the trading banks are required to return to the Government, by way of taxation, a considerable part of their receipts from interest or discount on GovernBjent finance. Thus the real net rate received and retained by the trading hanks in respect of such business is less than the quoted rate. A Central Bank would pay no interest on deposits lodged with it in New Zealand, and could employ its funds in appropriate channels free of tax. # “(2) The fact that in comparison with other countries the banks in New Zealand are unfavourably placed in'regard to income taxation. They are taxed, not on the actual profits made (as other companies are) but on an assumed income which is deemed for assessment purposes to be 30/- for every £lOO of average assets, plus 30/for every £lOO of average liabilities. “It should be further mentioned that in Australia, where the Commonwealth Bank acts as a Central Bank, the discount rate on Government finance was, until the Premiers’ Plan came into operation, charged at 6 per cent., and 4 per cent, was charged for more than a year after such a plan was put into eperation. “In New Zealand the rate was* £5 8/9 per cent, per annum, since reduced to 5 per cent., without any plan put forward to balance the Budget, “So when in each' country such a plan had not been formulated, the rate in Australia was higher than the rate charged for similar finance by the banks in New Zealand under less favourable conditions.

“The trading banks here have all along willingly afforded assistance to the Government, and have done so at rates as liberal to the Government as the conditions under which they trade would permit.”