GOLD IN BANKS

Evening Post, Volume CIX, Issue 131, 6 June 1930, Page 10

GOLD IN BANKS

RADICAL PROPOSALS

OUTLINED BY ECONOMIST

Several important alterations in the ■banking system i'ti Now Zealand were suggested last ni£;ht by Mr. B. C. Ashwin, M.Com., of the Treasury Department, during th?i course of a paper on "Banking and Currency in New Zealand," read to the Wellington branch ©£ the Australasian Economic Society. Mr. Ash-win inside it clear that the views he put yjorward were purely his own personal views, as a student of economics, and that those views were not necessarily concurred in by the Treasury. He said thfit the regulative provisions of the Now Zealand banking legislation ■were obviously designed to govern the operation o/i a self-contained'system operating upon orthodox lines on a full gold standard. This provision, however, had remained practically inoperative because trie actual system evolved out of our economic conditions was a sterling exchange standard which, generally speaking, had worked smoothly and efficiently. Economic facts and the traditional exchange policy of the associaated ba;nks were at present the only real opesrativ factors of the banking system. The present position, however, w,as quite illogical. The system should either he made to fit the existing legislation, which meant changing over to the gfjld standard, or the legislation should be made to fit the existing system. COST OF UNUSED GOLD. The legal recognition of tho sterling exchange standard, however, was more than a matter of academic interest, for it v.-ould enable large savings to be maclc for the benefit of the people generally, and, incidentally, the Dominion was in need of savings at the present time. These savings would come from th© utilisation of the £6,600,000 of gold which had remained quite unused for any purpose in tho vaults of the banks for the past fifteen years. That "dead asset" was costing the people of the Dominion about £330,000 per annum, which was equivalent to more than one-half per cent, of the advances outstanding. That was to say, if the gold could be turned into an interest earning asset, the overdraft rate could be reduced by one-half per cent, without altering tho deposit rates or affecting the bank dividend. All this, gold had been hold in New Zealand presumably in order that the banks might be in a position to comply with the pre-war legislation, should that legislation be brought into force again. It was thus in the interests of the country that action should be taken without further delay to definitely determine the system to be operative in future, and then concurrently with the appeal of the war regulations to make the. necessary amendments to the present banking legislation. REDEMPTION OP NOTES. "Prior to the war we had a gold circulation," said Mr. Ashwin, "but the sovereign played no greater part in the actual system than the silver and bronze coins. To return to a gold circulation would be a pure luxury which this country cannot really afford. Moreover, the circulation of gold has practically ceased even in the gold standard countries, so that it can safely be assumed that it will not be resumed in jS Tew Zealand. The other legal function of gol# was to act as a regulative factor and as guarantee of ultimate redemption in value of the note issues. But the note issue is not in fact regulated by the amount of gold held, but by the volume of credit in conjunction with the commercial habits of the community. In other words, notes are quite subsidiary to credit, and through the latter their value is kept at parity with sterling, which means gold, through the operation of the exchanges. The regulative factor being thus eliminated, the only reason for keeping a stock of gold in the country is as a guarantee of" ultimate redemption in value of the notes. This aspect of the matter would only be of practical moment in the event of the failure of a note issuing Jiank. and could be provided for quite as effectively in other ways. In fact, ji.r notes in circulation normally form only a small proportion (less than ohcI.enth) of the liabilities of a bank, the provision in the Banking Act, 1908, making notes a first charge on the assets of the issuing bank provides all %ho safeguard needed. In fact, it was jtlie only real safeguard, even under [the pre-war system, as gold, being legal tender, could then be demanded in withdrawing deposits, and in the ease of .1 3-tiii on the bank the stock of gold might conceivably have been absorbed in this •way. '•'.Finally, the argument might be put •forward that, even although the gold held in New Zealand was not a live factor in the exchange operations, it was nevertheless an exchange reserve to "be brought into action in a time of stress when the London balances had become exhausted. But in such circumstances, where arc the extra funds required? Undoubtedly in London, through which practically all our external payments are cleared in the final analysis. This being so, then tho total exchange resources arc no less if the whole fund is kept in London, instead of partly in New Zealand as is the case as present. By transferring tho gold to London, however, this portion of the exchange fund could be made interest bearing until such time as it is required. So long as our banks had credit in London, gold could be obtained from the Bank of England at any time. "I am aware, of course, that there is a certain amount of prestige to be gained from keeping a stock of gold in the country, and many people will doubtless regard the suggestion to ship it all overseas as distinctly revolutionary, but an analysis of the position shows that we have really no use for it in New Zealand. Further, the stock of gold is an expensive luxury, costing the country about £330,000 yearly. • ADVANTAGE AND A GESTURE. "Incidentally another £6,600,000 of gold would be an appreciable gain to the banking reserve of tho Bank of England, and the resulting reaction on credit in Great Britain could not fail to benefit New Zealand through an improvement in the price of our exports. Thus our own material advantage could be combined with a graceful gesture to the Mother Country.

"Ir. saying tVit the gold stock should be sen- to London I do not suggest that legislation should be passed compelling the banks to take such action. All that need be done is to amend the legislative provisions which require gold to be held in New Zealand, and it may aafcly be presumed that it would not be long before most, if not all, of it was sent abroad. There is the risk, of course,.that in the caso of tho four Australian banks, in a time like tho present, the resulting addition to the Lonilon balances would be used to bolster up the -Australian exchange, and thus be lost to New Zealand. However, if steps are taken to definitely fix the gterling exchange standard bj; legisla-

tion, this would forco a separation of the Australian and New Zealand exchanges and the banks to protect their 'position would practically iind it necessary to reserve the New Zealand funds for New Zealand business. PROPOSED LEGISLATION. "The question next arises what legislative provisions should be made assuming the formal acceptance of the present sterling exchange standard. I suggest the following as the essential points:— "(a) Definitely fix the sterling exchange standard by making it mandatory for the banks to provide exchange on London at a premium or a discount, with certain prescribed limits roughly corresponding to the cost of shipping gold to or from London. At present the system is operated on a voluntary basis. "(b) Bank notes as legal tender to be made a permanent feature of the system. A return to gold circulation being out of the question there is no alternative to doing this. "(c) The note issue to be tully covered by Government securities. This is practically the present requirement under the war regulations. It is really more a security provision than a regulative one, as the note issue is governed by commercial custom in relation to volume of credit. "(d) That, subject to necessary safeguards, Government securities to cover the note issue may be held in New Zealand or London. This would give more elasticity to the system and would prevent a large favourable trade balance from paradoxically being an embarrassment to the banks. "In the last point I have used the words 'subject to necessary safeguards.' In this connection I have to say that if banknotes are to be legal tender it is essential that the ultimate redemption of the notes shall bo assured in the event of a bank failure. Under the present pre-war enactments the notes had to be covered by gold and public securities held in New Zealand, and these provisions, coupled with the section in the Banking Act, 1908, making notes a first charge on the assets, provided adequate protection for the note holders. Under the war regulations notes might also be issued against securities held in London, provided such securities wore hypothecated to the Crown, which guaranteed tho notes. Incidentally, under the Bank of New Zealand.Act, 1920, that bank was given the right to issue notes against securities held in London without any such safeguard as that afforded by hypothecation. ISSUE OF NOTES. "It seems to mo that, if the banks are to have permanently the right to issue notes against securities held abroad, the securities in question must be definitely set aside for that purpose alone. Otherwise a bank with large trading interests in other countries, as in the case of four banks doing business in New Zealand, might use those securities to cover other liabilities, and when the trouble came the redemption would be lost to the New Zealand note holder. Hypothecation of the London securities would bo one way of overcoming the difficulty, but I consider a better protection could be obtained for the note holder. Hypothecation of the London securities would be one way of overcoming th. difficulty, but I consider better protection could be obtained for the note holder by a method that would also enable another desirable reform to be carried out. "The other reform I refer to is the institution of a single and uniform note issue. At present we have six noteissuing banks in New Zealand, and another one that has not been established has been given the right of note issue. If still further banks commence business in the Dominion and measnre up to ,the proper standard in other directions, the State could hardly refuse to givo them the right of note issue. Thus we might before so very long have ten or a dozen note issues circulating in Now Zealand. It would bo much more satisfactory in every respect to have a single note issue as is the caso in Great Britain. Accordingly, I suggest that while making the other necessary changes in the banking laws the opportunity be taken to set up a non-political note issue board whose functions would be similar to those of tho bank issue department of the Bank of England; that is to say, the board would be bound to sell and redeem notes at face value at the demand of the banks. Such notes, although issued in New Zealand, could be paid for by cheque in New Zealand or in London at the option of the banks. The board would be bound to keep its funds invested as closely as possible in Goyerninent securities, the interest on which, after deducting administrative expenses and provision for an investment depreciation fund, should go to the State in lieu of the present note tax. The redemption fund, set up in connection with tho British currency notes issued during the war, and recently transferred to the Bank of England, was administered successfully on these lines. The net result of the proposed S3rstem is that the notes would be issued against Government securities, as they may be at present, the only difference being that the securities would be held by a central note issue board instead of by the several banks. A CENTRAL BANK. "If such a note issue board were established, the banks would of necessity have to relinquish their present rights of note issue and purchase notes as they required them .from the board. These notes would be a liability of the board and not of the banks. The proposed system would be very simple to operate; we would have a single uniform note issue, and the note holders would be assured of ultimate redemption of tho notes, irrespective of the fortunes of any particular bank. I may add that the establishment of a note issue board, which, by the way, might in due course form the nucleus of a central bank, is not absolutely essential to the other proposals I have outlined, but would nevertheless be a valuable adjunct. "I consider that, if adopted, these proposals would firmly establish on a permanent basis a banking and currency system for this Dominion that would be absolutely sound, very economical, elastic in operation, and particularly well suited to our economic circumstances."