BANK AND STATE

Evening Post, Volume CXI, Issue 143, 19 June 1931, Page 8

BANK AND STATE

GOLD BEHIND NOTES

WHAT GOVERNMENT

RECEIVES

DIVIDENDS AND TAXES

Several interesting banking points were brought into prominence by Mr. William Watson, chairman of the Bank of New, Zealand, to-day. Eeferring to the backing to the note issue, he remarked how the relations of gold to currency had been in recent years subjects of many and various discussions, throughout which it might bo noted that bankers and other experienced men had supported a backing of gold as security, whilst others had considered that tho note issue of a country could be safely based on the security of the State without any tangible support. Very serious conditions had been brought about at various times and in different countries by giving effect to the latter view. Presumably, there might be no limit to what a Government might consider tho value of State security, and in recent years examples had been supplied by Franco 1 and Germany of the evil consequences of State inflation. France paid out State notes until a franc was_ worth in. sterling only one-ninth of its prewar value. Subsequently, tho franc ■was stabilised at about one-fifth of its pre-war value,, and debts and contracts incurred previously to these changes are now considered to have been repudiated to the extent of four-fifths of their original worth. Germany went still further, and to a large extent destroyed the wealth of her people by rendering almost valueless all Stato and private commitments. IN AUSTRALIA. "Quite recent happenings in Australia in connection with its note currency are so well known," remarked Mr. Watson, "that I need only allude to them. It is obvious that fiduciary issue by a State, without gold backing, while inflating prices temporarily, are not adaptable for payment of imports, or other exchange purposes. These remarks are sufficient to make it evident that the currency of the Dominion is conducted on sound and safe principles, is of such elasticity as to cope with the requirements of any expansion in trade, and is very remunerative to the State. "The proclamation constituting notes legal tender expires in January next. Doubtless, the Government will see tho wisdom of extending the period for two or three years to permit of a return to normal conditions." NEEDS OF THE COUNTRY. "The banking system of New Zealand has been evolved during more than 90 years of practical acquaintance with the country's requirements. It differs from the British system inasmuch as it has to deal largely with aiding aevelopanerit of land, as well as assisting in tho establishment and encouragement of all other industries essential to the bieeds of a young country and its growing population. It will be admitted that had the banks conducted their operations strictly in accordance with tho lines of British banking, the Doiminion would not havo mado anything like tho progress it has, and therefore it may be justly claimed that the BV3- ---■ tern-has met the needs of the country, rtncl has enabled the banks to assist their customers in weathering .many a storm with minima of ill effects. TAXATION. Mr. Watson also dealt with the taxation paid to the . Government of New Zealand in the year under review. Tho Bank of New Zealand paidi £54,109 • more-than in the year previous. The total increase in rates and taxes on the whole of the bank's business was £86,837. "There is no doubt," Mr. Watson ■believed, "that general high taxation drives money and credit out of a country, but by this I do not imply that New Zealand has, until now, suffered in such a manner; on the contrary, it is well known that large sums have been transferred from Australia and invested here. "The causes of these remittances were undoubtedly the more stable conditions which obtain here, fears of higher taxation, and probably exchange. It has been held by eminent authority in London that money and credit cannot ordinarily be removed from a country; but individuals can, and have been able to, transfer their assets from Australia to other countries, by various methods, and to enrich, the places of receipt by making investments there. It is also clear that subtraction by any State of the people's wealth, either by inordinate taxation, or by high death and gift duties, to pay for expenditure overseas, which cannot be met by excess of exports over imports, must impoverish that State to the detriment of all within it." THE GOVERNMENT'S SHARE. Income tax was increased last year by 10 per cent., he said, involving the bank in an, additional impost of £17,865. "As some of you know, banks in New Zealand are taxed not on what they actually earn in the Dominion,' but on whatj tinder an arbitrary and now unfair system, they are assumed to have earned; the result being that, as compared with what we would have to pay if taxed as a joint stock company we were mulcted last year to the extent of no less than an additional '£58.841. .. ■ "During, the year, £594,263 was paid by the Bank of New Zealand to the Government of New Zealand by way of dividends and taxation, viz.:— Dividends Wlf Income tax 196,524 Land tax 18,860 Note tax 103,W4: £594,263 RATES OF INTEREST. Subsequently the chairman referred to Tates of interest, pointing out that there had been no change^ in interest rates within tho Dominion smco last year. "Although the demand for money exceeds the supply," he said, "wo hope that ere long it may be pos' Bible to bring about a reduction ot rates. But as the banks do not control interest Tates, nothing can bo accomplished in the way of reduction unless certain other important interests can le induced to co-oporatc. The Bank of England late was reduced, from 3 per cent, to 2J per cent, on 14th May. It is to be hoped that tho lower rate will tend to stimulate enterprise in the Old Country, though it is feared that the accumulation of funds in London denotes want of confidence in the industrial outlook. Tho Bank of England sate lias little or no effect on rates here." EXCHANGE PROBLEM. .The present rates of exchange beftween London and New Zealand and Jvice versa were described by the chairman as "abnormally high, and there is no reduction in close sight. The principal factor in advancing rates from time to time (ho explained) has been the necessity for bringing about a reiduction in imports to correspond in jiome measure.with the reduced value of .texports. To a considerable extent this Result has been attained, but London Reserves, which have been heavily depleted, must be built up before reduc-

tion of rates can be looked for. Further, it is by no uieans certain that for tho presont year tho balance of trade will be in tho Dominion's favour to anything like an adequate amount. "Were' it not that tho banks held funds on a large scalo in London, the riso in exchange would have taken place sooner than it did and been heavier. "We have resolutely refused to permit our New Zealand funds in London to be availed of for the benefit of Australia, but, unfortunately, the banks do not control tho exchange position, consequently, through channels outside tho banks, Australians have secured possession of an appreciable amount of New Zealand fujuLs in London. BANKS MUST LOSE MONEY. "A large section of tho public does not appear to recognise that whilst tho margin betwoen buying and selling rates remains unaltered, tho banks derive no advantage either from a high buying or a high selling rate. As a matter of fact, it is almost certain that during the period of adjustment to normality, the banks must lose money on their exchange transactions. "The position of Australian exchange is also abnormal, and until conditions in the Commonwealth substantially improve, there is little or no hope of alteration. Complaints have been made by New Zealand exporters to Australia that tho exchange rate is seriously restricting trade. That no doubt is tho case. On tho other hand, our bank has funds in Australia far in excess of its requirements—an excess which in present conditions it. is impossible to shift. In fact, it would suit us to stop buying any exchange on Australia for a long time to come.

"It is well to emphasise," Mr. Watson added, "that it is the producing, and also the manufacturing, industries of the Dominion, and not the banks, that are reaping the advantage of the present abnormal exchange rates on London."