CORRESPONDENCE

Evening Post, Volume CXIV, Issue 19, 22 July 1932, Page 6

CORRESPONDENCE

FUNCTIONS OE BANKS

CENTRAL RESERVE BANK

(To the Editor.)

Sir,—l am extremely interested' iv an article on financial problems in yotii' paper of the 15th July—"A Complaint of a Banker*" I agree to a very large extent with the banker's complaint of the lack of concrete proposals put forward for monetary reform by the number of organisations which seem to be of mushroom growth throughout New Zealand at the present time, but I cannot agree with him in his remarks on the question of a Central Reserve Bank for New Zealand. . ■ , /

For instance, one would imagine with his banking experience.. he would have made himself conversant; with the " Niemeyer report. Had h? done this he would not have made reference to- the "eminent British banker" in his article. Doubtless he means Sir Otto Niemeyer:. Sir Otto Niemeyer, in his report covers the whole of the ground; -that is the want of information about, which the banker complains. The report deals with .the appointment of tho governor, deputy-gov-ernor, directors, capital required, how it is to be raised; work and functioning of the bank itself in its relationship to the trading banks; distribution of profits aud limitation of the same; recommendation* of the gold exchange standard to be operated by the bank; consolidation of the gold reserve; the note issue, aud even down to the drawing up of the weekly report and how'it should be set out so that the people of the "Dominion could read, as a, financial weath,er barometer, in concentrated form, the exact financial position of the bank] which, of course, would convey to them the true exchange value of their currency and the value of money in general. It would be very difficult to find anything that Sir Otto Niemeyer has not touched upon in his valuable report, and while this is so, we must remember Sir Otto Niemeyer was reporting to the Government and it is reasonable therefore to suppose that he would be understood by the financial advisers to,the Government, if not by the general public, and even some of the commercial bankers. ; No one, however, who has a nodding acquaintance with the functions of a central bank holds the view that with the establishment of such a bank inN,ew Zealand all our difficulties will disappear, and although the slump is often, referred td.as a.monetary crisis and our monetary reform associations are constantly quoting Professor Gustav Cassel, of Sweden, who says that it is, the McMillan report, on the other hand,' contends that this does not mean that money mis-management was the cause of the crisis. The.monetary crisis' is the effect, of the slump and not its cause..

" In view of our experience during the past year on the problem.. of exchange, where vested banking interests were in violent conflict one with another, and also with the interests, of the State, and where party interests in. the Government itself were divided for party reasons and not for State benefits, it is surely time that such a question as the exchange control should be taken from the influence of both Government and banking interests. Your correspondent asks, "How is the exchange to go free if it is to be controlled by a central bank?" The answer to this is jußt in the same way as a thief is_ allowed to go free without the restraining influence of the police; just as long as he keeps to the legal law of supply and demand, and does not break this law to the injury of others and the benefit of himself.' ' ~,. Such a thing as "free" exchange without a central bank is impossible. Hs may ask, however, how we managed with the parity of exchange prior to 1929. Thit is because New Zealand- prior to 1929, was linked with sterling, which in turn was linked to gold. . ' It would take up too much of your valuable apace for me to give detail* Of the establishment of a' central reserve bank, setting forth its operations and the benefits it would confer on the New getland banking system and through . .the bunking system, to the commercial ,com« rounity at large. I might just ma tew words give the opinion very forcibly expressed in thd Lord McMillan Repprt. It is to the~interest of every com* mercial banker that, in the short run, his reserves should be as small as possible consistently with' Safety. It w equally to' the advantage of each banker that there should be ono institution ' carrying a large reserve available for he use of all in moments of emergency, provided thht this institution is willing to utilise its reserve for the common safety when the emergency does arise. Hence the one-reserve system, the foundation of all central banking practice, arose in this country to meet a practical need, and found its organ in the Bank of England. The immense importance of this system has had to be recognised, in newer areas in which commercial banks preceded the institution of central banking, by the system of compulsory re-.soivc-deposita at the central bank.

. If the banker would get a copy of this i report and st h udy it, he would find it supports the contention-, of Sir Otto Niemeyer's. report, to the New Zealand Government, and in fact all monetary recommendations in monetary reform, and there is surely no banker in New Zealand will hold that our banking system is perfect; in fact, we have no system at all. The recommendations in the McMillan Report are quite meaningless to New Zealand, and cannot be applied without pur banking system being centralised through | the establishment of a central reserve bank.-I am, etc., . Auckland, 20th July.