A CENTRAL BANK

Evening Post, Volume CXVI, Issue 75, 26 September 1932, Page 8

A CENTRAL BANK

NIEMEYER REPORT

MAIN RECOMMENDATIONS

NO POLITICAL CONTROL

In view of the announcement made' by the Prime Minister (the Eight Hon. G. W. Forbes) on Saturday, that legislation would bo introduced this session providing for the establishment of a Central Reserve Bank, certain aspects of the report presented to the ,Governinenfc last year by Sir Otto Niemeyer are of interest. Among other things, Sir ptto urged the desirability of removing the bank from any form of political control. "In the first place," said Sir Otto, "the bank must be entirely free from both the actual fact and the fear of political interference. If that cannot be secured, its existence will do more harm than good, for, while a Contral' Bank must serve the community, it cannot carry out its difficult technical functions and cannot hope to form a connecting link with the other Central Banks of the world if it is subject to political pressure or to influences other.than economic. .Experience. has shown that the best method of safeguarding the independence of a Central Bank is to constitute the Central- Bank asa private corporation with a \ capital subscribed by the general public, and an independent BoaVd of Directors elected by the shareholders. Such a constitution does not mean that tho bank, is conducted for the private profit of a few individuals, for it is perfectly competent to limit- the, maximum dividends, to provide for the payment to the State of. any excess profits, to limit the voting, rights of the shareholders so as to prevent tho undue prominence of any single group, to place restrictiona on the choice of directors, and, if desired, to provide for the confirmation of the appointment of the Governor and Deputy-Governor by . tho GovernorGeneral. SHOULD HOLD BALANCES. "In the second place, in order that the bank may effectively discharge ,its functions in regulating the credit conditions of a country, it should hold both the banking balances of the Government and the reserve balances >f the trading banks. Trading banks are bound to hold liquid reserves, and it is no hardship to them that those -reserves should be concentrated in a Reserve Bank. In fact, it is usual that either-by law or custom they should be required to keep a certain percentage of their' reserves with the Eeserve Bank. In the case of New Zealand, I would. suggest that the requirement should be 7 per cent, of demand liabilities and 3 per cent, of time liabilities. • / ■ . "Provided these two conditions can be fulfilled, I should recommend the establishment in New Zealand of a Eeserve Bank on recognised lines, to which should. be given the exclusive right for a period of years of note-issue in New Zealand, the custody .of Government balances, and the custody of the minimum reserves of tho trading banka. - NOT A TRADING BANK. ~ "It must, of course, be recopnised that the sphere and function of a Reserve Bank are entirely different from those of, trading banks. _A .Reserve Bank must not be expected or called upon to act as a trading bank; and it. should itself be careful not to compete'with trading banks. .The statutes, which are suitable for reserve functions properly exclude much that would be perfectly legitimate trading- banking. The distinction is vital. '■ ' ' '

• "To avoid overloading the reportmth a multitude of matters which, though of great importance, are of a technical nature, I have put my detailed suggestions for carrying out the proposals indicated above in the form of draft statutes modelled on the lines of general central banking legislation, with such modifications as seem indicated in the circumstances of .New Zealand.'' Sir Otto summarised his; recommendations as follows:— •■—.■- , (1) That permanent legislation should be passed making the New Zealand note inconvertible in New Zealand but convertible- into sterling at rates fixed within certain limits. (2) That an : independent Eeserve Bank should be set up charged with ■ responsibility for the stability of New Zealand currency, invested with tho privilege of note-issue, and charged with holding the Government account and the banking reserves of New Zealand. (3) That, the note-issue should be unified and »coricentrated in the Eeserve Bank, the note-issuing powers of existing banks being abrogated. (4) That the trading banks should be required to transfer to the Eeserve Bank the gold they now hold in New Zealand in exchange either for Eeserve Bank notes, with which they can pay off their own notes, or for credit at the Beserve Bank. (5) That the trading banks should be required to keep with the Ee'serve Bank minimum reserves of 7 per cent, of their' demand liabilities in New Zealand and 3 per cent, of their time liabilities in New Zealand. . (6) That thereafter the existing prohibition on the. export of gold coin from New Zealand should be withdrawn.