Evening Post. FRIDAY, OCTOBERE 20, 1933. MOMENTOUS CHANGES

Evening Post, Volume CXVI, Issue 96, 20 October 1933, Page 8

Evening Post. FRIDAY, OCTOBERE 20, 1933. MOMENTOUS CHANGES

The Reserve Bank of New Zealand Bill introduced in the House of Representatives last night differs on several important points from the Bill introduced on December 8, 1932. The Minister of Finance declared on October 7 that "the Bill will remain substantially as first presented as far as general principles are concerned. There will be no major changes in the method of working of the Reserve Bank—the main principles will be there." We cannot agree with the description (thus implied) of the change now made as merely minor. There are major alterations on four issues: (1) Control of the bank; (2) the obligation of the bank to secure and maintain parity with sterling; (3) the right to issue notes; (4) the terms on which the gold held by the trading banks shall be transferred. Control comes first. It is scarcely necessary to recall Sir Otto Niemeyer's statement: "In the first place, 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." This principle was enunciated in the report of the Committee on Indian Reserve Bank legislation issued only two months ago. Accepting the principle that the Reserve Bank should be free from any political influence the committee recommended, in the light of experience of other countries, that the capital should therefore be held by private shareholders. When introducing the Reserve Bank Bill in the Indian Legislative Assembly on September 8, Sir George Schuster, the Finance Member, said that when the direction of public finance rested with, a Ministry responsible to a popularly-elected Legislature and liable to frequent political changes it was desirable that the control of the country's currency . and credit should rest with an independent authority acting with continuity, and that the only practical means to this ond was a Central Bank independent of political control. T

In the original New Zealand Bill control was placed in the hands of five directors, a Governor and Deputy Governor, all elected by the shareholders (after the first appointments). Now there are to be seven directors, of -whom three will be appointed by the Government, and in addition the Secretary of the Treasury will have' a seat on the board but without voting power. Further, whereas the first-appointed directors would retire (under the original Bill) from 1934, and shareholder control (counting the votes of Governor and Deputy Governor) would thus be established in 1938, the new Bill does not give, shareholders the opportunity of electing directors until 1936, and a majority of elected members of the board will not be attainable until the term of appointment o£ the Governor and Deputy Governor ends about 1941. Thus die initial term of State control is extended by three, or at least two years. Having regard to these facts and the narrow margin of share-holder-,director control,- it is evident that if the "actual fact" of political interference has not been introduced the "fear" has by no means been adequately guarded against. The Indian Reserve Bank report proposed eight elected and four appointed directors, with a Governor who might (after the first appointment) be elected or appointed (on this point there was a divergence of opinion); but the margin was. at least eight to five. When, eventually, the New Zealand bank shareholders can exercise their rights fully they will have four directors to three and the two members (Governor and Deputy Governor), whose election will be subject to Government approval. Even this will not be so, as we have pointed out, for seven years. The Government has certainly gone far enough, and we believe too far, in dallying with State control. There is a small enough margin of safety now, and any attempts to further whittle it away should be strongly resisted.

In view of the measure of Government control proposed added significance must be attached to the omission of the original provision that the bank should, at a date to be fixed, exchange its notes for sterling at a rate not varying from parity by more than 30s per cent. The date was to be fixed by the Governor-General by Order in Council, but the Order in Council was to be "issued in accordance with the written request of the board." The abolition of high exchange and the attainment of parity with sterling would therefore rest with the bank. The omission of this provision cannot be viewed except as a disavowal of one of the main objectives of a Central Bank—the maintenance of stability of exchange. The excuse advanced by the Minister of Finance that the provision "might. £3501 an cjqjfess direction to the

Reserve Bank to pursue an extremely deflationary policy to achieve parity with sterling" is transparently thin. Reserve Bank directors will not, we trust, be children to place such an interpretation on a perfectly plain clause. Taken in conjunction with the Minister's declared intention to load the bank with the Government's surplus London credits ("ten million sterling assets" Mr. Coates called them), this is disquieting. There is no direct provision in the Bill, so far as we can discover, for the transfer of these credits and the terms are not mentioned. This is a vital point and the Government should make a definite pronouncement of its intentions. Despite what Mr. Forbes said concerning the privacy of Government banking arrangements, information should be pressed for strongly. A Reserve Bank to carry the load of high exchange and maintain an artificial rate at the Government's desire cannot be contemplated otherwise than with alarm. In all this it is the possibility of political influence that gives rise to doubts. It has its bearing, too, upon a change of which the Minister of Finance last night gave no explanation, except that there were "no traps in it"—the omission .of the word "sole" from the clause giving the Reserve Bank the power to issue notes and the further omission of the twenty-five-year term. The new Bill contains the same provisions as the original measure for terminating the trading"bank note issues; but the changes we have mentioned leave die door open for a note issue by another authority—the Treasury, for example. Possibly this is only a concession by the Minister of Finance to allay the extravagant fears of people who have protested against "giving a foreign-controlled institution command of our currency and credit for a quarter of a century." But it will not promote confidence to thus introduce a factor which may at any time be turned to inflationary uses. A Reserve Bank is worse than useless Unless it has power and authority to promote stability and thus engender confidence. The changes made from the original Bill, unfortunately, do not tend in this direction, and the conflict of opinion with the trading banks on the ownership of gold holdings—an issue to be settled by calm reasoning—may be productive of further difficulty if the unveiled and unjustifiable hostility of some members of the House to the trading banks is allowed to set the tone of discussions. Such hostility and prejudice should be set aside, and set aside too should be any idea of creating a Reserve Bank to cover deficiencies and blunders in Government policy. If a bank is to be the sure foundation of a stable financial structure it must be established with close attention to permanent principles, and less regard for sectional aims and commitments. '