Evening Post. WEDNESDAY, OCTOBER 25, 1933. POLITICS AND FINANCE

Evening Post, Volume CXVI, Issue 100, 25 October 1933, Page 8

Evening Post. WEDNESDAY, OCTOBER 25, 1933. POLITICS AND FINANCE

A difficult task was set the Minister of Finance yesterday in moving the second reading of the Reserve Bank of New Zealand Bill. Though this subject has been before the country for some two and a half years there remains much haziness in the public mind concerning the need for a Reserve Bank and the principles on which it should be established. The fog has not been lessened by the introduction of related, though not wholly relevant, questions of currency into the public discussion. Mr. Coates had to explain the general principles of the Government policy and the Bill in which they are embodied, and also to anticipate the arguments that would be advanced by opponents from different angles. On the whole he carried through the task successfully, though he allowed the continuity of his argument to be broken too ofteri by interjections. When we acknowledge the difficulty of his task and the evidence of careful preparation which his speech revealed, we cannot, however, commit ourselves to agreement with all his statements. The principal weakness of the case which he presented lay in the fact that, while he declared emphatically against the introduction of political influence, he failed to show that the safeguards in the amended Bill are sufficient to maintain this excellent principle. Indeed, there was more than a suspicion of inconsistency in his statement that the Government would decide the monetary policy, and tho Reserve Bank would be subject to no influence other than the economic and financial position of the country. This inconsistency became more evident when the Minister was questioned concerning the continuance of pegged exchange. He stated that if it were necessary to continue pegging exchange after the Reserve Bank began operations it would be done hy agreement with the bank. In other words, similar pressure would be brought to bear on the Reserve Bank as upon the trading banks. Yet the Minister said at the outset, and we entirely agree with him in this statement: ' The bank cannot . function properly unless the management is free of any influence other than the - general economic and financial position of the country. Any suspicion of control by the political party in office must be removed. Mr. Coates may argue that the "general economic and financial position of the country" has resulted in pegged exchange. As he once declared that New Zealand was forced off sterling in the same way that Britain was forced off gold, we can understand that this interpretation would appeal to him. But a simple test may be applied—the test to which he himself has given the clue: Would a change of the political party in office result in a change of bank policy on this issue? Undoubtedly it would. The economic and financial position of the country would be substantially the same with a change of Government tomorrow as it is today, but high exchange would not be maintained. The political decision, then, must be held to be the. determining factor1 on this issue. The economic and financial facts are briefly these: that New Zealand has a substantial favourable trade balance, that credits (Mr. Coates referred to £10,000,000) have accumulated in London, that the taxpayers and consumers are hard pressed by this load, and that -the public finance is embarrassed by it. Yet economic and financial considerations do not bring about a change! And the same conditions will apply with a Reserve Bank, and yet there will be no suspicion of political influence! The fact of the matter is that, in addition to nominating three out of seven directors permanently, the amended Bill maintains the nomination system for seven years; for not until about 1941_ will the shareholder majority control be effective. There are other points in which \jfie Minister's speech left much to be clarified. He stated that the word "sole" was omitted from the clause which originally gave the Reserve Bank the sole right of note issue for twenty-five years because the word was unnecessary. But "sole" was included in Sir Otto Niemeyer's draft, as well as the original Bill; and Mr. Coates did not explain why the definite term of twenty-five years was also cut out. The references to the issue of Reserve Bank notes in New Zealand against the surplus exchange assets in London were made in answer to interjections, and that may account for their vagueness. The subject certainly calls for more complete explanation. The underlying

idea of the Minister's statement appeared to be that in some way such an issue of notes would permit available credit to be fully used, and the cost of exchange manipulation lessened. But what is holding the credits in London is the fact that confidence is^ lacking and enterprise will not make use of credits which carry the weight of the high exchange. Let this weight be released and the credits will be used. No magical change can be effected by an issue of notes alone. Our difference with the Government on this important issue is not that we disapprove of the establishment of a Reserve Bank, but that we fear that.the Government, partly in submission to opposition and partly to cover up its exchange policy, has departed from the essential sound principles of reserve banking. We wish to see a Reserve Bank constituted on sound, proper, and fair lines, and we believe that, so constituted, it. will strengthen banking and improve the Dominion's financial position at home and abroad. It will produce most of the results claimed by Mr. Coates, though we doubt if the benefits for State finance will initially be so great as anticipated unless the bank's resources are concentrated on giving relief to the Government rather than the general public. The Labour Paijty, however, offers no cure for the defects we see in the Bill. If Mr. Coates, disavowing political influence yet admits it, Labour desires and applauds it. Mr. Savage's argument against the Reserve Bank was that it was not a State monopoly of banking. He certainly essayed some mild criticism of central banking, asking speciously if it had saved America —overlooking all the factors which contributed to the American crisis and particularly the fact that the reserve banking system, though it attempted to apply checks, was not strong enough to counteract the evils of one of the most disjointed and dangerous banking systems in the world. "This line of criticism, however, could obviously not be pressed as Labour's own policy is to go further than central banking arfd introduce monopoly. But Mr. Savage did not explain how he would assure that political interference (which his party opposes when it produces high exchange) would be permissible and laudable if it produced something different { nor how the continuity of banking policy which is essential for stability would be assured if a change of Government involved an alteration of banking aims.