THE NEW ZEALAND BANKS

Evening Post, Issue 56, 7 March 1934, Page 10

THE NEW ZEALAND BANKS

MONETARY COMMITTEE INQUIRY OUTLINE OF FINANCIAL POLICY

A comprehensive outline of banking policy in New Zealand was given before the Parliamentary Monetary Committee today by the Associated, Banks, In order to give the banks a lead on the committee's, requirement, a questionnaire was prepared involving some of the salient features of financial policy in the Dominion, and the replies were submitted to the members of the committee for perusal last; evening/ The questions touched on the- rate of interest on overdrafts and advances, the'; cheque-using habits of the people, Sack?and station agents, the exchange rate, the factors taken into consideration in the granting of overdrafts, and the declaration of dividends.- Further points in banking : practice were also raised during the course of the. examination of the banks' representatives.

The .members of the committee are | ' Mr. J. A-. Nash (Government, Palmerston North), chairman, the Hon. W. j Downie Stewart (Government, Dunedin .West), Messrs. JAN. Massey (Government, Franklin), F. Lye (Government, Waikato), : C. H. Clinkard (Government,'Rotorua), J. A. Murdoch (Gov-ernment,-Marsden), H. Holland (Government, :Christchurch North), F.'Langstone (Labour, . Waimarino), F. W. Schramm (Labour, Auckland West), J. W. Munro. (Labour, Dunedin North), and Captain H. M. Rushworth (Country Party, Bay, of Islands). The experts associated with the committee are |_r..8. C. Ashwin and Dr. W. B. Sutch. The representatives of'th'o banks were SA.Shaw, E.-C. Fussell, and T. G., A. Jlarle. - ' The,questionnaire and the replies are j*si follows:— ■ KATE OF -INTEREST. Question: What determines the rate of. interest' charged ' and paid by the banks? Answer: Broadly speaking, it may be said .that the law of. supply, and demand determines interest rates charged and paid' by the banks. Ayconsiderable portion of a bank's profit-earning capacity rests on the margin between theiii* deposit and their overdraft and discount rates. The necessity for. maintaining an adequate margin has, > therefore, a bearing .. on advance and deposit rates. There is no fixed figure which can be quoted as the actual margin, which varies,as between deposits on different terms, and as between overdrafts yielding different rates of interest; it may be mentioned, however, that the margin between the minimum overdraft rate and the 24 months' fixed deposit rate is, at : present~ 2 per cent., though the margin is only 1$ per cent, and even _ per cent, in-respect of many fixed deposits still current. From the margin between-the deposit and over: draft • rates the banks have to make provision for a considerable portion of organisation and running expenses, reserves, depreciation, bad debts, and income taxation; after making these provisions the margin left for net profit is extremely narrow. For;taxation purposes it is arbitrarily assumed by the Taxation Department that ■ the income earned by each bank is constantly 30s on each £100, of the total average assets and liabilities of the. bank for the four quarters of the year, less-bad debts actually written off and the income on tax-free. securities. On the .fictitious income computed on this arbitrary; basis the banks are required ,to pay incbn\e tax at the maxir mum rate. No_ allowance is made for the fact that 'inAlcan' years bank profits represent a much smaller proportion of total assets and liabilities than in good ye_rs.A "', .;''.: - • ' The margin between overdraft and deposit rates is required to furnish in-come-taxation to the extent of, 17s 6d for each £100 of overdrafts plus each £100 of deposits, and this fact, of course-,.must-be taken . into account when fixing the minimum overdraft rates. - • The necessity of haying a. margin be-tween..-overdraft and deposit rates in; dicates the fact that bank overdrafts and discount rates- depend to a large extent on the rates paid for fixed deposits.. What, then, it may-be asked, determines the: rates paid by the banks for .fixed deposits'? The answer is that these rates depend-on the interaction of supply and demand for deposits. It is clear that,.to preserve, what the banks consider a proper volume of deposits, it is necessary for them to offer Tates which will enable them to • compete effectively with-the rates offered by the competitive institutions, such as Government Departments, including the Post Office. Savings Bank and Public Trust Department, also many trading concerns,. "In A this ' connection the following official statement by the chairman of the Associated Banks was published' on; February-27, I.33:—"Were overdraft rates to be reduced without adequate adjustments being made in the metho4 Of taxing bank incomes, the inevitable and inescapable result would be to curtail'the banks' means of assisting .theirycustomers. and the community^ in. general. The banks are willing ' t'b.-provide additional relief to the present situation by way. of further reduction in interest rates if, to- enable them to'do-so,, some reasonable and fair alterations are- made •in respect of their income. taxation, and if the Government, rates for deposits are suitably reduced." Further reduction's .in deposit and ad--vance rates were subsequently made, as indicated imthc reply to Question 2. ■ RATE ON OVERDRAFTS. Question 2: To what extent has -interest on overdrafts - and other advances been reduced, and. what proportion, of accounts has benefited? Answer: During the past four years ihe minimum rates.for overdrafts and discounts have ' been decreased as Jinder: — On November 1, 1931, reduced from 7 per. cent, to 6_ per cent.; on September 1, 1932, reduced from 6£ per cent, to 6 per cent.; on May 1, 1933, reduced from 6 per cent, to 5 per cent. The present minimum rate is 5 per cent. All accounts have benefited. -- .- During the same period fixed deposit rates were .reduced as under (reductions applied to. fresh deposits of all terms from. 3 months to 24 months; but.only the 24. months' rates aro quoted here, to illustrate the degree of reduction),: — .'.'.-. ~On .'Ajigust 1,. 1931, reduced from 5 per cent, to- 4J per cent.; on June 1, 1932, reduced from 4} per cent.'to ■4 per cent.^ on December 2, 1932, reduced from-4-per centy to 3J per cent.; on July 11, 1933, reduced from 3J per cent, to 3 per cent. The present rate,for -24.months' deposits is 3 per cent. -A It should be mentioned that these reductions- apply only to deposits taken subsequently to the dates .mentioned, and that the customers whose deposits were already current on those dates continued to receive the benefit of •those higher rates until their deposits matured. For.example, though the 24 months' rate was reduced from-4 per cent, to ,3J per cent, on December 2, 1932, _ a considerable volume of fixed deposits .are still receiving the 4 per cent. rate,, and some even 4_ per cent., though.'the present rate quoted is only . S per cent.;, so, that, in view of the reiductibns' in rates during the

past few years, it is clear that a material proportion of the banks' overdraft deposit business has been unremunerative to the banks during that period.. This can be illustrated by taking the case of fixed deposits receiving __ per cent, concurrently with the existence of the minimum overdraft rate of 5 per cent. The margin between tho two tatcs is 10s, which margin is obviously inadequate to provide the expenses in respect of such ■ business, i.e., 17s Gd income taxation in respect of each £100 of such overdrafts plus each £100 of such fixed deposits and, in addition, a proportion of other overhead charges and trading expenses. VOLVME OF ADVANCES. Question 3: To -what extent are variations in interest rates reflected in the number and volume of applications for advances? Answer: It is a well-known economic fact that the tendency of higher rates is towards lessening the number and volume of applications for advances, j and that the tendency of lower rates is to increase the number and volume of applications. However, the variations in the minimum rates during the past twelve years have not exceeded a range of 2 per cent., and with the exception of the recent reduction from 6 per cent, to 5 per cent., the alterations have been only in _ per cent, steps. Other economic factors affecting trading conditions, then, have also come into operation, and the comparative trends of overdraft and discount rates on the one hand, and the volume of advances on the other,, can be seen from the following. table :—

From this table it will be seen that sometimes, contrary to the economic tendency, the volume of overdrafts has increased after overdraft rates have been increased, and has decreased after overdraft / rates had been decreased. LIMITING FACTORS. Question 4: What are the limiting factors at present time in respect to (a) further lowering of interest rates? (b) further advances for business? Is there any unsatisfied demand for the latter? Does the amount of advances depend on the amount of legal tender held by the banks? Answer: The answer to the query as to the limiting factors in respect to further lowering of interest rates is to a large extent contained in the answer to question (1) of the questionnaire; it may be said briefly by way of recapitulation, _ however, that at the present time'the limiting factors are:— (a) the obstacles to reduction of fixed deposit rates—namely, outside competition, which hinders further appreciable reduction in tho fixed deposit rates; (b) the fact that thero are still fixed deposits/receiving interest at the rate of 4_ and' 4 per cent., though tho 24 months' rate now quoted is only 3 per cent. The limiting factor in respect to further-advances for business is as under:—As a result of tho heavy fall lin overseas prices for our exports on which this country very largely deIpen'ds, and- the consequent impact of the depression on New Zealand, there jare fewer avenues of profitable cmIployment of money. The effect of tlm is: (a) That those who possess liquid funds refrain from employing them; (b) that those who could obtain adjvanees, or who could increase their advances, refrain from doing so. As to whether there is any unsatisfied demand for advances for business, it is a simple fact that there is no bank limitation. In fact, tlie banks aro very willing to extend their advance business, and tho reduction of total overdrafts, is not in accordance with their own wishes. The factors a banker takes into consideration in granting such advances are those set out in the answer to question 9; to advance money on inadequate security or unsound propositions would liavc the inevitable effect of freezing bank resources and aggravating the existing conditions. The query as to whether the amount of advances depends on the amount of legal tender held by the banks is not | clear. Taking legal tender to mean legal tender notes, the amount of these held by the banks has no bearing whatever on the amount of advances. If the question refers to legal tender in circulation, the answer is no. If the question refers to gold coins held, the answer is also no. CHEQUE-USING HABITS. Question 5: Has there been any appreciable change over a period of years in New Zealand in the cheque-using habits of the people? Would it be an advantage to encourage the general practice of üßing cheques in everyday transactions? Answer: As in Britain and other English-speaking countries, the chequeuding habit is "highly developed in New Zealand, and the proportion of cheque currency to note and token currency is in accordance with the convenience of the users. "Statistics show that the ratio of cheque clearings to notes in circulation in' 1932 was less than in 1928, which would be due not so much to the habits of the people as to the fact' that cheques are more used for

larger transactions and notes for lesser, and the decline in cheque clearings is merely a reflection of trading conditions. As to whether it would bo an advantage to encourage the use of cheques in everyday transactions, it may be mentioned that c„uques are already so used widely, and the Government stamp duty of 2d per cheque, coupled with the convenience of legal tender for pocket and till money, would probably militate against a much more general use of cheques. STOCK AND STATION AGENTS. Question 6: Do stock and station agents come into activo competition with trading banks? Answer: To the extent that stock and station agents perform banking functions they may be said to be activo competitors. This is involved by the very nature of stock and station agency business, but as against this, there are certain functions performed by stock and station agents which are outside the scope of ordinary banking practice. To some extent some stock and station agents obtain financial accommodation from the banks, but they also get their funds from: (1) Their own shareholders; (2) by debenture stock; (3) by deposits from customers. There are examples in New Zealand'of large stock firms which do not require financial accommodation from their bankers. Question 7: What proportion of the exchange business of New Zealand is conducted by the trading banks: (a) In normal times; (b) at present? Answer: These particulars are not available to us. Possibly 80 per cent, or more is done by the banks, but this is merely conjectural. Under present exchange conditions there is more inducement for importers to endeavour to deal outside the banks. Question 8: In-normal times what is the procedure and what aro the determining factors in settling the exchange rate? Answer: Broadly speaking tho exchange rates in normal times depend on the supply of and demand for London funds, and these exchange rates may be said to represent the market price at which London funds arc bought and sold. If :an unbalanced external trading position results in a shortage or overaccumulation of London funds, it is of course necessary to make adjustments to-correct the position, because it is obvious that the perpetuation and aggravation of such a position would be to the'detriment both of the banking organisation and of the country in general. In the last analysis, goods pay for goods, and the goods we import must be paid for by the goods we export. Governriient borrowing overseas would have the effect of relieving a shortage of London funds which might otherwise necessitate an increase in .the exchange rates. An unfavourable trading position might be coupled with conditions of demand for bank accommodation necessitating an increase in overdraft rates. Subject to the above remarks, it may be said that innormal times an increase in the exchange rates is an indication that the supply of London funds is less than the demand, and that a decrease in the exchange rates is an indication that thero has been an accumulation of London funds which cannot be disposed of at file current exchange rate. GRANTING OF OVERDRAFTS. Question 9: What are the factors a banker takes into consideration in granting an overdraft? Answer: These considerations are:— (a). The purpose for which the advance is required, i.e., whether the money will bo used in such a way as will enable the debtor to provide for interest and repayment, and so enable the bank to avoid. becoming involved in frozen assets; (b) the length of timo for which tho advance is required—it being borne in mind that , bank advances are normally repayable on demand —this principle also being necessar; to avoid tying up, assets; (c) whether the present and' prospective value of the security affords a sound and safe cover for the advance. The character and commercial morality of the customer is also largely' taken into account, particularly where an advance or part of it is made on the "personal security" of the borrower; (d) tho banks of this country, recognising that this country is predominantly a. primary producing country, render financial assistance to a very largo extent to primary producers; the proportion that advances to primary producing interests bears to total advances in New Zealand on the books of ono of the banks, excluding Government accounts (which may be taken as a typical example) is:— Per cent. Primary producers 53 Co-operative, dairy companies :. 4 Mercantile concerns (which include stock and station agents) 22 79 Industrial concerns > ; 7 Other parties .' 14 100 VARIATION IN ADVANCES. Question 10: Advances vary from year to year; what are the specific causes of this? Answer: Broadly speaking, variations in.the output.and in the range of prices of produce and in imports may be said to bo. the root causes of advances varying from, year to year. When seasons and prices aro good, and the farmers' incomes increase, business activity is promoted, imports increase, new ventures are embarked on, and the demand ■■. for overdrafts is stimulated. Low prices, on tho other hand, limit the farmers' spending power, and the community has therefore t- • pass through tho period of adjustment necessary to tho altered conditions. During that period advances for new ventures are not so generally sought by borrowers. DIVIDENDS AND RESERVES. Question 11: In declaring a dividend, are reserves drawn, up on? Answer: It is not usual even if permissible under bank's charter to draw upon reserves to pay dividends; the general practice is to provide for dividends out of the year's profits. However, in special circumstances reserves might be temporarily drawn upon to contribute towards payment of the dividend; it may be taken as being contrary to banking practice to depleto reserves permanently for the purpose of paying dividends. Nevertheless, reserves form part of shareholders' funds, and the investment of such reserve funds, or the employment of them in banking business, ha 3 the effect of contributing towards the earning of dividends. Question 12: If dividends are sometimes paid from reserves, are securities sold to provide for these? Answer: Not necessarily, and we are not aware of that ever having been dono in New Zealand. USES OF RESERVES. Question 13: What are the uses of reserves? Answer: Kcservcs are set by from undistributed profits and/or from shareholders' contributions for the following purposes:—(a) To strengthen the bank's general position; (b) to assist in maintaining the bank's position liquid —a necessity of the first magnitude; (c) to provide for losses or other contingencies. A primary essential for the effective conduct of sound banking business is that thero should be entire confidence in the bank on the part of depositors, tho business community, and the public generally; sound reserves provido a tangible basis for such confidence. The banks, as.trading concerns, adopt tho practice of all prudent commercial organisations in building ujj adequate

reserves to enable them to cope with adverso economic conditions. It is to their reserves, combined with prudent trading, that the banks of this country owe their success in withstanding the impact of the depression with unimpaired soundness and without losing one penny of their depositors' funds'. Furthermore, banks, as repositories or! the funds of depositors, have wisely and traditionally adopted the precaution of building up ample reserves which, apart from their direct utility in the ways just mentioned, afford a tangible assurance to depositors that their interests are being properly safeguarded; iv this connection it should be pointed] out that all souik' banking concerns regard their first duties as being to safeguard the funds of note-holders and depositors. This is in itself a duty of national importance. It may further be mentioned that the general practice with these reserves is to specially invest portions in readily! realisable securities, preferably Government stocks, in balances with Central Banks, and to employ the balanco in the banks' own business. OVERSEAS TRADE. Question 14: What were the amounts of sterling funds held on New Zealand account by the banks since 1920 to 1932 (quarterly or monthly figures)? Answer: These particulars are not available as it has not been the practico to segregate the figures. Question 15: To what extent is there evidence that importers may be withholding external payments in anticipation of a return of New Zealand currency to its former parities? Answer: Ther© is evidence that external payments are being retained in New Zealand meanwhile, but so far as tho banks aro aware not to any considerable extent. ' Question 16: Is there evidence of the withholding or the accelerating of capital movements from or to New Zealand by reason of current economic conditions or of the rate of exchange? Answer: To assist the Government, and at the request of the.Government, the banks decline to facilitate the transfear of capital funds from England to New Zealand. As to capital transfers from New Zealand, it is clear that the present exchange rate acts as a deterrent. CREDIT INSTITUTIONS. Question 17: What other agencies in New Zealand, apart from the trading banks, extend credit to business men or farmers? ' Answer: Other such agencies include: (a) Stock and station agents, (b) State Advances—including Advances to Settlers,. Rural Advances, Rural Intermediate Credit, Advances to Workers, Repatriation Advances, Fruit Preserving Industry Advances, etc. (c) Government Life' Insurance Department, (d) Other insurance companies, (c) Building and investment societies, (f) Savings-banks other than Post Office Savings Bank.^ (g) Wholesale houses and retailers, (h) Dairy^ companies, (i) Private lenders and trustees, fil Public Trustee. KJJ Question 18: Would it be advisable to have greater co-operation between, and if possible co-ordinated control, over those outside agencies? Answer: It is felt that it would not be competent for the banks to express an opinion on the principle of co-ordina-tion or control of the outside organisations referred to. Question 19: Are securities ever sold in order to obtain a greater cash holding? Answer: Yes. Every bank carries easily realisable securities which aro available should it be necessary to add to its cash holding. "SOUND FINANCIAL BASIS." Question 20: Are there any specific improvements in New Zealand's monetary policy that can be suggested by the banks as desirable from the viewpoint of restoring and maintaining general prosperity? Answer: The present conditions in New Zealand are due to world conditions outride tho control of this country; specifically—a fall iv prices for our produce in tho market whero that produce is sold—and the banks emphatically consider that prosperity caunot bo achieved by monetary manipulation. As already mentioned, it is not the present banking:policy to restrict financial accommodation, and, moreover the amount of demand deposits in tho trading banks and savings banks alone aggregated over £70,000,000' at the end of 1933. The fact that money is available for good investments is evidenced by the response to the Reserve Bank issue, and by the premium already attaching to Reservo Bank shares. The remarks of the chairman of Barclay's Bank in the course of his address at the recent annual meeting of that bank should be of interest in this connection. He said: "It is a matter for congratulation that we are upon a sound financial basis, and that largely ojmg to the wisdom of the Chancellor or the Exchequer, the wild and unsound schemes proposed for currency and credit manipulations, designed to secure a quick return to prosperity, have been disposed of. We should realise that only by constant, patient, and faithful S >°^° S°UDd PrinciPles can the credit of the country be maintained at wn ft Cnt, hV gk Wcl ia tlle eyes of tho world, and that by these means alone ST^ r ey!»leadthCWOrlclto---MONETARY SYSTEM. Question 21: if is requested by a member of the committee that a brief explanation of the working of^the p re sent monetary system be given with particular reference to the follow?^ points:-(a) A definition is required O f money m its various (b) How money comes into existence (c) How it is put into circulation; (d) How it is cancelled out of existence. Answer: There is no, universal monetary system, and a brief general explanation of "the working of the present monetary system" or systems does seem practicable; moreover the Parliamentary Committee has at its disposal expert economic advice on such matters. However, some comments on the monetary system affecting New Zealand may be of assistance to the Committee, and are given hereunder-— Prior to tho World War, and subsequently from 1925 to 1928 Britain was on tho gold standard, and New Zealand was also prior to the war From April 1928 to September 1931 Britain was on the gold exchango standard, or the gold bullion exchange standard as it has sometimes been called. During the latter period New Zealand might be said to be on tho gold exchange standard in the sense that gold bullion could if necessary have been obtained m London m exchange for the banks' London funds held there, but in effect the standard was and still is a sterling exchange standard. In view, however of existing conditions it would probably be more technically correst to describe the present standard in New Zealand as an exchange standard of inconvertible bank paper money depreciated below par with sterling, but bearing a definite ratio to sterling, which in turn is depreciated below par with gold. Since the wealth and prosperity of New Zealand is founded pricipally on primary production for overseas markets, a fundamental service of the banks of this country is the financing of our external trade, which is, per capita, one of the largest in the world. FINANCING EXTERNAL TRADE. The broad basis of the operation of the working of this system of financing our external trado is well known, and only brief mention need be made: To the extent that external trade

transactions are made through the banks, the London offices of the banks receive the proceeds of our exports, and disburse the cost of our imports; theso transactions are preceded or followed by corresponding entries in bank accounts of the. exporters and importers of this country; it is evident that the London balances are continually being augmented by funds received from the marketing of our exports and overseas borrowing and depleted by withdrawals to pay for our imports and Government and local body interest. Within the country the banks prowide the standard banking services efficiently and as cheaply as possible. Financial accommodation is readily available for productive purposes under proper safeguards. The banking institutions of this country are established on sound principles, and their business is prudently conducted, with the result that they thoroughly merit the confidence reposed in them by depositors and note-holders, whose interests the banks regard as the primary banking duty. MONEY AND CURRENCY. (A) Definition of. money in its various forms. Money has been defined as "that which passes freely from hand to hand throughout tho community, in final discharge of debts and full payment for goods, being accepted; equally without reference to the character or credit of the person who offers it, and without the intention of the person who uses it to consume it, or enjoy, it, or apply it to any other use than, in turn, to tender it to others in discharge of debts or payment of commodities." —Walker. Money has been more simply defined as "anything which is widely accepted in exchange for goods, or in discharge of other kinds of business obligations."—Robertson. The conception of money consistent with those definitions includes (1) gold, silver, and copper coins, (2) convertible or inconvertible bank-notes, (3) Government Treasury notes. " Currency" is a more generic term, and is referred to by Sykes as follows:—"The term currency is generally used to denote the whole of the circulating medium by means of which debts are paid and prices are measured. It is synonymous with money in its broader sense, and contains the two subdivisions of the' coinage and the paper circulation, that is, bills, notes, cheques, postal orders, and 'similar forms of money." ORIGIN OF MONEY. (B) How Money Comes Into Existence: (1) Metallic money comes into existence by being dug from the earth and minted; (2) bank-notes come, into existence by being issued by banks, in accordance with the law of the land and under proper safeguards, and on a basis representing tangible value; (3) cheque currency comes into existence by being drawn by the spender on a bank or other firm which accepts deposits or makes advances that may be operated ou by means of cheques; (4) Government money '(e.g., Bradbury's) comes into existence by being issued by a Government Treasury Department. Bank-notes in circulation are almost invariably backed to the full extent of their issue by gold and/or securities. In English-speaking countries cheque currency forms the bulk of the circulating medium; cheque currency arises out of claims on banks or other firms by the drawers of the cheques. Claims oil a bank entitling customers to draw cheques may arise from the following sources:—(l) The deposit of gold, or token coins on current account; (2) the deposit of notes of that bank or of another bank or banks on current account; (3) the paying of cheques or other negotiable instruments into current account; (4) the obtaining of a loan from the bank on current account. Such loans are usually backed by security lodged by the borrower over tangible evidences of real wealth—e.g., laud, buildings, or marketable goods or securities. Such cheque currency thus has the dual backing of (1) the security against which the loan is granted, (2) banking resources. (C) How it is Put Into Circulation: This question is partly, answered under "B" above. Bank-notes are put into circulation (1) on the initiation, (2) at the option, of those having claims-on banks, and to the extent that money in that form is effectively required for circulation in the community. Tho expression "effectively required" is used because a person who had no goods or services exchangeable for money would not be able to effect any increase in the note circulation on his own initiation or option. Cheque currency comes into circulation at the option and to the extent required by those having claims on, and the right to draw cheques-on, banks or other firms. > The Modes in which Bank-notes Come Into Circulation are as Under: (1) By tho encashment of cheques or other negotiable instruments at a bank; (2) as the result of those having gold bullion or coins, or token coins, exchanging them for bank-notes; (3) by the payment of wages or salaries to bank employees. The mode in which cheque currency comes into circulation, is by customers of banks or other firms exercising their right to draw cheques, and by their exchanging such cheques for goods or services. The modes in which coins may come into circulation are:—(a) By those having claims on banks exchanging other forms of currency for such coins, (b) By the minting of coins. CANCELLATION. (D) How it is Cancelled out of Existence. (1) Bank-notes.—While in circulation bank-notes represent bank liabilities. When in the hands of the issuing bank the notes are neither bank assets nor bank liabilities. Banknotes cease to be money in circulation when they are returned to tho issuing bank, and are "cancelled out of existence" when they are no longer eligible or required for reissue. Cancelled notes are replaced by new notes to tho extent effectively required by tho community. Note issues aro increased to tho extent effectively required by tho community, subject to statutory provisions. (2) Cheque currency and other negotiable instruments are cancelled when they are presented for payment at the bank or firm on which they are drawn. The purchasing power which they represent, however, is -not thereby cancelled oiit of existence by banks; if they are paid into a credit account they increase the balance of that account by an equivalent amount. The expression "cancellation of money by banks" refers to the repayment of loans to banks. Such cancellation, while it may have the effect of decreasing the balances of some credit account or accounts (and so decrease tho amount of immediately "spendable" money available) at the same time normally frees from liability to the same extent the property or other tangible form of wealth which had been the basis or security for the loan. Unless such property or wealth' has deteriorated in value, it can, if economic conditions warrant, be re-em-ployed as th ebasis of fresh loans. The "cancellation of money out of existence" is normally at the option of the user or users of the money, and not on tho initiation of banks. '. 1 FUNCTIONS OF BANKS. Mr. Harle gave a resume of the incorporation of the trading banks doing business in New Zealand, showing how they obtained the franchise they hold, 1

their functions, and some of the statutory restrictions imposed on-them. • New Zealand banking operations, said Mr. Harle, come under the following main heads:—■ (a) The resources of the trading banks come (1) from shareholders' capital, (2) shareholders' reserves, (3) funds deposited, (a) on time deposit at interest, and (b) on current account (i.e., demand) deposits from the public and/or Government. (b) The banks, under their existing franchise, issue the bank note currency of New Zealand. (c) They, accept deposits as set out above. (d) They make advances on overdraft to borrowers and also discount bills. (c) They purchase bills (including produce bills) on places outside New Zealand—that is our "export" bills— and, on the other hand, they sell bills to pay for imports into New Zealand. (f) They act as the medium through which overseas loans are arranged for municipalities. (g) They act as repositories for the safe-keeping of their clients' documents and valuables. (h) They conduct a "clearing system" throughout the country for the collection of the cheque currency. (i) They act as bookkeepers for their customers. (j) They are a source of large revenue to the Government. SHAREHOLDING. As has been pointed out in the Press in Australia, a commonly entertained but utterly erroneous belief is held by some people that the banks are owned by a limited number of wealthy people. There are nine trading banks in Australia, and their shares are owned by some 71,000 people. The average capital holding is £528. The shareholders are drawn from every class in the community, except only the improvident; and their holding, for the most part represent ■ savings invested after careful thought, with the double motive of avoiding risk and ensuring a constant if low return. The average return on these investments, which was 7.4 per cent, in 1929, was only 2.47 per cent, in 1932. The shareholders, as in: other businesses, exercise complete control of the banks. They elect, reappoint, and remove directors, according to the degree of efficiency with which these are deemed to be discharging their trust, and, through .the • directorates,, they control _the_ management and staiiM of the institutions. It is' inconceivable that the shareholders - would : permit their servants to take a course of action which was inimical to their interests. That the officers of the bank . would themselves initiate such a •policy is incredible. . Like the shareholders, they ™ye all tkeir own stake in the country. The trading banks in Australia alone employ about 20,000 men and women There^are 756,000 people in Australia who have deposits in trading . banks j One person in every nine in the Commonwealth is a depositor. Similar general principles apply to New Zealand conditions, where the trading banks employ some 3300 men and women in their services. The shareholders in New Zealand holding shares*in the trading banks in New Zealand number approximately 13,130, representing an average capital holding of £487. . New Zealand bank figures are averaged and, "quarterly." returns of assets and liabilities furnished the Treasury each quarter. In addition to this, weekly figures, including "clearings" are furnished the Government Statistician. NOTE ISSUE. The Banking Act, 1908, provides that all bank-notes issued in New Zealand shall be a first charge on the assets of such bank. At the outbreak of war in 1914, the Government enacted legislation (Banking Amendment Act, 1914) giving the Governor in Council authority to make, by proclamation, bank-notes " legal • tender " throughout New Zealand. By section 44 of the Finance Act, 1916, uniform regulations were enacted for use whilst the legal tender position was continued; This enacted that the legal limit of note issue of each issuing bank is made up by-adding together:—(l) The amount of all coin held,- (2)-The amount of all bullion held; (3) The amount of all public securities held; (4) The amount of all war loan advances made on special accounts; (5) The amount of all soldier settlement loan Advances made on special account; (6) The amount of all advances made on wool account. Note: Items 4, 5, and 6, are non-ex-istent now and therefore, do not apply. The assets enumerated above must be held in New Zealand. "Public securities"- are defined as "the public securities of the Government of New. Zealand, or-of the United Kingdom, or of the Commonwealth of Australia, or of any State of .that Commonwealth." There are certain other provisions and- extensions of the foregoing which the Government have power to bring into operation, but they have not been invoked. Originally banknotes were taxed by the Government at the rate of 7s 6d per cent, per annum, payable quarterly. From time to time Parliament has increased it by steps up to the present figure of £4 10s per cent. Further, as bank income tax is based on an arbitrary basis, as explained later, the note circulation also bears income tax in addition of 8s 9d in the £100. Now that the Reserve Bank of New Zealand has been created, the functions of note issue will be taken over by that Ijank. INCOME TAX. Banks in New Zealand are not-taxed on profits like ordinary trading companies, but on an arbitrary basis. This basis is the average for the year of their assets plus liabilities. On this total they are assumed, to earn an income of £1 10s per £100. This is the "assumed" income for taxation purposes. From this can be deducted bad debts and contributions made' to staff pension funds. The net result is known as tho "taxable balance" and income tax is charged on this balance at tho maximum rates. It will thus be seen that the tax bears no relation to income and that a bank operating in New Zealand may be working at a loss or making small profits only, yet it pays a heavy so-called "income" tax. "The system of banking in New Zealand is the 'branch bank' one—which is the general system throughout British countries. This is in contradistinction to, say, the.American system of thousands of separate banks, many with small capital resources only. The branch bank method gives greater strength to the system and better facilities to the community. The method of ] making advances in New Zealand is the 'overdraft' system, by which mii terest is charged half-yearly based on i the fluctuating day-to-day balance of the debt. ; . "The trading banks in New Zealand, from the time of the arrival of the Union Bank of. Australia, Ltd., here in 1840, have been inseparably bound up in the progress of New Zealand, financing the old Provincial Governments, the General Government, the primary producers, and the industrialist alike, without fear or favour, realising as all banks should, that their interests and the prosperity of ihe Dominion coincide." Further proceedings at the inquiry are reported on the next page.

■ . ; .."'..■ Advances . Minimum Kate for Advances. '- (excluding Govt.) per cent. • . . •£, June, 1920 .... C June quarter, 1920 34,790,000 January, 1921 ........ 6i December quarter, 1920 47,118,000 March, . 1921 ........ 7 March quarter, 1921 52,446,000 January, 1923 ........ 6J • MarcE quarter, 1923 42,522,000 May, 1927 ........ 7 Juno quarter, 1927 50,753,000 July, 1928 CJ September quarter, 1928 45,119,000 February,' 1930' 7 March quarter, 1930 53,077,000 November, 1931. .... Ci December quarter, 1931 51,017,000 September, 1932 . G September quarter, 1932 49,975,000 May, 1933 5 June quarter, 1933 ■ 46,757,000