RESERVE BANK

Evening Post, Volume CXVIII, Issue 23, 27 July 1934, Page 9

RESERVE BANK

TH£' AMENDING Bill

PASSED BY HOUSE

' EXCHANGE MANIPULATION

FEAR OF INFLATION

The Finance. Bill, the main provisions, of which' amend the Reserve ■Bank of New Zealand Act of last session with the object of removing existing anomalies, was passed by the House of Representatives at 3.5 o'clock tliis morning. There was a long debate on the second reading of the measure, members taking advantage of the opportunity of discussing the exchange nianipulation. The - Government was criticised for proposing to pay £29,000,000 toMhe trading banks to meet Treasury bills issued against exchange transactions, it being claimed that this would be 'a form of inflation. This charge was denied by the Minister ,of Finance (the Rt.Hbn. J. G. Coates). In moving the second reading tho Minister, of -Finance said, that most of tho provisions relating to the operation of ..tho Reserve Bank wero technical or machinery, in character,'and designed to removo anomalies which had been found to exist. With all new projects it was almost inovitablo that thu necessity would arise to amend tho original, enactment from time, to' timo. Under the Bill the Banks Indemnity (Exchange) Act was repealed as from August ;l, when the Reserve Bank of New Zealand would commence operations and assume the responsibility for maintaining • the 7 exchango rate. Accordingly, the liability of the Govern- . ment to the trading banks would automatically lapse. 'Furthermore, the trading banks would be .ible to buy and sell exchange from and to the Reserve Bank,-so that there would be no oeea-s sion for the* Government to do any more business of that-nature with the trad- - ing banks. .The., Hoserve Bank would handle the. whole of the exchange. .NOT, A BURDEN. "Allowing for sterling used for the normal requirements of the' Govern-, ment, the surplus "sterling purchased .. under the Banks Indemnity (Exchange') Act amounted to approximately . £ 23,000,000,''; said Mr. Coates. " It: i.< proposed to hand this •amount over to the Reserve Bank under the section of the Reserve Bank of New Zealand Act under which ■ the Bank undertakes to buy sterling at rates fixed by itself. -. "This amount will, in no sense be a burden to the Bank. On the contrary, it will be a decided acquisition, for without ; a siibstantial.amount of sterling funds the Bank would be relatively powerless, and in the ordinary course it would have takfen it a considerable time to accumulate funds by buying in the market. . "The Reserve Bank will'pay tho Government for the sterling funds taken over at the current rate of exchange.' This will be used to pay off Treasury bills' owing to, the trading banks, which will then pdssbss,.cr.ed.ita: at the Reservo , Bank. These' credits can bo drawn against; any,i Reserve Bank notes ob tamed if the banks so desire. Thus the whole position under the Banks Indemnity (Exchange) Act will be liquidated and the suspense account extinguished.'"' .; . ■'.■".'' .\. ' . PROTECTION FROM LOSS. .Referring-to the- provision" which "guarantees 'the.Bank against loss in the event of the exchange dropping, and ensures the Government^ receipt r'bf. any profits, arising! out of Appreciation, the Minister said that legislation on those lines would have been neces: saiy quite apart from the handing over of tho funds iaccumulated under the Banks Indemnity (Exchango) Act. New Zealand currency was based on sterling,: and no legal i-ate had: yet been fixed. When that had been done by statute the duty, of maintaining'that value, would-be imposed, on the Reserve BankV lii - such circumstances no'guarantee of the Bank's position; would bo needed as the credit structure would bo controlled-by. the Reserve Bank to keep the exchange rate within certain limits on either side of the fixed par. Where the permanent exchange rate was not fixed by statute, as was the position in the Dominion, there was a definite onus on the State to protect the Central Bank from loss. This was particularly so in a,"case.like New .Zealand 'a where the Reserve Bank was practically compelled by law to keep a large proportion of its assets in sterling. Furthermore, ifc was a fundamental principle that the decisions of the .Reserve Bank made in the genera] interests of the Dominion should not.be influenced by the effect on its own financial position. It was primarily for this reason that the Reserve Bank Act provided for only a Umited dividend to shareholders and for.the- balance of the profits to co to Ihe State. • ... . : :,■-■.- ' PERMANENT. , Mr. Coates said that profits or losses on exchange affected the Consolidated rund only until a definite relationship between the currency of the Dominion and sterling was fixed by statute—that was, it was not a permanent provision. In the meantime the Reserve Bank had fixed the\exchange rate at £126 for a long period. There seemed little prospect of any loss, being borne by the Consolidated Fund. •■ ■: ..- Until the exchange rate was fixed by statute " without a guarantee*; the Reserve : Bank's (decisions on the rate could not possibly be unbiasod. With the relevant clause iii operation, however, the Bank could tako neither profit nor loss froni exchange movements, for any loss was to be made good .by tho Consolidated Juuid and any profit was to go to it {he Board of Directors had already nxed the exchange rato at" the level which it considered to be in the best interests of the'country. -This provision would continue in operation until such time as a definite relationship between tho currency of the Dominion and sterling had been fixed by statute -_ 'The wording of the clause under review, the Minister continued, "refers to the appreciation or depreciation in the assets m the Reserve Bank but it ■will' be understood that the only assets that can be affected by changes in the rate are those which-are held abroad Obviously changes in . the exchange coukLnot affect thft value of assets held in New Zealand, The object of the drafting m this language is simplicity.- Tho Bank will, of course, keop its accounts entirely in New Zealand currency, and its sterling assets in the books will be increased by the ruling ratc^of exchange. Thus any alteration in the rate will increase or, decrease the value of these assets, and this change in value of foreign assets is what the i-lause covers." MINISTER'S ESSAY. "In the first place I want to enter my protest against this method of passing important legislation," said tho Leader of thu Opposition (Mr. H. ,T. Kavagc). "This llou.sc has been in session for ouc month and we have this-

Bill circiilatecl one niglit and urgency' claimed for. it the following night. In such rapid progress the essay that has been read by the Minister in charge of the Bill is not very helpful."- The explanation which Mr. Coates had given was not at all satisfactory and personally he (Mr. Savage) was just about as wiso as he was before the Minister spoko. It appeared that the Reserve Baiik was to bo guaranteed against loss for all time. The Minister of Finance must know as well as the speaker knew, that the raising of the exchange had not brought another twopence into the country. All that had happened was that New Zealand's curroncy had been depreciated. The Government had got into a mud ! hole in London. The Government found : it had a lot of money there and that it ■ could not get it backwards or forwards. I In order to get over the difficulty it had issued Treasury bills to the trading 1 banks and these were to be met by the . payment of Reserve Bank notes. : . What tho Labour Party wanted to • know was why the Government had not ■ issued the notes in tho first place in- [ stead of raising the rate of exchange. ', FATTENING THE FAT. . Mr. Savago declared that the Government had expended millions on fattening the already fat,'and.now it had 1 come back to whero tho Labour Party i haid said it should have started—by ; using tho credit of New Zealand. Mr. Coates: Straight-out inflation. L know you have advocated that all along. Mr. Savage: I'want to know why the i credit of the State was not used in tho i first place. Peoplo outside of the House could tell me a few weeks ago that these Treasury bills were going to bo met by ; a Eesorve Bank issue. Now wo appear to be getting confirmation of that from the Minister. ■ ■. : . . : The Prime Minister (the RtNHon. G. W. Forbes): That, was said when the Reserve Bank Bill was going through last session. 'Mr. A. J. Stallworthy (Independent, Eden): What does the Prime Minister know about it? ■ ■- ■• Mr. Savage said that tho Government's chickens were now qoming home ; to roost. ' -■ ' ■ '•-. Mr. Coates: 'Where is the nigger in r.ho woodpile? Mr. Stallworthy: Tho Minister of Finance. (Laughter.) . , • Mr. Savage: Sometimes the member for Eden is very helpful.- . PEOPLE WILL PAY. / s The Leader of the Opposition said that it did not matter what the Minis ter of Finance said about the Bill, the people of New Zealand would havo to, pay for it in tho long run. New Zealand was depreciating its currency without adding to its volume What it should have done was to increase the ~ volume without depreciating tho currency. It was difficult to see whero any profit was going to'come from so far as the operations or1 tho Bcserva Bank Were concerned. They did not know how many millions of pcuhds there were in London and they were asked to place the Consolidated Fund behind tho exchange transactions without that knowledge. There was no doubt that tho Government would have been dead long ago if it had not beon for the assistance of the trading banks. ■MV. W. Nash (Labour, Hutt): And it. cost £1,500,000 a year! " -■ ;■' Mr. Savage said that they had £23^000,000 in London and it appeared that they would never be ablo to get it here. Even when they paid off the £23,000,000 to the trading banks they would'still have the credit in London. If that money was going to be used to meet Stato liabilities in London the tax payers of Now Zealand would have to" pay the piper. If on tho other hand credits were, to be used by New Zea land importers the buyers of imported goods would have to pay the piper,' so that in the long run the people of New Zealand paid the piper which ever way it'went.' ■.'■■.'■ . "... - --. PROFIT TO THE BANKS. Mr. i l. Langstone (Latxmr, Waimarino) said that against tho £23,000,000 surplus sterling in London the Government had to issue £28,750,000 in Trea sury bills. Furthermore, tho Govern ment had to pay interest of 5 per ent. on the bills, but obtained only £ per cent, on the London funds. It was vow proposed to pay off the banks with ■Reserve' Bank notes, and that would mean.-that the banks would mako a profit of the difference between the sterling funds and the amount, of Treasury bills met in New Zealand by Reserve Bank notes. /The raising of the exchange rate gave the primary producer a price 25 -per, cent, above sterling, and there was nothing to prevent him being paid 50 or 100 per cent, above sterling. That proved that it was'possible to fix money prices in New Zealand "'-without reference to any other country. However; the Government had carried out its "policy to the extent" of benefiting the exportable goods only. New .Zealand 's currency ehould bo freed from outside.influences,, but should be based on the requirements of the Dominion. Mi1. Langstone criticised the Government for amending the Reserve Bank of New Zealand Act by a clause in the Finance Bill. Mr. R. A. "Wright, (Independent, Wellington Suburbs) said that in a state of public unrest such as .now obtained Bills should be clearly and carefully explained. The taxpayer wanted to know whore his liability began and • where it ended. It was clear that an increased liability was , going to bo placed on the Consolidated Fund. What had the exchango cost the country up til] the end'..of-last year? He estimated, from tho Gazette, that it was £4,770,810, in addition to which must be added £1,797,188 for tho . extra money the Government had to pay for interest in London, making a total of £6,274,5)!)5. Was that true or not? When the Banks Indemnity Act was passed nobody dreamt what the liability would amount to. Where was the £6,000,000 to come from? Would the Reserve Bank issue notes, or would the Government have to raise the money by loan; If the Minister took the country into his. confidence and told the House exactly what tho position was N he would strengthen his position in the country Tho majority of tho people in New Zealand now dreaded the opening of Parliament on account of- what might be done, and ho considered that it would bo better if Parliament's doors wero shut up for five years. Mr. W. J. Jordan (Labour, Manukau): Why did the honourable member voto to extend its life? . Mr. Wright asked whether the Government was preparing for^n. permanent currency depreciation. Was that the object of tho Bill? No headway woull bo made while legislation, of an upsetting nature was before the House. INTERNAL TAXATION. Mr. W. Nash (Labour, Hutt) said that there was. no possibility of restoring confidence While one section of tho community was going short of .the things that were necessary for a full life, knowing that they could have them if the organistion ; wore made available for getting themJ The member for Stratford (Mr. W. J. Poison.) had said that the exchange should go free 'and that pegging should be stopped, yet he had supported the pegging a further 15 per cent. The oxchange rato was nothing else than a process of internal taxation, as tho money received by the farmer was supplied- by the people of New Zealand. The Government had not saved the working,farmer by its policy. The Government had badly managed the funds it had in London. ,!

Mr. i\ Lyo (Government, Waikato) contended that tho British importers carried the burden of the additional raising of tho exchange rate.. Curronc-y 'depreciation was in progress ia aiiy

country of consequence in the world today, and New Zealand was not alone in depreciating her currency. Tho.Gov-' eminent was exercising its right to manage its own internal currency. The I raising of the exchange had benefited the people of the country. Mr. H. T. Armstrong ("Labour, Christchurch East) said that was it not a fact that the farmers required more artificial propping up today than ever before. Mr. A. J. Stallworthy (Independent, Eden) said that tho exchange transactions had disturbed the public accounts and had drawn an unfavourable comment from tho Auditor-General! The clause in the Bill referring to local body sinking funds was of tremendous importance, and he asked whether' those affected knew of the provision of tho Bill. Mr. Coates interjected that the two local bodies affected knew of tho clause. Mr. Stallworthy: Are they in favour of it? . Mr. Coates: I think they would like it different. • • • Mr. Stallworthy said that the clause would place an immediate new burden on the taxpayers. The raising of the exchange last year had wiped out all tho economies made by local bodies and had prevented them from reducing their rates. The Reserve Bank was having to depart from the' ordinary banking practice in order to bolster up a bankrupt Government. IS IT INFLATION? Replying to the debate, the Minister of Finance said that the guarantee to the Reserve Bank only covered tho period in which exchange remained as it was. If New Zealand permanently devalued its money by statute there would bo no guarantee. Tho Leader of tho Opposition had suggested that the : Government should have issued monoy without raising the exchange rate, but to do that would-be to call in tho printing press. That would be definite and direct inflation. Mr. Savage: What is the Minister doing? ■' Mr. Coates: The Minister is not inflating. The Minister has his sterling assets which he proposes to sell to tho banks. - .Mr. .W. Nash: It is inflating Now Zealand currency. Mr. Coa'tcs: Is it inflation 1 : Mr./ Poison: Expansion! (Laughter.) Mr. Coates said' that ouce inflation was started it was almost impossible to stop it. : . ' . Mr. VT. Nash: Why-are you doing it, then? ..'■■. Mr. Coates: We are not doing it. Mi\' W. Nash: You propose to issue £29,000,000 'worth of notes against assets held in another country. ' Mr. A. M. Samuel (Independent, Thames): Would you admit that it is controlled inflation? ' Mr. Coates: I have yet to learn that it is inflation at all. There is not one economist who will say that it is inflation.. .... Replying to Mr. Wright, Mr. Coates asked if tho member for Wellington Suburbs really expressed concern as to ihc soundness of New Zealand's finances. • ■* . .Mr, Wright: Yes. Mr. Coates: How can I put your mind at rest? Mr. Wright: Make a straightforward statement.'. . . . Mr. Coates: 'Any statement I make will be queried by you> I think. .The Minister went on. to say that there was ample evidence of Now Zealand's financial soundness. SOMEWHAT EXAGGERATED. The Hon. W.Downio Stewart (Gov crnment, Duncdin West) said that he thought the fear of inflation arising from the repayment of the Treasury bills was -somewhat exaggerated. For instance, ,the Bank of New Zealand would be called on under the Reserve Bank Act to make a deposit on long term aDd short-term liabilities of between £fi,000,000 and £7,000,000, and the note issue would be largely absorbed by the deposit. The Rank of New Zealand had approximately £2,000.000 in gold, so it would have tj. deposit with the Reserve Bank .something over £4,000,000 in notes. If there was to be a danger of inflation, he felt that it could have taken place already. . Captain H M. Rushworth (Country Party, Bay of Islands): It has .taken place-already. It is the opposite effect that I am afraid of. Mr. Stewart: I think between deflation and inflation, you will not notice much difference at all. The Bill was put through all stages and passed, without amendment.