RESERVE BANK POLICY

Evening Post, Volume CXIX, Issue 134, 8 June 1935, Page 8

RESERVE BANK POLICY

The considered statement of Reserve Bank aims and policy made by the Governor at the first ordinary general rrieeting yesterday will be of wide public interest, for the Bank's operations affect, not merely its shareholders and customers, but all commerce and industry in the Dominion. In so far as the Bank is wisely guided and faithfully administered it will exercise an increasing influence in assuring the sound monetary conditions which are essential for prosperity and steady progress. It js gratifying, but not surprising, therefore, to note that the keynote of die statement made by the Governor is caution and adherence to tested principles until sound reasons can be given for innovations. In sdme quarters this declaration may be unwelcome. People who hanker after the "rash experiments" which the Governor deprecated will be disappointed with the statement that "there is a definite limit to what can be achieved by monetary action alone" and that the aim of the Reserve Bank must be "to do whatever is possible in the monetary sphere to . facilitate and promote development" on lines of economic production. But it is better that over-eager expectations of radical changes in the monetary system should be disappointed rather than that the Reserve Bank, to adopt the Governor's metaphor, should attempt to run before it has learned to walk. Such attempts inevitably end in falls. The Bank has most to fear from the friends who would urge it forward too fast.

This danger may come not only from the quarters where inflation, or "costless credit" is openly advocated, but from other persons who profess orthodoxy, but with an interpretation and practices of their own. Such practices prejudiced the operations of the Bank before its establishment. The Bank was brought into being with an artificial exchange rate in operation, and when it became the Bank's duty to fix the rate it chose the existing level. In recording this fact yesterday the Governor stated, however:

In taking that course we dealt with the situation as we found it when the responsibility for fixing the rate was entrusted to the Reserve Bank; our action should not therefore be regarded as necessarily identifying the policy of the Bank in this respect with any particular steps which had previously been taken.

As an indication that "in the circumstances, approximately the correct level was selected," the Governor stated that the rates had .since remained unchanged without any noticeable pressure in either direction. We prefer to accept this indication with reserve, pending a full examination of all results. The sterling credits held by the Reserve Bank have not accumulated. They have been reduced when allowance is made for the gold sold; but two factors bearing on this must be taken into account: (1) The greater demand of the Government (as disclosed in the Public Accounts) for London funds; (2) the accumulation of overseas assets in the hands of the trading banks. Between July 30, 1934, and April 29, 1935, the excess of overseas assets of the trading banks over overseas liabilities has risen from £13,782,114 to £24,209,121. This suggests that the trading banks have been drawing on their credits with the Reserve Bank and allowing their own overseas [credits to accumulate where they can be invested for short terms with at least some return.

The movement of funds from New Zealand which this betokens must be set down in the account when considering the Governor's statement of the benefit accruing from redemption of the Government Treasury bills and the easy money conditions to which the transfer of credits and the redemption of bills led. The easy money conditions, indeed, became too easy, and had it not been for the prudence of the trading banks a speculative boom might have followed. We pointed out this possibility when it first became ap- '• parent that the Government in» tended to make the Reserve Bank, as Professor Murphy has said, "a sort of Plunket nurse for ils exchange baby." The responsibility thus devolving ofi the Bank lessened its initial power to control credit and currency for the benefit of New Zealand as a whole.

This leads to consideration of the very important pronouncements of the Governor , regarding the independence of the Bank.

I I think it must be clearly understood, he said, that the Reserve Bank should always maintain an entirely hon-polltical attitude. The board accepts the view that the ultimate responsibility for the monetary policy of the Dominion must rest with the Government of the day, but holds that it is the duty of jthe Bank to tender to the Government impartial advice on monetary and financial matters and to exercise its own judgment in carrying out those functions entrusted to it. The objective pf the Reserve Bank is

the promotion and maintenance of the economic welfare of the Dominion as a whole, and not merely the sectional interests of any one particular class or group.

In certain conditions it may become the duty of the Reserve Bank to go further than tendering impartial advice in order to assure that the "ultimate responsibility" is not assumed in such a way that monetary policy is subjected to sudden and unsettling changes with every change in political power. Moreover real independence concerns two parties—the Government and the Bank. The present Government recognised this up to a point when legislating to give the Bank protection from loss resulting through alteration of the exchange rate. "Without some such measure of protection," the Governor said, "it would be difficult for the Reserve Bank to take a completely detached view of the exchange position." The Government guarantee relieved the Bank from any possibility of bias arising from consideration of its own circumstances. But the Minister of Finance, in speaking on the Bill which gave the guarantee, made this significant statement:

Until the exchange rate is fixed by statute without a guarantee the decisions of the Reserve Bank of New Zealand on the exchange rate could not possibly be unbiased.

The guarantor, by reason of the guarantee, has become an interested party. The public should be assured that this interest will not lead to an attempt to qualify the basic condition which Sir Otto Niemeyer attached to his recommendation for a central bank, that it "must be entirely free from both the actual fact and the fear of political interference" or its existence would do more harm than good. Public advocacy of a permanent depreciation of New Zealand currency, including a statement by a Cabinet Minister, calls for an assurance that the Government will do its part fully in maintaining the Bank's independence. Political foresight should emphasise the paramount importance of establishing this principle firmly.