RESERVE BANK

Evening Post, Volume CXXI, Issue 138, 12 June 1936, Page 5

RESERVE BANK

YEAR'S BUSINESS

NET PROFIT OP £98,012

REPORT TO PARLIAMENT

POLICY OF BOARD

"After making such provision as the board deemed to be proper in the circumstances for rebate on British Treasury bills not then due, depreciation in other assets, and superannuation and retiring allowances for the staff, the net profit for the year amounted to £98,012 7s 2d," stated the annual report of the Reserve Bank of New Zealand, for the year ended March 31, 1936, presented to Parliament yesterday afternoon. "Of this sum £70,000 was paid in advance to the Consolidated Fund in compliance with the request of the Minister of Finance made under the terms of section 11 of the Finance Act, 1934, leaving a balance of £28,012 7s 2d outstanding at the end of the financial year.

j "As provided by section 2of the ReJ serve Bank of New Zealand Amendment Act, 1936, a dividend of 5 per cent, on the paid-up capital of the Bank was I paid to the registered shareholders of 1 the Bank as on March 31, 1936. The j remaining sum of £3012 7s 2d has since i been credited to the Consolidated Fund, 5 making a total of £73,012 7s 2d so : paid over in respect of the year. I EFFECT OF LOW RATE. "The profit was again affected very considerably by the low rate at which 1 British Treasury bills continued to be sold in London," continued the report, "the average rate ' obtained by the _ Bank from that source being lis 2d per centum per annum. Having regard, however, to the statutory pror, visions governing the investments and reserve of the Bank, the primary need for a central bank to maintain a very ti liquid position, and the almost entire absence of any other more profitable yet suitable means of employing funds, the income of the Bank could riot but be dependent in a large measure upon the yield obtainable from British Treasury bills." • •j PRINCIPAL CHANGES. The principal changes in the balancesheet as compared with the figures at | the close of the previous year were | shown as follows:— I Liabilities.—Bank-notes: An increase of £804,582 10s, which more than offisets a decrease of about £310,000 in (the total amount of the trading banks' notes outstanding, thus reflecting an increase in the turnover of trade which took place during the year. Demand Liabilities.—(a) State: A decrease of £3,428,333 13s 9d, which is , accounted for partly by the sale to the Treasury of London funds to provide | for the repayment on October 1, 1935, I of £2,135,800 sterling of the New Zeaf land 5 per cent. 1935-45 sterling loan and the cost of converting the balance of £8,000,000 of that loan. (b) Banks. —An increase of £4,530,345 13s 6d. Since the end of November the 3 trading banks' balances have been maintained at a level exceeding by about £5,000,000 the total of their balances during the earlier part of the year. This increase was brought about by the sale by them of London funds to the Reserve Bank. The minimum balances required by Statute in respect of the demand and time liabilities as on March '30. 1936, amounted to £3,362,772. Assets.—(a) Gold: 200,000 sovereigns were sold in London at the beginning of the year. 1 (b) Sterling Exchange.—The sterling funds (calculated at the rate of £100 1 sterling equals' £124 New Zealand) 1 available, for the purposes of the 1 Bank's statutory reserve, as defined by i section 17 .of the. Reserve Bank of : New.Zealand]Act, 1933, increased during the year by approximately 1 £2,418,000, the total at the end of the ] year being about £8,000,000 (New Zealand currency) higher than the lowest > point touched during the year. 1 (c) Investments decreased on bal- ] ance by £268,653. | During the year the number of share- '• holdings' decreased from 6300 to 5699, J and the average holding rose in consequence from £79 7s 3d to £87 14s 8d (nominal value). ( Dealing with bank-notes, the report < stated that the needs of the public were being adequately met by the 1 existing notes, and it was not proposed ' to incur the expense of adding to the j number of denominations of the ori- t ginal issue until there was evidence of \ a reasonably widespread demand for < notes of any other denominations. ; EXCHANGE RATE. ] In connection with the exchange s rate, the report points out that there were no changes in the fyasic rates-of exchange quoted by any other of the countries in the sterling group during f the year. It was interesting to note * a statement reported to have been made f at the recent annual meeting of the I Bank for International Settlements to " the effect that an area covering more J than 85 per cent, of the world's trade J enjoyed for a full year the benefit of practically stable exchange rates. _ The report stressed the fact that the £ Bank's discount rate (2£ per cent.) was now as low as that of any other central .bank in the sterling group of countries, with the exception of the Bank of England, whose rate was 2 per cent. When n the Bank commenced business, the rate f was 4 per cent., which was 1 per cent. c below the best rate then being charged by the trading banks for overdrafts. a LONDON FUNDS. C "Although naturally fluctuating on " account of the usual seasonal demands, the combined totals of the London P funds held by the Reserve Bank and J those shown in the monthly returns of the trading banks as held in respect of Ne;w Zealand business varied only " slightly over the whole year," stated the report. Figures (in New Zealand currency) shown as on the last Monday in March of each year were as follows: —Reserve Bank: 1935 £22,435,000, 1936 £24,830,000; increase of £2395,000. Trading banks (net figure): 1935 £16,005.000, 1930 £14,143,000; decrease, £2462,000. Totals: 1935 £39,040,000, 1936 £38,973,000; decrease. £67,000. "During the same period, the values oi of exports and imports to and from all sc countries (New Zealand currency) sa were:—Exports,' £49,676,000; imports, in £37,440,000, showing an excess of ex- ci ports amounting to £12,236,000. b< "Against this favourable balance of di trade there must be set off the total of oi the London funds absorbed by interest sion Government and local body debt, and by the part redemption and part us conversion of the Government's 5 per ni cent. 1935-45 sterling loan, which, to- M gether, amounted to approximately w £11,200, leaving a net favourable bal- ur ance of £1036. th

"It will be seen that the balance of payments arrived at in this manner corresponds more or less closely to the alteration in the combined holdings of London funds. Whilst this comparison suffices to indicate broadly the absence of any pronounced net movement of capital to or from the Dominion, it is not intended as an cxact calculation, as various qualifying factors have been disregarded and, in addition, certain alterations in the method of arriving at the amount of London funds held by trading banks in respect of New Zealand business were agreed to during the year. i

"There still appears to be a lack of understanding in some quarters as to the nature and significance of the London funds at present held on account of New Zealand. To regard them as lying idle is obviously incorrect in various respects. In the case of a country like New Zealand, which is on a sterling exchange standard, London funds serve the same purpose as do the gold reserves of countries on the gold standard; that is, they constitute the foundation upon which the credit structure of the Dominion rests, in addition to providing a reserve available for meeting commitments overseas in case of need. Moreover, the full equivalent of the London funds in New Zealand currency has been made available in the form of purchasing power in the hands of the public in the Dominion, and until required for expenditure overseas, this purchasing power is available for use within the Dominion." The report quoted figures showing the reserve position—that is, the ratio of gold to sight liabilities—of certain countries on the gold standard. For December, 1935, the figures were:— Switzerland, 85 per cent.; Netherlands, 76 per cent.; U.S.A., 75 per cent.; France, 71 per cent. The highest point during 1935 was as follows:—Switzerland, 96 per cent.; Netherlands, 81 per cent.; U.S.A., 75 per cent.; France, 81 per cent. The figures, it was stated, did nit include any foreign currencies which might have been held in augmentation of the national monetary reserves.

I- "As compared with these figures," :. stated the report, "the Reserve Bank's s ratio stood at 98.46 per cent, at the f end of the financial year, the lowest 3 point touched during the year having a been 96.56 par cent. But whereas uj reserves shown for the aforesaid 'gold' > countries were entirely held in the form of gold, which is unproductive, the bulk of the reserve of the Reserve Bank is revenue producing. It must 1 be remembered, also, that the Domi--1 nion's sterling reserves accumulated : at an abnormal rate during the years - 1933-34, and they are, therefore, more 2 than ordinarily liable to be drawn ' upon in respect of deferred purchases ■ overseas. Moreover, the Reserve ■ Bank's figures being relatively small, 1 the effect, per £1,000,000, produced upon the ratio by the replacement of ' sterling assets by assets in New Zea- '■ land would be relatively great." INCREASED BUSINESS. ; The report stated that with the ex- : ception of exports, the price levels at . the end of the year did not differ much from those at the beginning, although moderate fluctuations occurred. There could be little doubt that, taken col-, 1 lectively, they indicated a considerable increase in business activity. Despite the increase in business' activity easy money conditions prevailed in the Dominion during the whole of the year. The State accounts were always in funds, and there was no need for the Treasury or any other public department to borrow from the Reserve Bank. The trading banks, likewise, maintained balances at above the levels required by Statute, and they were not obliged to ask for accommodation. In addition to, their balances at the Reserve Bank, the trading banks held Reserve Bank notes and silver coin, these three holdings combined forming their cash reserves in New Zealand currency. Over and above these cash holdings, they held substantial amounts of London funds in respect of their New Zealand business, and in accordance with statutory provisions such balances, to the extent to which they were held in liquid form, were , available for immediate conversion ' into New Zealand currency at any J time. 1 TRADING BANKS' HOLDINGS. 1 "Since the passing of the Banking 1 Amendment Act, 1935, the totals of the trading banks' holdings of New Zealand Government securities in the \ Dominion have been added to their . monthly returns," stated the report. "As , these securities, which amounted to ( over £5,000,000 at the end of March, ( could in case of need be pledged as £ collateral for advances from the Re- j serve Bank, their existence has a bearing upon the financial situation. _ ( "The figures indicate a state of liqui- j, dity of the banking system of the Do- £ minion throughout the year. The fact that the total of the trading banks' j advances at the end of March was c only very slightly in excess of the cor- c responding figure a year before, may, therefore, be taken as indicating the t absence of demand for additional ac- c commodation on the part of satisfac- f tory borrowers. This position is fur- r ther evidenced by the fact that the overdraft rate has never been lower e during the present century. d "In the easy money conditions which a prevailed, the board did not consider r that any useful purpose would have n been served by the expansion of Cen- 0 tral Bank credit in the Dominion to s any appreciable extent, nor did there appear to be any need for contraction. The Reserve Bank, therefore, aimed j, at the maintenance of a state of equi- g librium. rather than the attainment of n any other object by monetary means. s BANK'S AIM. ti "In all its actions the board has ® been guided by its conception of the ® two primary functions of the Reserve Bank as a Central Bank. In the first c ' place, as banker to the State it has n aimed at conducting the affairs of the r bank in such a manner as to enable it ° to give as much assistance as is prac- * ticable to the Government of the day SJ in putting its monetary and financial policy into operation. Secondly, as 11 banker to the trading banks and cus- £ todian of their statutory cash reserves, " it has, within the limits of its powers, j| ! endeavoured to render to them all rea- " sonable support in the conduct of their a ' normal business and also to safeguard J* their cash reserves entrusted to its " care.

"In the exercise of these functions and in tendering any advice to the Government on monetary and financial matters, it is the constant endeavour of the board to act in a spirit of complete detachment from any sectional interests of any kind whatever, and to regard all such questions entirely from the point of view of what is most likely to promote the welfare of the Dominion as a whole."