CENTRAL BANKS

Evening Post, Volume CXXII, Issue 56, 3 September 1936, Page 12

CENTRAL BANKS

THE BRITISH GROUP

KEEPING INTEREST LOW

"Evening Post," September 3. Banks of the British Empire are described by "The Times" as having marked time during the past year. It is recognised by that journal that these banks have made a welcome, if modest, recovery from the worst effects of the international trade collapse, "but as was generally foreseen their full emergence from its consequences is proving a long-drawn-out process. "In many countries money rates are so low that: earning. power, is necessarily restricted. "One notable exception to the continuance of excessively low money rates is provided by Australia, where, as a result of the combined effect of increasing demands from primary industries and.extensive*, borrowing for Government works, money rates have of recent months shown an upward trend. In all the Empire oversea countries trade., assisted by , exchange stability, has 'given.' signs of improvement, while South Africa's prosperity has been well maintained." RADICAL JCHANGES. - Special reference is made to newlyformed reserve banks of the British Dominions. It is temarked: that there is a tendency for! Liberal or Labour Governments to regard a central bank under . private control as a potential obstacle to .their political objectives. Two of the new Empire central banks have undergone, • radical changes in their constitutions/;' As instances of this .tendency the writer of the article quoted remarks that."the new Liberal Government WhichVcame into power in Canada'last year has taken steps to bring the' Bank of Canada under direct Government control by giving the Government a majority shareholding. • Still more drastic were the changes instituted by the new Labour Government in New Zealand, for by an amendment to the Act governing its formation and powers, the general functions of the Reserve Bank of NeW Zealand were restated as being 'to! give effect as far as may be to the Monetary policy of the Government as communicated to it from time to time by the Minister of Finance.'" [ AUTHORITIES DISREGARDED. The article continues: "It is strange to find,: that ,th.e,views of most financial authorities on the constitution of central banks1 should be thus disregarded and' that central banks should be deliberately drawn into the orbit of political* vagaries. "Australia has pursued an opposite policy by fortifying her central bank against political interference." Dealing specifically with the Reserve Bank legislation the writer of the article observes: "The Government's action provides another example of the tendency of left-wing .politicians to regard a central reserve bank as an important element in their ideal of a socialised State rather than a bankers' bank better able to carry out its duties of watchdog over thej country's banking and credit systems if it is divorced from political control. By passing amendments to the Reserve Bank of New Zealand Act the new Government converted the Reserve Bank, .into a State bank, with powers to 'regulate and control credit arid currency in New Zealand, the transfer of moneys to or from New Zealand, and, the disposal of moneys that are derived.from the sale of any New Zealand products and for the time being are held 'over-; seas.'" . . . TRADING BANKS M^TT SUFFER. An outline 'of the legislation by which the Reserve Bank of New Zealand has been transformed' into a State bank is given, and the article proceeds: "The Governor of the Bank is now empowered to require the trading banks to increase to any extent the balances which they have to maintain with the Reserve Bank. ■At present these balances are fixed on a percentage basis of 7 per cent', of demand liabilities and 3 per cent, of fixed. Another • direction in which '■ these increased powers of the Government may ultimately affect the working of the trading banks is the control that the Government is to assume over the marketing- of the Dominion's primary nroducts, for- it: was pointed out by Sir Austin Htarris. in his speech at the recent meeting of the Natiqnal Bank of New. Zealand that this control must seriously ' affect the banks'! activities in the exchange market. NEW ZEALAND CREDIT HIGH. "Apart from an element of doubt engendered by these Socialistic experiments, the trend of New Zealand's economy gives good grounds for confidence. The trading banks are well prepared to finance a larger •, trade movement for they possess heavy surplus resources, the average aggregate deposits and advances for the March quarter having been £65.600,000 and £45,106,000 respectively. The latter, it is encouraging to note, show an increase of £2,000,000. New Zealand credit remains high,. the misgivings created by the,. repent speech of the Prime Minister having been followed by a reassuring announcement by the High Commissioner in London." : ■'• HIGHER INTEREST RATES. Australia is' described as an exception to;most other Empire countries in that there are definite signs ofa'.hardening of money rates in -consequence of the increases credit demands of the Government - and of industry. These larger demands have arisen,-from the extensive public works programmes of the Governments and from the revival in trade activity resulting largely from the increased value of exports. While borrowing in the London market has been confined for some years to conversion operations, the Commonwealth, has raised large fresh loans in the Australian, market, and interest rates on these issues have risen appreciably. Indications were not wanting that the improvement in industrial, conditions' in the Commonwealth was leading'to an almost too rapid expansion in imports. The general rise in Australian banks' deposit rates as a sequel to the innovation of offering for public subscription' £1,000,000 of Treasury bills at a slightly higher rate than that obtainable, on deposits with the trading banks, is mentioned. It is acknowledged that "the trend of Government finance in Australia is satisfactory, for j the desirability is recognised of curtailin? public works in the presence of increased trading activity and rising prices. • Australian exchange has remained steady, and there is every indication that the Commonwealth Bank of Australia adheres to ths' view that stability of exchange is one of the first

benefits which a reserve bank should aim to confer upon a nation's industry." ■ , CANADIAN MONEY 'RATES. Improvement in Canadian industry and commerce is noted. Greater attention is now being paid by Federal and Provincial Governments to the question of balancing Budgets. This should react favourably on the credit of the Dominion. Important measures have been, passed—namely, the trade agreement with the United States, the Act which, aims at bringing the Bank of Canada'under Government control, and the transfer of the management of the chief harbours of Canada from local authorities to a central authority. Manufacturing operations have shown expansion in several directions in the current year, notably as regards the heavy industries, while the mining industry has been active. Canada is still largely dependent upon agriculture for her prosperity. The leading features of Canadian banking: continue to be extreme liquidity and a low level of earning-power. "Interest rates are lower in Canada today than ever before. In view of such conditions it is not surprising that banking profits have shown little or no recovery from the low level to which they- fell^ in the slump and that dividends have remained at the reduced rates which were announced in 1934.". SOUTH AFRICA AND INDIA. South Africa's prosperity is shown to have been well maintained, though the agricultural industry had until lately suffered rather severely from drought. Activity in the Rand mining industry continues at a very high level, and this is the-principal basis of the country's prosperity, while the outlook for agriculture, is now brighter. Indications of increased employment and larger spending power have been increasingly apparent, and the country's good fortune is reflected in the national finances,- which have reached a degree of solvency that must be the envy of many less happily-placed territories. There was a Budget surplus of £1,850,000. : India's internal trade has continued to show gradual improvement, but the most interesting aspects of its economic progress have been the healthy state of the national finances and the extremely low level of money rates. The Reserve Bank of India, it is shown, has rapidly and' efficiently, carried out preliminary work associated with its initial stages and promises to prove a valuable and important factor in the economic advancement of the Indian Empire. Sir Osborne Smith, the governor, said that the bank was now in a position to tackle the agricultural problem and the board hoped in a short time to show that the Reserve Bank would prove of benefit to the ryot. ' • ■