RESERVE BANK

Evening Post, Volume CXXVIII, Issue 18, 21 July 1939, Page 10

RESERVE BANK

YEAR REVIEWED

MONEY FOR STATE

BOARD'S ADVICE

CUT IN EXPENDITURE

Profits totalling £250,285 and pointed advice to the Government to avoid further recourse to the Reserve Bank for additional accommodation are features of the annual report of the Reserve Bank of New Zealand tabled in the House of Representatives today by the Prime Minister (the Rt. Hon. M. J. Savage).

Generally reviewing the economic position, the report states: "The: developments outlined earlier reveal that not only did general business activity and the demand for imports continua at a high level in. spite of the reduction in the total value of exports and a considerable net outflow of capital, but that, notwithstanding the expansion of credit, represented by the increase of over £14,000,000 in Reserve Bank accommodation to the State (including the increase of £2,300,000 in advances to the Primary Products Marketing Department), commodity prices remained relatively stable tnrougnout the year. Now that the surplus sterling reserves have been practically exhausted, however, and the Reserva Bank has been relieved of the obligation to pay its notes in sterling, a different situation presents itself.

"No longer will it be possible lor credit created by the Bank to find an outlet to any appreciable extent in the purchase of goods from overseas (except by using the Bank's statutory reserves for the purpose). Whilst the demand for commodities was being partially satisfied by the utilisation : ot the Dominion's, available sterling reserves, the effect of the expansion .of credit on internal prices was not very great; but in existing circumstances, any additional credit expansion would inevitably tend to cause,- sooner off later, a general rise in prices with' a consequent diminution in the value of all savings, wages, salaries, and pensions.

LIMITING EXPENDITURE.

"The board would, therefore," tht report continues, "stress the desirability of the avoidance of further, recourse to the Reserve Bank for accommodation and of limiting Governmental expenditure to such a sum as can be raised by taxation, in addition, to what can be borrowed from the public, either in the Dominion or overseas. If such a policy were .adopted* and, still further, if steps were taken to reduce the outstanding advances from the Bank, there would be a better prospect of the Bank being able to assist by granting accommodation during relatively unsatisfactory export periods without jeopardising the financial economy of the Dominion."

ADVANCE IN PROFITS

The Bank's profits of £250,285 have been paid, into the Consolidated Fund. They represent a substantial advance on the previous year's profits, the report explaining that this has. been due,, despite an increase of approximately 20 per/cent, in expenses, to -an increase in the return of advances from the State, additions to the tot^l holdings of investments, and heavier sales of sterling. However, while the last item has yielded an immediate exchange profit, it is pointed out that this is at the expense of future earning power of the Bank's sterling holdings.

The increase ot £1,693,000 in the amount of notes outstanding at March 31 was; the report states, to be expected vi view of the further increase in the national wages bill /and in the rise in retail prices which toon place. An increase in the Bank's investments by £1.260,379 is explained by the fact that the total investments at March 31, 1938, were temporarily reduced by allowing certain State Departments to take over some of the Bank's securities for a short.time, thus employing their surplus cash balances.

MARKETING ACCOUNT.

The survey of the .Internal Marketing Account contains the prediction of a substantial deficit at the end. of the season. Valuing stocks of butter and cheese on hand at March 31 at then current prices, and allowing for the cost of realisation, the Dairy Industry Account then showed an estimated deficit of approximately -£1,©00,00p, but since then London prices had fallen still further. • "To'the extent that such deficits exist," adds the report, "they represent the creation of credit, beyond the equivalent of commodities produced, and the board ■ considers 'it important that the inflationary tendency of such accommodation, should not be overlooked." •. .

The section dealing with "exchange control recapitulates information already published regarding the broad lines on which the- system is operated, adding, "In operating the permit system for transfers the Bank has been guided by your assurance to the effect that one- of :the- objects of exchange control is to enable overseas debts whether Government, local body, or. private to be met on. their due

dates,"

Attention is called to the fact that although exchange- control covered a considerable portion of .the . .export season, the Bank- -was- only able •to build up its sterling holding by £527,000. An estimate is made of £14,000,000; annually :as the; normal requirement for overseas debt services and1 other transactions including travellers' requirements, and attention is called to the fact that the surplus of exports, over imports for tlie, ye,ar fell to £3,459,000. , > '

It is suggested that the decline in the favourable balance of overseas _ trade accounted for one-half the . shrinkage in overseas funds; it is also evident that there was an abnormal overflow of capital. ..

The report then comments,; '?In view of the relationship between internal credit expansion and the demand.for overseas funds, the connection between the total increase of more than £14,000,000 in the accommodation granted by the Reserve Bank to the Government, and the loss of overseas funds which occurred during the year, is significant."