BOLD AT “BOOK” VALUE

Evening Star, Issue 21569, 15 November 1933, Page 2

BOLD AT “BOOK” VALUE

BANKS REPLY TO FINANCE MINISTER CATEGORICAL DEMONSTRATION OF CONFISCATION The Associated Banks furnish the following reply to Air Coateses "arguments justifying the taking of'the 'banks’ reserves -of gold at book value (£3 17slOd); — : The Finance Minister’s statement, which appeared in the Press on October 20 contains the following arguments in support of his contention,- first, that the banks are not entitled to the true value of their gold, and secondly that the Government has the right; to take over the banks’ gold at book value. Arguments set out by the Alinister of Finance are commented on seriatim as under:—

1. The Finance Minister states: “ Rights of note issue were granted to our trading banks, but are subject to a tax and to certain conditions regarding redemption in gold coin.” The conditions regarding redemption in gold coin have been suspended. The proclamation making notes legal tender does not expire till 1935, and will not be cancelled prior s to 1935 unless the reserve bank is established before then, and it will be established before then. The establishment of the reserve bank will have the efleet of permanently ■ extinguishing the conditions affecting the trading banks as to redemption in gold, and the trading banks’ notes will then be replaced by reserve bank notes, which also will be legal tender. 2. The Finance Minister states “ It is a recognised principle that the value of the monetary unit, and, in fact, monetary policy generally, are entirely matters to be determined by the State, which must stand all losses involved, and should take all profits accruing therefrom.” It should -be noted that State interference in respect of the value of the monetary 'unit almost invariably takes the form of currency depreciation. Currency depreciation, as such, always, results" in ftn increase in the value of gold when the value of the gold is expressed in terms of that depreciated currency. To admit -that the State has the right to reap a pecuniary reward from currcncy depreciation at the expense of bona fide property owners would be to admit an exceedingly dangerous principle. The banks do not admit this principle, and in this they arc supported by-authoritative legal opinion. The Finance Minister has announced that the State “ must stand all losses involved.” Nevertheless, had the banks purchased their gold at a higher market rate than that whicli now rules, the State would not make good any loss to the banks on taking the gold over. This is evidenced-' beyond question by the fact that though the banks paid in sterling ,for their gold (which they imported) the government now proposes to take that gold from the banks at its nominal value expressed in terms of depreciated notes representing little more than half the real value of the banks’ gold. It is thus clear that the Government proposes to take any profits that might accrue on the banks’ gold (though any sijch. profit ß are owned by, .the banks), but would not make good any losses, nor is it even (on present indications) willing .to pay for, that gold in the currency with which the banks purchased their gold—that is; pounds'-ster-ling. ■- * 3. The Minister states “ Any profits that may be obtained from the sale of our gold reserves, etc.” In referring to the banks’ gold as “ our ” gold reserves, he is assuming what ho unsuccessfully attempts to prove—namely, that the Government owns the banksl gold. As is recognised at law, the gold is the property of the banks.

4. The Alinister states: “The premium on gold in comparison with the mint par value is , the measure of the depreciation in the value of the notes. This depreciation has been at the expense of the people and not at the expense of the banks.” The fact of the banks’ ownership of their property (their gold) is not affected whether or not the Government elects to adopt any policy which entails loss on the community. The banks could not equitably; por should they by parliamentary’ action, be called upon to make good, out of their own resources, any such deficiencies resulting from Governmental policy. Alorcover, it is en-

lively incorrect to say that the taking of the banks’ gold at its nominal value in terms of depreciated currency would not be “ at the expense of the banks.” It is obviously and irrefutably clear that to take gold assets and to give, in exchange for those assets, depreciated notes which could repurchase only 80 per cent, of the amount of sterling, or only about 53 per cent, of the amount of gold, would be very greatly at the expense of the banks and of their shareholders, who number over 50,000, more than a third of whom reside in New •Zealand.

MARKET PRICE AVOULD INVOLVE NO LOSS.

5. The Minister states: “Under the permanent banking legislation of New Zealand, each of the note-issuing banks is required, to redeem its notes in gold bn demand.” ' This requirement has been suspended. Legal tender reserve bank notes’ will take the place of the present note issues. 6. The Minister states: “ The published return's for , the September quarter- show - notes issued at £0,145,203, whereas coin and bullion held amounted to £5,070,254, of which about £OOO,OOO is silver coins.” This clearly shows that the. banks hold much more gold than---was statutorily required as a special .backing tor their respective note issues.;-

7 The Minister states; “The commercial banks have no established statutory right to the continuance of the inconvertibility of their notes.” This fact does not in any way alter the legal fact, that the gold held by the banks is their;own! property, and that the Government is not entitled to profits arising from sale of such assets owned by the hanks. It should be noted —(a) That the statutory provision that notes should be legal tender was made primarily in the interests of the country and of the Government; and in view of world conditions, and general world developments since notes became legal tender in New Zealand, inconvertibility of notes will be continued whether or not a reserve bank is established. Neither the essential continuance of notes n.« legal tender nor the proposal to establish a reserve bank (whote notes also would be legal tender) provides the slightest reason for the Government’s contention that the Government is entitled to take the banks’ gold at. anything less than its value, (b) That the notes of the reserve bank will not be convertible into gold, any more than the notes of the trading banks are, (c) That llicrc is now no statutory requirement that any gold should be held da a special reserve backing in respect of the trading banks’ notes—which represent a general first charge on all their assets, (d) That while the prewar legislation was in operation the banks held (and they continue to hold) gold reserves in respect of their general business greatly in excess of the then statutory requirements—which provided that not less than one-third of note issues must be backed by a special gold reserve in respect thereof. (e) That if the reserve bank took over the banks’ gold at its market price (as it should do) it would suffer no loss, since the realisation of such gold in London would yield sterling proceeds equivalent in value to the price paid in Now Zealand currency.

8 ; The Alinister states: “During the period covered hy the proclamations, the export of gold (other than uncoined gold) is prohibited unless specially .authorised by the Alinister of Finance. The reason underlying this is that as the Government had guaranteed redemption in gold it was essential to ensure that an equivalent amount of gold was retained in the country.” (a) It- should be noted that Iho Government has not been called upon to make any payment whatever under its guarantee of bank notes. The undertaking of the Government is merely to provide that at any time within sixmonths after the expiry of the proclamation making notes legal tender, the Government would redeem any hank notes which had been presented to the issuing bank and not paid. As shown above, the note issues ol the banks are so remarkably well covered by their assets that their notes are absolutely safe. The liability of the Government under this undertaking is purely nominal, as is evidenced by the fact that separate note circulation of the six banks, aggregating £6,110,000, are a first charge on, and abundantly protected bv. the respective assets of the six banks, whicli aggregate £70,000.000 iii New Zealand; these assets include coin and bullion £5,000,000 and Government securities £17,963.421 (over £13,000.000 being in short-dated Treasury bills). It will be the business of the reserve bank to discount Treasury bills, and the Government has assured the banks that the reserve bank will do so for them, and in view of the fact that the Government has under-

taken to repay these short-dated Treasury bills at maturity to the banks in legal tender notes of the proposed reserve bank to the extent required by the banks, it is quite clear that the Government’s real liability under its guarantee of the present note circulation is entirely non-existent; for the Uanks could thus redeem all their notes m circulation by means of legal tender notes of the reserve hank, to which they arc entitled under the above arrangement. AGAINST BANKING PRACTICE. (b) As mentioned above, the Finance Alinister explains that the reason underlying the prohibition of gold exports without sanction “ is that as the Government had guaranteed redemption in gold it was essential to ensure that the equivalent amount of gold was retained in the country.” . It is significant that when the Government guarantee terminates the gold will not continue to be held in the country, the Government will not pay anything under its guarantee, and furthermore, be it noted well, the notes of the reserve bank will be legal tender without any statutory requirement for that bank to hold any gold as a special note reserve. When these facts are taken into consideration it is clear beyond all doubt that the Finance Min-ister-is nob justified in holding the view that the Government’s nominal liability under its guarantee, or the Government’s monetary policy in connection with the reserve bank, in any way prejudices the title of the banks to retain the true value of the gold which they purchased with their own assets and imported at their own expense. (9) The Alinister goes on to say; “ It follows therefore that the gold holdings of the banks must be regarded as special reserves against notes issued and not as part of the general assets of the banks.” In reply to this it is sufficient to state that this view is not according to law and is not according to banking practice. This is further evidenced (a) by the fact that, in accordance with banking law the banks hold part (and the greater part) of their special reserve backing for their note issues in the form of public securities; (b) by the fact that it is not proposed to regard the total gold taken over by the reserve bank from the trailing banks as a special reserve against note issue of that bank, though, as above mentioned, the notes of that bank will replace the present issues. The Reserve Bank Bill provides that that bank must “ maintain a minimum reserve of not less than 25 per centum of the aggregate amount of its notes in circulation and other demand liabilities.” It is important to bear in mind that this reserve need not include any actual gold at all. When this is taken into account it will be seen that the 33 1-3 per cent, actual gold backing which was required under the legislation now suspended is out of date in view of subsequent developments CONFISCATION. (10) The Alinister states; “ The banks hold the gold on charge at face value, and if they receive that value for it the banka Buffer no loss.” It has been shown above that the banks would in fact, suffer loss. The reason why banks show their gold holdings at face value is explained by the 1933 report of the South African Reserve Bank, as under: —“ All gold held on December 28 last, the date on which gold payments were suspended, as well as that bought since, appears in this account (i.e., gold coin and bullion account) at the statutory price of £3 17s lOjd per standard ounce. The question has often been asked why we do not take in the gold at market price. The reply is that the price of gold expressed in South African paper pounds is a fluctuating one, whereas the bank has to maintain certain minimum statutory reserves in proportion to its note issue ami deposits, as well as having to show what ratio its cash holdings actually bear to such liabilities on any particular day. It is obvious that to comply with these provisions of the Act gold held can be valued for such purposes only at the statutory value. A similar practice is being followed by Groat Britain and other countries which have suspended gold payments and whose currencies fluctuate in terms of gold.” It may be mentioned that, although under the war legislation the banks are not required to hold any gold as a special reserve against their note issue, yet nevertheless the banks have (in accordance with the careful principles on which they conduct all their business) continued to regard their gold coin, to the extent of one-third of their note issue, as a special reserve against such issues. If any further evidence of this is required it is supplied by the fact that the banks frequently applied for, and occasionally obtained, permission to export part of’tlieir surplus gold which they held over and above the statutory requirements. (11) The Minister states; “World experts consulted recently in London were definitely of opinion that the gold sli on Id lie taken over by the reserve bank at par value only, and that in principle any profits or losses should accrue to the State.” The hanks also have obtained expert opinion which is quite contrary to that received by the Minister, and the boards of all the banks doing business in New Zealand—and there are many widely experienced men on them—regard the Government’s proposed action as confiscation—which it actually is. , TRACT ICE ELSEWHERE. 12. The Minister states; “In tlio Commonwealth of Australia legislation was passed in 1929 which, with a view to protecting the currency and maintaining the public credit of tho Commonwealth, made provision for all persons to furnish particulars of gold coin and bullion hold and for such gold coin

mid bullion to bo banded over to the Commonwealth Bank at nominal value Cor coin and at £3 17s IOJd per ounce for bullion in exchange for Australian notes.” The above statement, as it stands, is misleading. The Finance Minister lias omitted to explain that when that Act was passed Australian currency was at approximate parity with gold, and that such gold taken over by the Commonwealth Bank was so taken over at the then market price. By agreement the Commonwealth Bank took over part of the bank’s gold at market value, and the trading banks were left free to dispose of the balance of their own gold on their own account at the market rate.

Notwithstanding the legislation referred to by the Finance Minister, the Commonwealth Bank continues to fix the price of gold at the current market rate, and advertisements to that effect regularly appear in the Australian daily Press. The following is quoted from the Sydney ‘ Morning Herald ’ of September 19, 1933: —'“The price fixed by the Commonwealth Bank for gold, including jewellery, lodged at the Melbourne Mint for the week ended September 15, is at the rate of approximately £7 7s Id per standard ounce (22 carats), equal to a premium of BS.BB per cent. Payment is made according to the assay value of the gold. The price is Is Id higher on the week. The price per ounce fine is £8 Os 6d, a rise of Is 3d on the week. The Commonwealth Bank’s price for sovereigns at head office, Sydney, yesterday was 375. This is subject to alteration without notice.” It is unthinkable that the Australian Government or tiio Commonwealth Bank would use the proposed action of the New Zealand Government as a pretext or precedent for taking such gold at substantially less than its true value. 13. The Minister states: “In England and France profits on the reserve gold resulting from currency legislation were appropriated by the State without question.” As to Franco, it will be remembered that profits resulting from French monetary policy appropriated by the French Government were to a great extent at the expense of Briti.h creditors. Tims the use of foreign precedent in monetary matters is hardly calculated to inspire in British peoples the confidence which is so essential to economic stability and rehabilitation. As to England, it is noteworthy that notwithstanding legislative power of the Bank of England to acquire gold at mint par, yet the Bank of England pays the market price.

PROPORTION OF GOLD TO NOTKS. 14. The Minister states" It lias been stated ou behalf of the banks that their gold holdings are in excess of what they are required to hold under statutory authority. The permanent legislation provides, inter alia, that notes in circulation must not exceed the total of the coin bullion and public securities, nor more than three times the amount of gold coin held in New Zealand. This has wrongly been interpreted in the direction of stating that the gold holding may bo one-third of the notes issued.” The answer is this: —(n) In the case of three of the hanks the suspended law explicitly provides that the proportion of coin shall not be less than one-third part amount of the special reserves against the note issue. These banks are;—The Commercial Bank of Australia, the National Bank of New Zealand Ltd., and Union Bank of Australia, in respect of the Bank of New South Wales and Bank of Australia. it is enacted that their respective note circulations shall not exceed three times the amount of coin and bullion held by each of those banks in New Zealand. The Bank of New Zealand enactment provides that the amount of notes issued by that bank may not be more than throe times the amount of coin hold hv it in New Zealand, (b) The solicitors of the Associated Banks confirm as correct the banks’ reading of the law ns having meant, when in operation, that they were required to hold not loss than one-third of tho amount of their note circulation in coin as a special reserve therefor. 15. The Minister goes on to say:— "The statutory provision in question deals with the note issue, and as such must take into consideration not only the actual issue at any moment, but the possible issue arising out of credit fluctuations. Here 1 may say that it is not possible to carry on banking without cash reserves, which in Non- Zealand consist of the banks’ own unissued notes, and in order to be in a position to issue additional notes, the hanks must hold additional gold cover.” That this contention cannot bo sustained is evidenced by two facts —namely (al First, it has no hearing on practical possibilities; the total of notes in circulation when the permanent legislation ivas in operation could have increased from the then figure of about £1,700,000 to tho enormous total of some £10,000,000 without exceeding the circulation which could have boon based on the gold then held by the banks. The banks would never have committed the absurdity of holding gold reserves as a special note backing for the purpose of providing for snob a remote contingency. The surplus gold was held as a general business reserve, (b) Secondly, even if additional note issue powers were required at any time, the banks could then i turned iately have imported gold or otherwise have obtained it by realising securities.

Moreover, at any time prior to the war, the banks could, without disturb* ing the adequacy of their special note reserves have transported to London and held there as sterling balances the surplus gold which they hold here at that time in respect of their business. Had the banks done so they could —and rightly so—have retained the fuli sterling value of such balances at the present time.

UN DR FA MED-OF ACTION. However, it was never dreamt by the banks of this country that their title to the true value of their gold would ever be questioned, and accordingly the banks continued to hold their surplus gold in this country. That they did not exercise their right to transfer it to London and hold it there as a sterling reserve is no reason why they should be arbitrarily deprived of its true value now. Nor is the subsequent prohibition on exports of gold, or the Government guarantee, any pretext or justification for the proposed Governmental action, since the need for holding the, gold in New Zealand no longer exists, and since, moreover, the guarantee, which probably is soon to cease, was given in respect of a contingency which did not materialise and is not in tho least likely to arise before the reserve hank commences business. 16. In tho appendix to his statement the Minister quotes as precedents the actions of certain foreign Governments which appropriated the premium on gold resulting from devaluation of the currencies of such countries. That such precedents are quoted—even if their cases Were parallel with tho present position in New Zealand —gives occasion to grave doubts as to the future basis of national confidence, and opens the way to alarming possibilities. The following statement by Sir Arthur Michael Samuel, M.P., formerly r Financial Secretary to the British Treasury (reported in tho London 1 Observer ’ of September 17 last), throws a flood of liglit on the financial _ morality of certain foreign countries:— " The abuse of credit by uncrcditwortby foreign borrowers has developed into an abuse of confidence amounting to nothing less than vulgar dishonesty. We sec the result—international commercial intercourse has become nearly impossible because the structure on which such commerce can be organised lies in ruins. The cold, selfish disregard of their post-war contra ctural obligations by the PrussoGerman authorities when they imposed the terms of the transfer moratorium on those who had trusted to their pjodged faith has shocked all honest men. Tho more recent default of Rumania is almost as bad. Some foreign borrowers have defaulted on the flimsiest pretexts, and others feel no dishonour in having broken faith on their obligation. Wo have entrusted untold millions of our savings to South America, Nearly every nation in South America, except Argentina and Venezuela. has defaulted.”

It is significant that the above short statement makes direct mention of two of the countries whose precedents arc quoted hy the Finance Minister—namelv, Bumanin and South America.