BANK NOTES

Greymouth Evening Star, 30 August 1934, Page 10

BANK NOTES

SOME PROBABLE EFFECTS It is interesting to note the possible or probable effect of the change in. New Zealand bank notes issue-authority, on currency procedure and problems in New Zealand. It may be confidently expected that for all that the man in the street and the man in the shop and the cffice will see, the effect Will be just about nil (writes “Wizard” in - the “New Zealand Accountants’ Journal”). Quite 85 per cent, of :our currency, that is our paper or metallic media for settling trade and financial transactions, is in the form ' of . cheques. These-cheques are cp’awh, at . the will of persons who have, recorded in their names in the books of the banks, credit balances representing-The right to accumulated wealth; 'which., they may utilise to call lor services or goods as they desire. Every citizen, having such a credit balance and—su-eh- a right to call. for services or goods, does so when he seeks to exorcise his right, by arranging some economic or business" transaction with some'other citizen. • When the terms of the transaction are agreed upon and the rights and obligations to settle it have, by the parties, been reduced to an amount certain, a cheque is used to facilitate the actual settlement. It firstly passes from hand, to hand of the parties as a token of settlement, ft is then passed into the paying bank by the recipient, and it is used to effect a transfer from the bank account of one to the bank account of the other. •■''Our'■ bank notes in the past have been used for the bulk of the' remaining 15 per cent, of transactions which are not'settled by cheque. They have been used merely as counters of an agreed value, to settle balance of transactions that could be more conveniently settled that way than by cheque. This extra convenience would attach itself to notes rather than cheques in cases where the amount was small, or in cases where one or other of the parties could not,conveniently use a bank account.

Whilst these bank-notes were in circulation they-were credited, in. the books of the issuing bank, .to a kind of suspense account, called .“Notes in Circulation Account,” arid when they reached the bank again, the amount they represented was credited to the account of the man who tendered them, and by a complementary entry, was written off the “Notes in Circulation Account.” The banknotes themselves then became mere cancelled tokens in the hands of the bank, figuring neither in the assets nor in the liabilities of the bank in its balance sheet.

LIMIT NEVER REACHED The total extept or amount to which the .banks could' issue bank-notes was liipited by Statute and by Ordcr-in-Co’ihcil. This limit was fixed so as to preserve a relation between the total amount of notes in circulation at any time, and the total amount of certain liquid and easily realisable assets which the banks held. At no time have the banks ever found it necessary to' approach this limit. Our currency, as Sir Otto Niemeyer pointed out in His statesmanlike report, was regulated, 4s to' Its amount, by the legitimate tradd- transactions which required notes for'TTfeif' settlement. In our busiest days,, when Hie volume of

transactions was at its maximum, there was never the slightest difficulty in procuring on demand from the banks the necessary notes to effect settlements, 'whenever required, and with the issue of banknotes thus at its maximum, the legal limit, was never approached. As .frpm August 1. 19.34, New Zealand banknotes- will be issued by the Reserve Bank of New Zealand. The paying tellers of that bank will carry out the policy and follow ‘the instructions of the Board of Directors, and one thing may be relied on as certain; that is that they will not be instructed to make gifts of these notes to any class of applicant. These notes will find their way into circulation only as persons or bodies, having the necessary credit recorded in their favour in the books of the bank, make application by cheque or other form of. order for an issue of notes to enable such party to. effect settlement of some transaction.

The notes will be inconvertible in New. Zealand. That is, they may be described as the final or irreducible element in the currency system —there IS ...no. simpler form of currency into which they can be exchanged. The only thing any holder of nofes can demand in exchange fpr the Reserve Bank notes will'be either silver or bronze coins dr other notes of the same or of a different denomination, issued by the Reserve Bank of New Zealand. This does not mean, however, that they are to be issued without any precautions, or that they, are issued on any blit a sound basis under which thej’ represent real value.

It is provided in Section 16 of the Act, as amended by the Finance Act No. 2, 1934, that on. presentation to the head office of the Reserve Bank in Wellington of notes of the bank to any amount not less than £l.OOO, it shall be the duty of the bank, in accordance, with this Section, to give in exchange for such notes, sterling for immediate delivery in Loudon. If this statement be examined carefully it will be seen that this ultimate and distant use that may be made of the bank’s notes fixes the basis of the value of the notes in Wellington. Any holder of the notes may accumulate them until he has a parcel of £1,001) and he may then demand in exchange a draft payable in London, in English sterling. The draft must be issued by the Reserve Bank, and it must be one that will be honoured in London. The draft will be honoured in London, not by reason of anything that is in the Reserve' Bank of New “Zealand Act, as enacted by the New Zealand Parliament, but by reason of the ability of the Reserve Bank’s London office, to satisfy other banks and financiers inLondon, that it has at that financial centre, real wealth available to make good all drafts and other orders which it Issue's payable in London’.

In the last analysis, therefore, the security behind' the Reserve Bank's notes is either its real liquid assets available in London, or its assets in Now Zealand capable of being converted at its will, promptly, into real wealth in London.

As a kind of local security for the note issue it is provided by Section .17 of the Act that it shall be the duty of (ho Reserve Bank at all times to maintain a minimum reserve of not less than 25 per centum of the aggregate of its notes in. circulation, and other demand liabilities, in the form of (a) gold and bullion, (b) sterling exchange in England; and- (c) exchange in other countries which is realisable in gold.