GOLD RESERVES

Gisborne Times, Volume LXXIII, Issue 12080, 20 October 1933, Page 5

GOLD RESERVES

OWNERSHIP OF PROFITS. BANKS’ CLAIM REJECTED. MINISTER’S EXPLANATION. THE PROPERTY OF THE STATE. INCREASED VALUE FROM DEPRECIATION. (Special To The Times). WELLINGTON, Oct. 19. In a statement to the House of Representatives on the profits on gold reserves, Mr. Coates, in introducing the Bank Bill said : “In order to clarify tho situation in respect to profits on gold reserves I would like to draw attention to the undisputed fact that the issue of currency, whether in the form of notes or coin, is a prerogative of the State. The 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. Such right'of note issue is a matter quite apart from commercial banking, which, in most countries, is carried on without it.

“Furthermore, it is a recognised principle that the value of tbo monetary unit, and, in fact, the monetary policy, generally are on(1 roly matters to he determined by the State, which must stand all the. losses involved, and should take all the profits accruing thoreform. Any profits that may be obtained from' the sale of our gold reserves arise not out of banking, but, firstly, out of Great Britain going off the gold standard, and secondly, out of the depreciation of New Zealand currency in terms of sterling, both matters of- monetary policy. The premium on gold in comparison with the mint at par value is the measure of the depreciation in the value of the notes. This depreciation lias been at the expense of the people, and not at the expense of the banks. It follows that any profit on gold reserves arising out of Government action should accrue to the State representing the people as a whole. The sterling value of gold in London is approximately 1.30/- per fine ounce. At mint rate fine gold would be approximately 85s per ounce It is with the latter figure that the market rate for gold should he compared. REDEMPTION OF NOTES.. “Under the permanent banking legislation (the Banking Act 190 S of New Zealand) each of the note issuing banks is required to redeem its notes in gold on demand. The published returns for the September quarter show notes issued at £6,145,203, whereas the coin and bullion held amounted to £5,076,254, of which about £600,000 is silver coin. '

“Under special war legislation (the Banking Amendment Act, 1914) provision was made whereby the Gover-nor-General in Council may from time to time declare by proclamation, tliat the notes of any hank shall, during the period limited by such proclamation, be legal tender everywhere in New Zealand, and during the validity of such a proclamation the notes of the bank in question shall be inconvertible. Before making such a proclamation the Governor-General may require that adequate security be given by the banks that they shall pay their notes in gold on demand after the expiration of the period limited by the proclamation. In the event of default of payment by any issuing bank, this war legislation provides that the Minister of Finance shall pay the notes when presented in gold. Thus, when notes were made legal tender the note holders were still promised ultimate redemption in gold coin at its face value, and as the profit on gold only arises out of the abrogation of this right, it is clear that such profit should go to the people as a whole, and not to the banks. Thus the commercial banks have no established statutory right to the continuance of the inconvertibility of their notes. The present proclamation expires in 1935, but contains - special provision for earlier termination.

EXPORT OF GOLD PROHIBITED BY RESERVE BANK.

“J£ a reserve bank is established during the period covered by the proclamations, the export of gold (other than uncoined gold) is prohibited unless specially authorised by the Minister of Finance (Banking Amendment Act 1914, section 6). The reason underlying this is that as the Government had guaranteed redemption in gold and it was essential to ensure that the equivalent amount of gold wa« retained in the country. It follows therefore, that the gold holdings of the banks must be regarded as special reserves against the notes issued, and not as part of the general assets of the banks. In view of the fact that the total gold coin and bullion now held by the commercial banks is actually less than the notes issued, it is quite clear that if the Government -removed the proclamation, the banks would very soon he in a position of having to pay out the whole of their present gold holdings, giving a sovereign for each one pound note presented. Even if the present position was maintained, and no Reserve Bank established, the banks could only work on the assumption that the temporary war regulations would be allowed to lapse at any time, and, accordingly, apart from the necessity of protecting the Government guarantee ,it would be necessary to hold their present gold reserves in the country. Thus, they would not be able to realise any.profit by disposal. GOLD RESERVES PART OF BANKS’ OBLIGATION. “It is clear, therefore, that any profit to accrue from the disposal of the present gold holdings is contingent on Government action in providing permanent legislation to make and maintain notes as legal tender. The keeping of gold reserves was part of the obligation imposed on- the banks in return for the right of note issue given them by the Government. The right to issue currency was an

important concession, carrying corresponding obligations. Gold was regarded as the backing for the note issue, and not as an ordinary asset, since the State has guaranteed payment of the notes in gold. The banks thereby have surrendered their liability for the ultimate redemption of the notes. Therefore they have also surrendered the right to hold the assets covering that liability. The banks hold the gold coin on charge at face value, and if they receive that value for it, the banks suffer no loss. Any gain that accrues will be due to Governmental action, and therefore rightly belongs to the State. No genuine case can be made out for the banks to any share in this gain. PRECEDENT IN BRITAIN AND FRANCE. “World exports consulted recently in London were definitely of opinion that the gold should be taken over by the Reserve Bank at parvalue only, and that in principle, any profits or losses should accrue to the State. la England and France profits on the reserve gold resulting from currency legislation were appropriated by the State without question. This is a well-established rule, and is set out more fully in an appendix attached hereto. “The gold delegation of tiro financial committee of tho League of Nations recommended the concentration of all monetary gold in tho reserves of central banks, and that in thoso countries where gold lies looked up in the vaults of private hanks, measures of reform should he adopted. The same delegation pointed out that ail appreciable economy might be effected if all gold coin, gold holdings against cei-tificates, and gold immoblilised in commercial bnjnk.'y were made available to perform the proper function of gold in the currency mechanism of to-day. Gold should be withdrawn into the reserves of the central banks, and replaced by notes .

WRONG INTERPRETATIONS OF GOLD HOLDINGS.

“Finally, I may say that ifc has been stated on 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 held in New Zealand. This has been wrongly interpreted in the direction of stating that the gold holdings may be one-third of- the notes issued. 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. CASH RESERVES ESSENTIAL. “Then I may say that it is not possible to carry on hanking without cash reserves, which, in New Zealand, consist of the banks’ own unissued notes, and in order to be in a position to issue additional notes, the banks must hold additional gold to cover the amount of such additional gold. The cover was decided by each bank for itself, and as gold is a dead asset the presumption is that the respective amounts hold were not in excess of what was considered to bo a safe margin, in eaoji case. On this point, also, it- is of interest to observe that since 1914 tho note issue has more than trebled, while the coin and bullion held is to-day about approximately the same as it was in 1914.