RESERVE BANK

Hawera Star, Volume LIII, 27 September 1933, Page 8

RESERVE BANK

CASE FOR OPPOSITION ‘POINTS AGAINST’ SUMMARISED. DEFENCE OF TRADING BANKS. Tlic proposed reserve bank is tc have the sole right of issuing notes; it would act as the Government banker, and the trading, hanks would also have accounts with it (writes IF J. Km the “Investors Journal ). that is compulsory. It is the belief ol a great majority of people, whose know-, fed re of banking is very limited, that bv/the Government holding monopoly of the note issue, more currency, that is legal tender notes, would b© in circulation. which isi a very popular fallacy There would be more money in circulation if the notes were -re deemable anil issued recklessly—-issued regardless of the security and solvency of "the borrower. But an unrestricted issue pf paper money is not content--plated, and that being so, it would be safe to say that the reserve bank will not be able to force upon the public) a single additional New Zealand pound note. The circulation will be fust what the public want-no more and no less. The reserve bank* wiLl not be free to issue notes beyond the legitimate demands of the people, consequently it is the people themselves who fix the volume of the note circulaTlie six trading banks in the Dominion can supply, and have always supplied, all the currency needed by the public, and that there is not more in circulation is no fault of the banks, but the will of the people. The hanks welcome borrowers to whom they can safely lend; and as trustees of depositors from whom their lending resources are derived, banks ought never to lend on any other condition. The idea that a reserve bank can spawn currency and crftdi,t at will is a myth, and it is tragic to find that this myth .should be venerated by so many al Jeged intelligent men. funds from trading banks The resources of the reserve bank are to be derived principally from the six trading banks. Portion is to be derived by compulsory taking 7 per cent, of the demand for free deposits and 5 per cent, of the time or fixed deposits, and a still greater proportion for the notes required for circulation and till money. Altogether the amount to be extorted from the trading banns for the support of the reserve ban*, on a rough, calculation, will be approximately £12,000,000. In normal times, the margin between the deposits held by the trading bank s and their advances to the public is a. comparatively small one; there have been many occasions when the c.d----1 vances have exceeded the deposits, but jat present, owing to various factors, I principally the lack of confidence, the 'deposits exceed the advances by about I £94 millions. With the return of I normal conditions the demand for acl- | vanoes will expand, while, the fixed , deposits will tend to contract-. With a loss of resources amounting to about £12,000,000, which practically goes into cold storage in the reserve bank, the question arises what will then he the position of the trading banks with respect to their overdrawn and borrowing customers-, and what effect would the. (realisation of the banks’ very considerable holdings of Government securities have on Government stocks and credit? The Minister of Finance, and the Brains Trust behind him, have perhaps wilfully overlooked this aspen of the matter. Are our farmers and traders to suffer because the Bank of England which desires to see a chain of reserve banks established throughout the British Empire, thinks l little New Zealand, with a population of not much more than 11 millions and already maintaining six sound trading banks, should have another institution foisted upon it? To crown all, the proposal to establish a reserve bank is made at a time when world finance is disorganised and the immediate future shrouded' in the greatest uncertainty. For a responsible Government to suggest such a change is highly reprehensible. It is worse than swapping horses in midstream.

In the statement of the Minister of Finance the authority 65 Sir Ernest Harvey, Deputy Governor of the Bank of England, is quoted to the l effect that a- central bank would be doomed to failure if in anv way it is subject to Government control or interference, and yet the impression one gains from the Ministerial statement is that in the matter of exchange the Government would see that the rate was fixed on the nrices realised for our primary products in overseas markets and nut! on trade balance, which is the cmlvj sound method of fixing the exchange' rate. Sir Otto Neimeyer, also an officer of the Bank of England, m his, recommendations' to the Government ; laid it down that the exchange jf.te l should not rise or fall beyond 30s ter cent, of the gold point. If that principle were adopted ruling rale to-day would be £1 10s per cent, instead of nearly 25 per cent, for a demand draft on London. It may be pointed out that with the exception of South Africa, no British Dominion has allowed itself to be persuaded into establishing a reserve bank bv the Bank of England. The proposal was submitted to and rejected b v the Federal Government of Australia, and in Canada it is being hot*® opposed b” leading and eminent financiers. The haste of our Government to establish a reserve bank reminds one of that verv old saying: “Fools rush in where angels fear to tread.” THE CASE SUMMED HP. The case against the proposed ro--1 serve bank may bo briefly .summarised as under: There has been no demand on the part of the people for the establishment of a reserve bank as proposed A reserve bank in New Zealand could perform few services- that are not | available under our present banking system. The reserve bank could not function with an artificially pegged exchange rate.

A reserve bank cannot furnish increased credit facjilitje's for farmers and others, for it w.ill have no contact with the public and would not and could not do away with the necessity of requiring adequate security for bankincr accommodation. Tkc borrower with inadequate banking security would be no better off than be is today.

The transfer of approximately £12,000.(100 from the trading banks to the reserve bank would curtail the lending powers of the trading banks, and the Government as well as local bodies, farmers and others, would In l inconvenienced thereby. It would in fact mean a- contraction and not- an expansion of credit. As the Government .and therefore the people of New Zealand, have a considerable interest jn the Bank of New Zealand, deriving in income tax, note

tax and dividends approximately £OOO.OOO per annum, it should be a matter of careful investigation as to what extent the income now derived from the Bank of New Zealand is to be affected. i At present, apart from the Bank of England, there is only one reserve, bank in the British Empire, and that is in the Union of South Africa. That reserve bank was powerless to prevent the farmers of that country from being ruined through the fall in prices. A reserve bank in New Zealand would not and ocptld not add a ten shilling note to the circulation, or a farthing to the price of any of our primary products. Sir Otto Niemeyer. in his report to the Government, laid it down as a cardinal principle that a central reserve bank should be entirely free from Government control or interference, failing which it would prove an utter failure. Whatever the intention may be at present, he would be a bold man who would affirm that a central reserve bank in New Zealand would not become the plaything of the political party in power. At the very outset the reserve bank , will carry a strong political taint, for i the Governor, depidjfy-Governor, and all of the first directors are to be appointed by the Government. Finally, the debt of the country will be increased by £1,000.000 for the Government must lodge that sum with the reserve bank to become the reserve fund of that institution.