BANKING BILL

Hawke's Bay Tribune, Volume XXVI, Issue 100, 8 April 1936, Page 5

BANKING BILL

before The Upper House USE OF POWERS Credit Will Be Issued For Creation of Assets PURCHASE OF SHARES <t<- Teleeraph—Press Association., WELLINGTON, April 7. Urgency was accorded tho passage of the Reserve Bank of New Zealand Amendment Bill in tho Legislative Council this morning. Moving tho second reading, the Hon. M. Fagan, Leader of the Council, set out the objects of tho Bill, and said that tho Government’s power would be used -sensibly and credit issued only for the creation of assets, such as railways and houses. Parliament would always be consulted and the best check was the three-year Parliament. The Reserve Bank would be strengthened so that no private or other interests could deal a blow at the sovereignty of the State in the realm of currency and banking. Dealing with the cancellation of share capital, Mr. Fagan said that io recompense tho Reserve Bank for cash payments it might make the Government would pay the amount to the bank either in cash or securities, and thus the original capital of £500,000 would be retained, thus keeping intact its general reserve fund, while the Go | rnment would meet the cost of buying out the shareholders. The bank would not only control currency and credit internally, but was charged with the duty of controlling overseas transactions in respect Of New Zealand business. That should make no difference whatever to firms who were carrying on business as importers or exporters, but it would make a difference to speculators and financial institutions who would use sterling funds for their own ends. STERLING FUNDS. * Dealing with sterling funds, Mr. Fagan said that an erporter of fat lambs would receive payment from his bank- in New Zealand currency and so would not suffer. The farmers’ bank would then sell sterling to the Reserve Bank and would be paid in New Zealand currency. Sterling funds would thus be at the disposal" of tho Reserve Bank and would be used to meet New Zealand’s overseas debt commitments and to finance imports just as at present, but there would be no opportunity for New Zealand’s sterling funds to be used by speculators and taken out of the control of New Zealand.

The first Reserve Bank did not entirely meet New Zealand’s _ needs. There was no money market in New Zealand, no short-term market in the English sense. Hence Reserve Bank control by means of any of the recognised open market policies would have little influence on currency and credit, because the means of influencing it were not developed in New Zealand. The only powerful means of affecting the volume of money and credit issued in New Zealand was by means of movements in the exchange rate. The authority of tho bank to buy and sell Government securities had been expanded, and this would enable Parliament to determine the amount of long-term accommodation that might bo necessary to finance special productive public works. The powers in the United Kingdom Gold Standard Amendment Act, 1931, providing for the suspension of the gold standard in Britain were far more drastic than those incorporated in the Bill before the Council. The British Government passed a Bill in 1931 empowering the Treasury to set- up the clearing office for collecting and dealing with certain debts and to authorise the imposition of restrictions on imports. Thus extensive powers had been given to the British Treasury to conduct tho operations necessary to preserve the foreign trade and foreign exchange of Britain. Tho President of the United States had been given similar powers by recent legislation. Such powers were necessary in any modern State, and were particularly necessary when there was a possibility of the Government being undermined by financial influences who had only their own interests to serve. Stick provisions merely ensured that control of credit and currency was really iu the hands of the State.

TRADING BANK BALANCES. Dealing with reserve requirements, Mr. Fagan said that the trading banks could build up a credit structure equal to fourteen times their balances with the Reserve Bank. If these balances rise then the banks can expand operations. Judging by the balances of the banks at the present tine, they can expand by about £20,000,000, and that was a potentially dangerous situation and might easily lead to an inflationary boom. The same situation existed in the United States. Hence provision had been made to vary the balances which member banks must keep with the Federal Reserve Bank. Thus, if the banks had big balances with tho Reserve Bank, they could start inflation but for that provision. In New. Zealand no such provision existed, despite the fact that for some years monetary authorities had been advising its adoption. Power was now included in the present bill however. If the banks had balances of £20,000,000 with the Reserve Bank and a reserve against demand liabilities, tho present law meant that they could inflate so that short-term deposits stood nt the figure of £280,000,000. Under the change now proposed the balances trading banks had to keep might be varied upwards, so that if the banks were tending to start inflation, the reserve requirements, instead of being soven per cent., could bo ten per ceut., which meant that, instead of an expansion fourteen times being allowed for, it would be only ten times. In conclusion, '.Mr. Fngnn said Ihn 1

the precedent when a change of Government had occurred, that the elected chamber hud the right to carry out tho policy ratified by the electors. The Council always recognised that the policy of the Dominion was determined at the polls, and although ho welcomed detailed criticism, he thought he was right iu assuming that he ho would not receive unreasonable obstruction.