Reserve Bank Year Reviewed

Manawatu Times, Volume 64, Issue 171, 22 July 1939, Page 5

Reserve Bank Year Reviewed

Money for State

BOARD ADVISES CUT IN EXPENDITURE

(Special to “Times.”) WELLINGTON, July 21. Profits totalling £250,235 and pointed advice to the Government to avoid further recourse to the Reserve Bank for additional accommodation are features of the annual report of the Reserve Bank of New Zealand, tabled in the House of Representatives to-day by the Prime Minister (Rt. Hon. M. J. Savage). Generally reviewing the ecouomic position, the report states: “The developments outlined earlier reveal that not only did general business activity and the demand for imports continue at a high level in spite of the reduction in the total value of exports and a considerable net outflow' of capital, but that, notwithstanding th,e expansion of credit represented by the increase of over £14,000,000 in Reserve Bank accommodation to the State (including tho increase of £2,300,000 in advances to the Primary Products Marketing Department), commodity prices remained relatively stable throughout tho year. Now' that the surplus sterling reserves have been practically exhausted, however, and the Reserve Bank has been relieved of the obligation to pay its notes in sterling, a different situation presents itself. “No, longer will it bo possible for credit by tho bank to find nn outlet to any appreciable extent in the purchase of goods from overseas (except by using tho bank’s statutory reserves for the purpose). Whilst the demand for commodities was being partially satisfied by the utilisation of the Dominion’s available sterling reserves, the effect of tho expansion of credit on internal prices was not very great, but in existing circumstances, any additional credit expansion would iucvitnbly tend to cause, sooner or later, a general rise in prices with a consequent diminution in the value of all savings, wages, salaries and pensions.

Limiting Expenditure “The hoard would, therefore,” the report continues, “stress the desirability of the avoidance of further recourse to the Reserve Bank for accommodation and of limiting governmental expenditure to such a sum as can he raised by taxation, in addition to what can he borrowed from the public, either in the Dominion or overseas. If such a policy were adopted, and, still further, if steps were taken to reduce the outstanding advances from the bank, there would be a better prospect of the bank being able to assist by granting accommodation during relatively unsatisfactory export periods without jeopardising the financial economy of the Dominion.’ ’ Advance in Profits The bank’s profits of £250,285 Lave been paid into tho Consolidated Fund. They represent a substantial advance on the previous year’s profits, the report explaining that this has been due, despite an increase of approximately 20 per cent, in expenses, to an increase in tho return of advances from the State, additions to the total holdings of investments, and heavier sales of sterling. However, while the last item has yielded an immediate exchange profit, it is pointed out that this is at the expense of future earning power of the bank’s sterling holdings. The increase of £1,693,000 in the amount of notes outstanding at March 31 was, the report states, to be expected in view of the further increase in the national wages bill and in the rise in retail prices which took place. An increase in the bank’s investments by £1,260,379 is explained by the fact that the total investments at March 31, 1938, were temporarily reduced by allowing certain State Departments to take over some of tho bank’s securities for a short time, thus employing their surplus cash balances. Marketing Account The survey of the Internal Marketing Account contains the prediction of a substantial deficit at the end of the season. Valuing stocks of butter and cheese on hand at March 31 at then current prices, and allowing for the cost of realisation, the Dairy Industry Account then showed an estimated deficit of approximately £1,000,000, but since then London prices had fallen still further. “To the extent that such deficits exist,” adds the report, ‘‘they represent the creation of credit beyond the equivalent of commodities produced, and the board considers it important that the inflationary tendency of such accommodation should not he overlooked.”

The section dealing with exchange control recapitulates information already published regarding tho broad Hues on which tho system is operated, adding: “In operating the permit system for transfers the bank has been guided by your assurance to the effect that one of the objects of exchange control is to enable overseas debts, whether Government, local body, or private, to be met on their due dates.”

Attention is called to the fact that although exchange control covered a considerable portion of tho export season, the bank was only able to build up its sterling holding by £527,000. An estimate is made of £14,000,000 annually as tho normal requirement for overseas debt services and other transactions, including travellers’ requirements, and attention is called to the fact that the surplus of exports over imports for the year fell to £3,459,000. It is suggested that the decline in the favourable balance of overseas trade accounted for one-half the shrinkage in overseas funds; it is ‘