NIEMEYER REPORT

Northern Advocate, 3 November 1931, Page 8

NIEMEYER REPORT

THE RECOMMENDATIONS. The following is the text of a bulletin prepared by the Department of Economics of Canterbury College. The report on banking and currency in New Zealand presented by Sir Otto Niemeyer falls into tluee j.arts, all of which are eommendably concise, direct and lucid. The first is a general report which includes a survey of Ihe conditions to be met and the recommendation that a Central Haul: be established; the second outlines suggested points for incorporation in New Zealand bank law; and the third part consists of draft statutes providing for the. establishment of a reserve bank. The recommendations of the report as a whole are described in the first two sections of this bulletin, while in the last two sections the question of their application is examined. It should be noted that the report was prepared long before Britain suspended the gold standard, and the report assumed that the gold standard would be maintained in Brit-

The survey of New Zealand currency concludes that the volume of note circulation is governed by the \olume of credit available and the needs of the. public for cash, ami that internal credit conditions, as reflected in the amounts of bank, deposits and advances, are determined mainly by the state- of bank balances held in London. The report regards it as undesirable that gold coin should circulate again in New Zealand and therefore unnecessary that notes should be made convertible into gold within the Dominion. But it is coninto gold within the Dominion. But sidcred highly desirable that New Zealand currency should be made convertible at approximately fixed rates with some currency which is itself convertible with gold. In this way New Zealand money might be effectively linked with gold, and this end might be achieved by the official adoption of the sterling exchange standard which has long been operated in practice. Similar standards have been adopted in many countries, and for New Zealand it would be necessary to ensure that local currency should always be exchangeable for sterling, and sterling for local currency, at rates fixed within narrow limits. This would maintain New Zealand currency always approximately at par w 7 ith sterling, and therefore with gold the international currency, since sterling was directly exchangeable with gold when the report was prepared.

The measures necessary fur the official adoption of the sterling exchange standard are next discussed. It is considered that difficulty might occur in making it mandatory for the present note issuing banks to maintain parity of notes with sterling, and for other reasons it is regarded as desirable that the note issue should be uniform and subject to centralised control. A note is'sue board might administer a uniform and centralised note issue, but would have no means of maintaining parity of exchange between local notes and sterling. A currency and exchange board might both issue notes locally and also hold funds abroad for exchange purposes, and so maintain the desired parity of exchange, but it would have little necessary connection with local credit conditions, which exercise strong influence over exchange rates. Consequently it is recommended that a General Bank be established, charged with the duty of managing the note issue, accepting responsibility for the •dabilify of exchange rates, holding reserve balances of trading baitks, and carrying the Government account. j

Central Reserve Bank, According - to the recently published MacMillan Report. (on Finance and Industry in Groat Britain) it is the almost universal practice or the modern world that the Central Bank should possess a monopoly of note issue, in order to provide effective safeguards against note inflation. J3ut this does not of itself secure to the Central Bank control over the volume of credit, which, in English-speaking countries at least, is much more important than note control. There are means however, of securing (he necessary centralised control over credit. It is to the interest of every commercial banker that his reserves should be as small as possible consistent with safety. It is ccpially to the advantage of each banker that there should be one institution carrying a- large reserve available for the use of all in times of emergency, provided that this institution is willing to utilise its reserve for the common safety when the emergency docs arise. Henc-c the one reserve system, the foundation of all central banking practice, .arose to meet a practical need. The importance of this system has been recognised, in newer areas where commercial banks preceded the institution of central banking, by the system -of compulsory reserve deposits at the Central Bank. Once the commercial banks of a country hold their reserves in the form of deposits at thc i Central Bank, the possibility of control by 4 the Central Bank arises. For an expansion of credit by the Central 1 tank lias the i fleet of increasing tli»‘ reserve deposits of the commercial banks at the | Central Bank, and ia restriction of credit by the Central Bank decreases these reserve-deposits. Tn the first case the commercial banks; can expand, in the second they are •sconcr or later forced to contract fjioir own loans. These results follow whether or not the expansion or co atraclion of credit effected by the Central Bank through

operations in the money market, or through operations in connection with the commercial hanks themselves, that is, whether the Central Bank operates by means of the purchase and sale of securities, or by means of rediscounting for the commercial banks. The report recommends that these powers and duties be given the New Zealand Central Bank, The bank would lie required to issue' and manage

: uniform note issue for the Dominion. I Titnotes .'tie to ho inconvertible in Xew Zealand, but convertible into sterling exchange at rates varying- by not more than U per cent either way ! front par. Tims stability of exchange would be maintained and currency would be kept convertible with gold, j not in Xew Zealand, but indirectly | through the medium of sterling. The bank is also to carry all Government accounts, largely because an intimate knowledge of movements of public funds is necessary to effective credit and exchange control. In addition it is to carry the reserve balances of the commercial banks, who will be required to hold on deposits with the Central Bank a compulsory minimum of 3 per cent of their own time deposits and 7 per cent of their current deposits. In practice the other banks would be able (o increase their resources by rediscounting their own loans with (he Central Bank at the Central Bank’s rate. 'lt is the exercise of this practice in money markets served by Central Hanks that makes their rate a significant and effective instrument of credit control in those markets. Against its own demand liabilities, including notes the Central Bank would be required to hold minimum reserves of 30 per cent, in Hie form of gold, deposits at the Bank of England, British Treasury Bills up to three months, and firstclass bills of exchange. These provisions would permit elasticity of currency and credit in New Zealand, would allow some economy of gold and reserves, and would enable reserves to be held overseas, mainly in London, where they are likely to be required for the clearing of balances of overseas payments. But a Reserve Bank is not a trading bank, and restrictions are placed on the bank’s activities which, would make them complementary to rather than competitive «jjnth the activities of the commercial banks. The bank is intended to hold the ultimate reserves for the Dominion’s currency and credit system, and to have them in a form always ready for use if needed. Hence its assets must be kept in the 1 most liquid form. Its long-term security investments are limited to the amount of its paid-up capital and reserves; its advances are limited to three months and are to be made only against first-class collateral; and its discounts are to be limited to firstclass four months’ bills, and to a specified proportion of six months’ agricultural bills. All these limitations aim at preserving liquidity and availability of assets, as does the provision that the bank shall pay no interest on its deposits, except in the case of Government funds held abroad. “While a Central Bank must serve the community, it cannot cany out its difficult technical functions and .cannot hope to form a connecting link with the other Central Banks of the world if it is subject to political pres- [ sure or to influences other than economic.” “The bank must be entirely | free both from the actual fact and the fear of political influence.” The report recommends that the bank shall lie constituted as a company, with a capital of £500,000 in fully paid shares, to lie subscribed by the public, and a reserve of £1,000,000 to be provided by the Treasury, which is to be used in the first place for taking up shares not subscribed by the public. Each share held shall entitle the holder to one vote, but no shareholder may exercise more than 1000 votes in his own name and 1000 by proxy. The board of directors shall consist of a governor, deputy-governor and five other directors, two of whom shall have been actively engaged in primary industries and two in industrial or commercial pursuits. Xot more lhau one director shall also be a director of any other bank, and Members of Parliament, officers or employees of the State or of other banks may not be directors. The governor and deputy-governor shall be elected for seven years by a general meeting of shareholders, except that the first governor and deputy-governor shall be appointed for seven years by the Gov-ernor-General in Council. The distribution of net profits is limited to a cumulative dividend of fi per cent on paid-up capital, the surplus being divided between the reserve and the Government until the reserve is double the capital, after which the whole surplus is to be paid to the Treasury.

Changes Proposed. This account of the recommendations contained in the report shows that the new organisation of currency and hanking proposed for New Zealand lias two main features. First is the official adoption of the sterling exchange standard already in use,- together with a centralised and uniform note issue. Second is the establishment of the Central Reserve Bank, The first feature involves little change beyond the change of note issuing authority, the consefpient centralisation of gold reserves and the adoption of means to maintain exchanges on London approximately at par. Before the war New Zealand had all the essentials of a gold standard. The resources used to meet balances on account of international payments were the banks’ exchange funds held overseas, mainly in London, where they were needed, rather than the gold reserves in the Dominion. The exchanges were maintained at par by the banks' readiness to exchange local currency

for sterling and sterling for local currency at approximately fixed rates, rather than by the export and import of gold. Since 1014, when the gold standard was suspended and until quite recently, approximate exchange parity with sterling has been maintained at most times by the same means. The method adopted, a method which has grown up to fit the conditions and is certainly the best suited to the needs of New Zealand trade and finance, constitutes the sterling exchange standard. It is now p. reposed that this standard should be ratified by currency legislation and maintained in the future as the accepted legal standard of the Domiii-

For the more effective administration and maintenance of this standard as the essential feature of our monetary system, the Central Bank is recommended. It is proposed that the bank should issue notes in New Zealand, hold funds in sterling and exchange New Zealand currency for sterling at rates fixed within the same limits as the gold standard would impose. But the bank is also to be a reserve bank, pooling the reserves of the commercial banks, providing a common reesrve upon which they can draw by re-discounting their own loans, and so economising both reserves and gold by removing the necessity for each bank to hold a largo individual reserve. Compulsory minimum reserves are provided for, both against the Central Bank’s demand liabilities and against the other banks’ deposits, but some- elasticity of credit necessary to meet emergency is also given in the ’condition that these normal minima may -at times be modified. The report considers it possible, too, that, through the agency of the Central Bank and the new facilities for discounting and re-discounting that it would provide, a short loan market, which is at present almost entirely lacking in New Zealand, might be developed. In addition the bank might link the Dominion more effectively with the Bank of England and with other cetnral banks, and might enable Now Zealand to participate in that international co-operation of central banks which is developing, and which it is hoped will improve, the management of monetary affairs and bring about greater stability of world prices. Question of Adoption.

A full year has passed since Sir Otto Niemeyer visited New Zealand. It has been a year of extraordinary developments in monetary affairs. Prices throughout the world have continued to decline until New Zealand export prices are about 40 per cent below the levels of .1020. The whole world is passing through one of the severest depressions in history. Unemployment, of appalling severity, is the general rule. A moratorium has been declared for international payments on account of war debts. Large budget deficits have occurred in most countries. Few nations have been able to maintain their currencies at par with gold, and even Great Britain has suspended the gold standard. At the moment, the gold standard itself is suspect, and the future of monetary policy is very uncertain. On account of the present magnitude of fluctuations in world prices, it may be possible and desirable in the future to maintain a greater measure of internal price stability by permitting wider variations of exchange rates than in the past. Although parity of exchange with sterling is of more importance to New Zealand than parity with gold, in view of the present great uncertainties and the pressing need for attention to domestic matters of more immediate concern, it would appear both unwise and impracticable to bind the Dominion to any fixed monetary policy for the immediate future. For this, if for no other reason, the adoption of the recommendations contained in the report must be postponed. But there are other cogent reasons for giving critical consideration to these recommendations before any attempt is made to apply them in practice. The sterling exchange standard recommended has long been in ■operation, and is likely to remain. But the Central Bank proposed is less familiar. Central banks arc long established and have- become an essential part of banking organisation in some large financial centres, such as London and New York. In New Zealand both financial organisation and monetary conditions are different, and there remains some doubt as to the real advantages to be secured here by Hie establishment' of a Central Bank.

experience elsewhere has shown that any improvement in banking organisation effected by, the introduction of central banking depends almost entirely upon the measure of co-opera-tion developed between 'the Central Bank and the trading banks. Already a considerable measure of co-operation exists and many functions of a Central Bank are effectively discharged by means of the present association of commercial banks. These include the issue and management of notes, the maintenance of the sterling exchange standard, a clearing system, and certain working arrangements which permit economy of individual reserves. It is not certain that a Central Bank would improve these arrangements nor that onr monetary affairs would bo managed more economically or more effectively by a Central Bank, which must inevitably bo relatively weak and inexperienced at first, than by the present commercial banks, with their greater resources and longer and more intimate experience of our affairs. It is possible that a Central Bank might prove merely an additional piece of machinery, and an expensive luxury of little real value. It is also possible' that it might be the means of providing

more effective organisation of credit and sounder and more stabJo exchanges. In addition, the question of freedom from political control, the importance of which is stressed in the report, has to be decided. It would be foolish for Xew Zealander**, with little knowledge and no experience of central banking to dismiss the recommendations of the report offhand. On the other hand, in view of present difficulties and uncertainties, their immediate adoption, even in part, is impracticable, and it would be equally foolish to apply them in the future unless the fullest investigation into tin* practical details of their application had made it reasonably sure that the gains to be. secured would at least equal the cost.