MUST PREVAIL

Northern Advocate, 27 July 1934, Page 8

MUST PREVAIL

I HIGH EXCHANGE RATE V DISPOSAL OF FUNDS. rtf ■ STERLING PURCHASE. POLICY* POINTS EXPLAINED,

“(Prom Our Parliamentary Special.) WELLINGTON, This Day. Making it dear that the present exchange level will, prevail until a definite‘'relationship between the currency of New Zealand and British sterling is established, the Minister ofvFinanee, Mr Coates, in the House of. Representatives last night insisted that 'the- surplus sterling purchased under £he now expiring arrangements , with. the trading banks, and amounting; to £23,000,000, will be a. decided | acquisition to the Reserve Bank of y New .Zealand, which is to begin its operations on August 1. Mr- Coates, who at the time was moving the second reading of Finance L Bill, v explained how the Government indemnity to the commercial banks would be liquidated, and how the hew agreement between the State and the Reserve Bank would operate. The Minister said that most of the provisions in the bill relating to the s Bank were technical or machinery ~in character, and designed to- remove anomalies which had been found to exist. With all new projects it was almost inevitable that necessity would arise to amend the ■ original enactment from time to time. Under the bill, the Banks Indemnity '. Exchange Act was repealed as from August 1, ; when the Reserve Bank . would start operating and assume the . responsibxty for maintaining the exchange 'rate. Accordingly, the liabilf ity ;of the Government to the trading banks would automatically lapse. Furthermore; the trading banks would be able to buy and sell exchange from- and to the Reserve Bank, so that there would be no oe--1 casion for the Government to do any more-business of that nature with the trading banks. The Reserve Bank would ’ handle the whole of the exchange. “Allowing for the sterling use of the. normal requirements of the Government,” said, Mr Coates, “surplus sterling purchased under the Banks ..Indemnity (Exchange) Act amounted to approximately £23,000,000. This amount it is proposed to hand over to ‘the Reserve Bank, under section 16 "of the Reserve .Bank of New Zealand Act, 1933, in which the bank undertakes to l&y sterling at rates fixed . by itself. “I may add that this amount will in no sense be a burden to the bank. N On the contrary, it will be a. decided acquisition, for without a substantial amount of sterling funds the liank would be relatively powerless, and in the ordinary course it ■would have taken a considerable time to accumulate funds by buying in the market. “The Reserve Bank will pay the Government for the sterling funds taken - over on the current rate of exchange. , This will be used to pay off Treasury bills owing to the trading • banks,. which will then possess cre- ' ditkyalL. the Reserve Bank. These credits, pan be drawn against the Reserve Bank- notes, obtained if the banks so desire. Thus the whole position under the Banks Indemnity (Exchange) Act will be liquidated and the suspense account extinguished.

( Guarantee Against Loss. “This brings me to clause 4 of the bill, under 'which the Reserve Bank is guaranteed against loss arising from a fall. in ■ the exchange rate, and, on the other hand, the Reserve Bank i must pay to the Government the A equivalent of any appreciation in its •assets.as a result of any increase in the exchange rate that may take A- place. “I may say that legislation on these lines would have been necessary,' quite apart from the handing ,over of funds accumulated under the Banks Indemnity (Exchange) Act. In other words, this clause is in no sense a continuation of the Banks Indem-nity-(Exchange) Act. “New Zealand currency is based bn Sterling, and no legal, rate has yet been fixed. When this has been done by statute, the duty of main- , taining that value will be imposed On the Reserve Bank. In such circumstances, no guarantee of the ■ bank’s position will be needed, as the | credit structure will be controlled by ! the Reserve ißank to keep exchange rates within certain limits on either , side of fixed par.. “Where a permanent exchange - rate has not been fixed by statute, as is the position in our case, there is a definite onus on the State, recognised • by all countries, of protecting the pentral bank from loss. This is particularly so -in a-case like ours, which the Reserve Bank is practically compelled by law to keep a large proportion of its assets in another currency, • i.e., in sterling. “Furthermore, it is a fundamental A principle that decisions of the Re- / serve Bank, made in. the general interests of the Dominion, should be influenced by the effect on its own . financial position. It is primarily for this reason that the Reserve Bank provides for only a limited dividend to shareholders, and the balance of the profits go to the State. Provision Not Permanent. ■ < ‘lt should be noted that profits or losses on exchange movements affect the Consolidated Fund only until a definite relationship between our currency and sterling is fixed by statute, v that is, this is not a permanent provision. In the meantime the Reserve bank has fixed the exchange rate at ,125 for a long period. There seems little prospect of any loss being borne • by 1 the Consolidated Fund. “Until the exchange rate is fixed by / statute, without guarantee, the Ee-

servo Bank’s decision on the exchange rate could not possibly be unbiased. With this , clause in operation, however, Hie bank can make neither profit nor loss from exchange move ments, for any loss is to bo made good by the Consolidated Fund and any profit is to come to the Consolidated Fund. The board of directors have already fixed the exchange Tate at a level which they consider to be in the best interests of the country. The clause under discussion enables them to pursue this end, and this end alone. The clause will continue in operation until such time as a definite relationship between our currency and sterling has been fixed by statute. ‘ 1 It will perhaps be noted that the wording of the clause refers to appreciation or depreciation in assets of the Reserve Bank, but it will be understood that the only asset that can be affected by changes in the exchange rates are those which are held abroad. Obviously, changes in exchange could not affect the value of New Zealand assets. The clause has been drafted in this form _ for simplicity, otherwise it would have (icon somewhat long and involved. Entirely N.Z. Currency. “It may be explained that the bank will, of course, keep its accounts entirely in New Zealand currency, and its sterling assets in its books will be influenced by the ruling rate of exchange. Thus any alteration in the rate of exchange increases or decreases the value of these assets, and this change in value of foreign assets is really what is covered by the provision of the clause. “New Zealand’s surplus exchange has been bought by the Government through the medium of money borrowed on Treasury bills,” said Mr Coates. He admitted that the complaints about the high rate of interest charges, by the commercial banks wore justified. “I am not going to defend it,” he said. “The rate is 5 per cent. Members knew that the banks demanded it.” Mr F. Langstonc (Labour, Waimarino): “And the Government gave in to them.” Mr Coates: “The Government went to this extent, that legislation was passed which will put us beyond any danger of paying, similar rates again.” The Hon. W. Downie Stewart (Government, Dunedin West): “That was what you were paying the public, and the banks thought they were entitled to it also.” Mr Coates added that at the same time Australia was paying 3$ per cent on Treasury bills and England less tha'n 1 per cent. New Zealand’s rates were much higher, though the Government did try to get them down lower. A Labour member: “Why did you not use the Bank of New Zealand?” Mr Coates replied that that would simply leave the Bank of New Zealand open to retaliation, and would be asking it to undertake an unknown liability. The Government was redeeming these Treasury bills through the Reserve ißank taking over the sterling surplus.

“IN A MUD HOLE.” POSITION OF GOVERNMENT. “PEOPLE WILL HAVE TO PASL” CRITICISM OF MR SAVAGE. (From Our Pai-liamentarv Special.) WELLINGTON, This Day. The assertion that the Government had at last adopted the policy enunciated by the Labour Party for New Zealand’s internal use of its own credit was made in the House last night by the Leader of the Opposition, Mr M. J. Savage, He contended that it would have been preferable had the Government instituted that principle before It raised the exchange rate —a device which had not brought one additional penny into the country, Mr Savage, who followed Mr Coates in the second reading debate on the Finance Bill, protested against rush methods of passing such important legislation. Actually, the bill had been circulated one night, and the House was compelled, through the Government’s emergency motion, to send it through all its stages at the next sitting. Moreover, in such rapid progress the essay that had been read by Mr Coates had not been very helpful, most of the House being as wise as they were before the Minister read his speech. From what had been said, it appeared that the Reserve Bank was to bo guaranteced against loss for all lime. The raising of the exchange had brought no extra money into the country. All that had happened was that New Zealand currency had depreciated. The Government, said Mr Savage,* had got into a mud hole in London; It found it had a lot, of money there, and H could not get: it backwards or forwards. in order to overcome that, difficulty, it had issued Treasury Bills to the savings banks, and these were to be met by payment of Reserve Bank notes. What tiie opposition wanted to know was why the Government had not issued nptes in the first place, instead of raising the rate of exchange. Mr Savage declared that the Government had expended millions on fattening the already fat, and now it had come back to do what, the Labour Party had said it should have started by doing—using the credit of New Zealand. Mr Contes: “Straight out inflation. I know you have advocated that all along. ’ ’ Mr .Savage ;“T. want to know why the credit, of the State was not used in the first place. People outside of the House told me a. few weeks ago that these Treasury bills were going in be met by the Reserve Bank issue. Now we appear to lie getting confirmation of that from the Minister.” The Prime Minister, Mr Forbes; “That was said when the Reserve Bank Bill was going through last session,” Mr A. J. Stall worthy (Independent, Eden): “What does Mr Forbes know about it?” Mr 'Savage said the Government’s.

chickens were now coming home to j roost. I Mr Coates: “Where is the nigger in ' the woodpile?” Mr Stallworthy: “The Minister of Finance.” Mr Savage: “Sometimes Mr Stallworthy is very helpful.” He added that it did not matter what the Min- ! ister of Finance said about the 'bill, the people of New Zealand would have to pay for it in the long run. New Zealand was depreciating its currency without adding to its volume. What it should have done was to increase the volume without depreciating the currency. It was difficult to see where any profit was going to come from, so far as the operations of the Reserve Bank were concerned. They did not know how many millions of pounds there were in London, and they were asked to place the Consolidated Fund behind the exchange transactions, without that i knowledge. There was no doubt the * Government would have been dead ■ long ago if it had not been for the j assistance of the trading banks. j Mr W. Nash (Labour, Unit); “And ; it cost £1,500,000 a year.” j Mr 'Savage said that they had £25,- \ 000,000 in London and it appeared ! they would never be able to get it ! to New Zealand. Even when they • paid off’ the £25,000,000 to the trading • banks they would still have the credit | in London, If that money was going to be used to meet State liabilities in London, the taxpayers in New Zealand j would have to pay the piper. If, on ' the other hand, the credits were to be, j used by New Zealand importers, the j buyers of imported goods would have j to pay the piper—so that in the Jong | run the people of New Zealand paid 1 the piper whichever way it went. J