NORTHERN ADVOCATE DAILY MONDAY, NOVEMBER 12, 1934. THE RESERVE BANK

Northern Advocate, 12 November 1934, Page 4

NORTHERN ADVOCATE DAILY

MONDAY, NOVEMBER 12, 1934. THE RESERVE BANK

Registered for transmission through the post as a Newspaper.

Tiie DepaGmehL of Economies at Canterbury College has pre-. pared for -tire Canterbury Chamber of Commerce a bulletin dealing with the woGdhg of the Reserve Bank,The■■.•bulletin is of a most interesting nature, and serves to r 1 ift -the veil ■ of mystery which has shrouded /the bank’s activities. When/the bank was established, capital of £500,000 was issued to New .-.Zealanders,, ■with holdings limited ,to , 500 shares of £5 each. The issue was heavily over-subscribed. The ■Government provided a reserve amounting to one million sterling. This capital of a million and a half has been invested. It' hap- i pened that the bank commenced j business at a time when New Zealand conditions were by no means normal. Under the Banks’ Indemnity Act the Government had undertaken to purchase from the trading banks all surplus sterling exchange accruing from January 20, 1933, the date on which the exchange rate was raised. To purchase those sterling funds the Government borrowed on Treasury bills, mainly from the trading banks. By August 1, 1934, when the Reserve Bank opened, about £23 millions of sterling had been accumulated by the Government. From returns published since then, it appears that about £2O millions of the Covernmcnt’s sterling funds, were transferred to the Reserve; Bank in London (the remainder probably being retained by the Government for other purposes). Transferred to New Zealand at the ruling rate of exchange, this amount would give the Government a deposit of about £244 millions at the Reserve Bank. If the whole of this amount were used to pay off Treasury bills, it would mean that this deposit would be transferred to the credit of the trading banks. In iddition the trading banks transferred about £4,3 millions in gold o the Reserve Bank, which would give them a total credit )f £28.8 millions. Against this hey took, out (by September 3) marly £8 millions in notes, trails'erred Government deposits of ibout £3.5 millions, and left ibout £17.4 millions on deposit, making a. total of £28.9 millions. The Reserve Bank notes are gradually being put into circulation instead of those of the trading banks, and on ■ September 17 there were £3,113,354 Reserve Bank notes and £2,851,549 trading bank notes in circulation, j or £fi millions in all, which is about the amount that was-usual before the Reserve Bank was established. The trading banks hold nearly £6 millions of notes ready to replace their own notes, or to increase the currency if

necessary. ‘The change over to! the now banking sj’stem is nowj practically complete; the Reserve 13ank has issued its notes and taken over the gold of the trading banks, the Government deposits have been taken over by the new bank, the Government has handed over its accumulation of funds in London to the bank and the Treasury bills outstanding have been, paid oft. Under the Act the trading banks are required to hold ns deposits in the Reserve Bank 3 per cent, of their time liabilities and 7 per cent, of their demand liabilities in New Zealand. At present the maximum amount required is about £3• millions. On October 1 the banks actually held deposits i in the Reserve Bank amounting to about £lB millions. The biggest parr of the balance of £ls millions is available for lending in New Zealand or elsewhere, but, as there. lis little demand for loans at the moment, interest rates have : fallen to a'very low level.. The bulletin issued by the (Canterbury Chamber of Commerce concludes its : ' analysis by sayihg.that an important part of the Reserve Bank’s business has | yet to be begun. According to i the Act its primary duty is to j exercise control over cuiwency and credit for the promotion of the economic welfare of the Dominion. A Reserve Bank, it is pointed out, exercises Such control largely by means of its loans and through the conditions under which it lends. The returns show an abundance ol; funds available for lending, but in the weekly statement required by the Act the spa‘ces for entry of discounts and advances have, so far, been completely blank. As yet the bank has made no loans beyond the investment of an amount equal to its capital and reserves. Without discounts or advances and with very moderate investments, it can exercise little direct influence, in the market. But it is anticipated that the bank will give a lead to the development of a short loan market in the Dominion, and. through its activities there, it may evolve and exercise methods of control. In its first stages, however, the bank has assisted in making available funds so abundant that at present they exceed demand, and there is little inquiry for additional funds or new forms of loans. As recovery develops, says the bulletin, demand increases, and the present excess funds are absorbed, the bank’s; opportunity may. grow. If and when it becomes a considerable . operator in the money market, its rate may be expected to provide a useful market barometer, and its policy an effective instrument for that control it was designed to exercise.