RESERVE BANK BILL

Nelson Evening Mail, Volume LXVI, 30 January 1933, Page 8

RESERVE BANK BILL

A FINANCIAL REVOLUTION ANALYSIS OF THE MEASURE REMARKABLE PROVISIONS (Contributed by A. N. Field) I The most striking thing about the Reserve Bank of New Zealand Bill now before Parliament is that it is entirely external in its origin. The next most remarkable thing is that under it the money of New Zealand will be under rigid external control. And another remarkable feature of an altogether remarkable measure is the nature of the reserve to be held by this bank. In no quarter within New Zealand has there been agitation for the establishment of a central reserve bank as planned in the Bill. The public have never asked for sucli an institution; the banks have never asked for it; and the politicians have never asked for it. Nobody had thought of it until Sir Otto Niemeyer visited this country in the latter part of 1930, as representative of the Bank of England, and recommended the establishment of a reserve bank. The Bill is before Parliament not because anybody here wanted it, but because an external institution, the Bank of England apparently desired it. In his report, published in 1931, Sir Otto Niemeyer, explained that the object of monetary control in his opinion should be to maintain a stable exchange. The ideal to his mind was that a New Zealand pound note should always, in theory, be convertible into a fixed and invariable amount of gold. The maximum amount of fluctuation allowable should not exceed II per cent either way, which roughly represents the cost of shipping gold between New Zealand and London. As second best, the New Zealand pound note should be maintained at parity with the British pound. A REVERSAL IN POLICY At the present moment the Government of New Zealandjs committed to a policy totally at variance with that ■ enunciated by Sir Otto Niemeyer. The 1 New Zealand pound in 1931 moved 1 away from parity with sterling to the 1 extent of 10 per cent as the result of 1 action by the Associated Banks. It was stated at the time that this 10 per ’ cent exchange rate had been fixed somewhat above the natural level of ex- [ change as determined by demand and , supply with a view to discouraging iin- . ports. On 20th January of this year , the exchange rate was raised to 25 per . cent., the banks “reluctantly” yielding . to Government pressure in the matter. The position thus is that the princii pal objective urged by Sir Otto , Niemeyer in recommending the establ lishment of a central reserve bank has l been discarded by the Government —for • the time being, at any rate —but never- ■ theless the Government is apparently bent on establishing the bank. This leaves for consideration the secondary objectives advanced by Sir, Otto l Niemeyer, the originator of the Bill. ’ These were : first, that a central reserve ’ bank here would provide “an instrument for co-operation with the Central Banks of other countries—a cooperation which is becoming of increasing importance and which at present finds no suitable point of contact in New Zealand,” and, secondly, that it would result in “incidentally transforming into an earning asset the present dormant holding of gold” in the bank vaults in New Zealand. ■ Sir Otto Niemeyer was entirely silent as to the precise advantages to be gained by. the establishment of close ■ contact with the central banks of the world. The most powerful central bank 3 in the world is the United States I Federal Reserve System. This was l established at the end of 1913; it was advanced as an institution to prevent [ financial stringencies and panics, Des--1 pitp the fact that it possesses a greater t power over world monetary conditions . than any other institution ever establ fished, there have been greater stringencies and panics since it was es- ; tablished than were ever known before, iAs the result of pressure from the United States central banks have been • set up in many .other countries. Fin- > ancial advisers were sent to these 1 countries, and they were proffered gold 3 loans to iiidfice them to set up central ’ banks and tie their currencies to gold. 1 These steps have done nothing to induce any revival of prosperity so far. j No evidence has been adduced to show that the spttjng up of a central bank ' in New Zealand would revive prosperity here. TO WHOSE BENEFIT? \ As to the “transforming into an earn- [ ing asset” of the gold now held in the i bank vaults in New Zealand, the only » way this can be achieved is by shipping i the gold away and selling it, and investing the proceeds in interest-bearing , securities. The manner in which this ! may be done under the Bill now before ' Parliament will be examined in a subsequent article: it needs examination. The principal argument remaining for the Bill out of the three advanced by Sir Otto Niemeyer, is thus that the five , million odd of gold now held by the banks can be transformed from a dead into an earning asset. At 4 per cent per annum this means that an income of over £200,000 per annum can be secured by selling this gold: at 5 per cent over. £250,000 ppr annum can be secured. This gold, however, is not the property of the popple of New Zealand, but of the trading banks. Only a portion of the profit to be derived from this gold sale would go to the reserve bank, and only a portion of the banks profit would go to the Government. Before the Government gets any profits from the Reserve Bank the shareholders in that institution must first get a dividend of 54 per cent on their money, then half of what re-! maips go to the general fund of the bank, and the Government gets the other half. After the. reserve fund reaches a certain figure the Government’s share increases, but the sale of

the gold would probably lake place before Ibis point bad been reached. does not appear that the people of New Zealand would derive any considerable benefit from this transforming of the gold in the bank vaults into an earning asset. Nevertheless, while the advantages to be derived by the citizens of this country might be negligible, there would be clear and quite positive advantages to be. derived by the ex-, leuial financiers buying the gold. They 'wmi.i,d receive this metal and in return for if would hand over a certain j ainoui.it of paper, o,f greater or less value. .So long as the gold standard obtains in certain great countries, and so long as huge debts payable in gold are owing by oilier nations, gold lias a

very definite value in controlling the economic life of the world, and to the financiers every little bit is worth mopping up, even New Zealand’s five or six millions. THE BASIS OF REGULATION Tiie need of the world is for money stable in purchasing power over commodities—money that is an honest measure of human effort. The Reserve Bank Bill does not provide anything of the sort. It provides that our money shall he kept at parity with sterling. In his Rhodes Memorial lectures at Oxford University last year Professor Gustav Casse], the. European monetary expert, said: ■ “England is on a ‘sterling’ basis, but nobody knows what ‘sterling’ means and official circles continually refuse to give a dear and definite answer to this most important and most natural question. Other countries look in vain to England for a lead in monetary policy. ..” “Sterling” to-day is an inconvertible paper currency: it has ceased to be maintained at any fixed parity with gold: it is not maintained at any fixed parity to anything else. Our Government has abandoned the idea of maintaining the money of New Zealand at fixed parity with sterling: it has not accepted the idea of maintaining at any fixed parity with anything else. It adopts a high exchange policy, and at the same time is committed to proceed with the establishment of a money-controlling machine the chief object of which is to prevent the exchange ever getting away from parity by more than 14 per cent. The Reserve Bank Bill provides all the machinery needed for maintaining a low exchange rate: it provides none at all as it stands for maintaining a high exchange rate. If the low exchange rate is not wanted, what object is there in proceeding with the Bill? Having discarded the monetary policy recommended by Sir Otto Niemeyer. why persevere with the erection of the machinery to effect that policy? These points deserve elucidation: so far they have not been elucidated. To be continued.