THE New Zealand Herald AND DAILY SOUTHERN CROSS SATURDAY, NOVEMBER 4, 1933 THE RESERVE BANK

New Zealand Herald, Volume LXX, Issue 21640, 4 November 1933, Page 10

THE New Zealand Herald AND DAILY SOUTHERN CROSS SATURDAY, NOVEMBER 4, 1933 THE RESERVE BANK

The Reserve Bank of New Zealand Bill is practically through Parliament. It is hardly the type of measure the Council would amend or reject. Therefore, except that there still remains opportunity for the Government to introduce amendments if it should so desire, the form of the Act that will reach the Statute Book must be regarded as virtually fixed. As soon as it is given force by proclamation, New Zealand will have a central reserve bank. Theoretically this is a very important and beneficial development. The case for central banking is supported by an overwhelming weight of authoritative opinion. In a setting suitable for its operation it can exercise a powerful influence by tending to smooth out the ripples or reduce the waves which continually threaten the tranquillity of commerce and finance. A reserve bank system cannot prevent the recurrent booms and slumps which mark the economic history of the civilised world, because they are largely based on deep-rooted psychological causes. In a word, a central bank cannot perform miracles, and it is no use expecting one to do this. In New Zealand the proper setting for a reserve bank is largely absent. There is only a rudimentary bill market, and practically no money market. The experts who recommended a reserve bank suggested it would help to develop both these, which should be of value as the Dominion increases in industrial, commercial and financial stature. If its establishment is not a thing to grow wildly enthusiastic about, it is certainly worth watching with interest as it sets about performing the functions with which it is being invested by Parliament.

The bill itself can be quite frankly described as less valuable in its present form than when first introduced. During the discussion attention was principally centred on the mechanism for management and control. The limitation by shares and the independent directorate at first contemplated obviously represented the Government's response to the most emphatic expert advice it received, that the bank should be free from the suspicion as well as the fact of political control. Though the provision for share capital, to be held in strictly limited amounts by individuals, remains, shareholder control has been severely reduced. The Government nominees on the directorate, the presence there of a Treasury official, and the reservation of State influence in the appointment of governor and deputy-governor have all altered the complexion of the bank substantially. The effect of these alterations can only be determined by experience. Will it be possible to find men of independent judgment to serve on the directorate, or will it be saddled with nominees who are, in opinion, pale shadows of the Government of the day? This second alternative is 'a risk inherent in what the bill now contains. Again, will men of the calibre required for the two chief executive positions be found to accept appointment at the hands of a political party —which is what the Government in essence is? Further, if governor and deputy-governor of the proper type are found, if they clash in opinion with the Government, what will be the result? Further, to these doubts and queries there is the question why the sole right of note issue was not conferred on the reserve bank, as at first proposed. The trading banks are losing their present privileges, but nothing has been said about the possibilities of another note issuing authority now that the reserve bank is not to have the exclusive right. Possibly there is, in the background, some idea of the Treasury issuing notes—on the analogy of the war-time "Bradburys"—in an emergency. It is an interesting point which was not cleared up during the debate.

The actual course of discussion of the bill was instructive as an example of the way sweeping statements so frequently prove unfounded in the face of critical examination. The country was told with great vehemence that the foundation of this hank would enslave the people for all time ; the absolute lack of credible argument to that effect was very noticeable during the debate. The actual objections in detail to

the measure proved to be very mild, and the case made for them was quite unconvincing. A classic instance was the assertion that if the Reserve Bank took shares in the Bank lor International Settlements, control over this country would thereby be handed to a foreign institution. Mr. Downie Stewart remarked that the more probable result would be that New Zealand would thereby gain some say in controlling the Bank for International Settlements. There was no answer, because the logic was unanswerable. It is too much to ask that practical people should believe taking shares in a company to be tantamount to submitting to control by that company. Actually the way tremendous denunciation of the reserve bank proposal died away when it became necessary to give chapter and verse for the objections, shows again that much of what is being said nowadays on the severely technical subjects of credit and currency amounts to an appeal to the emotions and not to reason. Finally, it may be said that the bank in operation is likely to be neither so wonderfully beneficial as its enthusiastic supporters allege, nor the evil thing its detractors assert. It may prove a useful piece of machinery for the better development of Xew Zealand's credit structure—based, as all the facts of the Dominion's life require, on the overseas yield of exported commodities That possibility will be tested by time, as will the further possibility that indulgence in a full-fledged reserve bank system is an ambitious move by a country not yet far advanced from financial and economic infancy.