A CENTRAL BANK

Otago Daily Times, Issue 21772, 11 October 1932, Page 6

A CENTRAL BANK

ITS FUNCTIONS EXPLAINED Asking the question—“ What is a central bank and why should we have one? ” a writer in the Evening Post says- that a central bank might be, and often is, described ns a bankers’ bank. Its functions include the issuing of the bank notes of a country as the Bank of England issues notes, as the Commonwealth Bank of Australia issues notes. If there were a central bank in New Zealand there would bo one bank note instead of six different bank notes in use in New Zealand, ns at present; in short, the central bank would have the monopoly of tho note issue of New Zealand. It would be the bank in which other banks must place their reserve funds; and it would do business with such banks as such banks now do business with the public.

It would endeavour to do what is described as maintaining “ the credit structure on a sound foundation.” In other words, if in tho national interest it thought too much money was being lent out by tho banks, considering the nature of the business on which it was being lent, it could apply certain brakes. On the other hand, if, also in the national interest, it thought that industry aud commerce were worthy of an increase in the amount of money required to borrow in order to expand, it could discreetly case the brakes —a little, at any rate.

It would also act as the bank of the Government, holding Government moneys and dispensing them to departments as required.

The name of Sir Otto Niemeyer has been fairly prominent in discussions and print on the subject of a central bank for New Zealand. That gentleman is a recognised expert in the science of bank ing, although his own diffidence might make him reluctant to admit this. He was “ called in" as an expert b., the New Zealand Government for consultation on certain matters of high finance, as a plumber might be called in to repair a leaky cistern. When he came to New Zealand he did not at once say what should or should not be done. Instead he made many inquiries on all sorts of subjects and from all sorts of people, in his earnest endeavour to obtain the material he felt he needed before giving a considered opinion on the objects of his visit.

He did not. dictate; he did not dogmatise. On the central bank question he said, in brief, that an independent reserve bank should be established in New Zealand to issue notes, to do the Government’s banking busihess, and to hold the reserve funds of the tanks doing business in New Zealand. He also suggested that what gold the banks now hold in their vaults should be handed over to the central bank when it was set up, and that central bank notes should be given in exchange for it. Incidentally, there can be very few banks in the world at present with more gold in their coffers than notes in circulation. That has been the case in New Zealand for many years past. It is slightly different to-day, latest returns showing as follow: Notes issued .. .. £5,010,825 Coin and bullion ~ 5,605,426

Excess notes .. £314,399

In 1028 there was over £1,250,000 more held in coin and bullion than notes in circulation. But this change in the position of gold and notes does not enter into a' simple explanation of what a central bank is. A central bank, it is expected, would set a standard price for money, as the Bank of England discount rate does when it alters fits rate, usually on a Thursday morning. When that rate is announced other rates for banking and similar loans for daily, weekly, or quite short periods are adjusted accordingly. London, New York, Paris and some other great financial centres have markets for money, or facilities for lending, and vast sums of money for quite brief terms such as day to day, week by week, and so on. But neither .the facilities nor the need for such business exist here. If anyone; wishes to borrow money and can put up approved security he can do so by obtaining a loan from his banker. The idea that a central bank has only to be set up to make money plentiful and cheap,,.to make borrowing easy and rates of interest low, should be dismissed at once. Not even a central bank can violate certain fundamental and inexorable laws governing banking practice and escape disaster. A central bank does not engage iu trade in competition with other hanks. Sir Otto Niemeyer was most emphatic on this point, showing that abstention from this kind of thing was “a vital distinction” between the central bank and tho trading bank. The only one of the British dominions having a central bank is tho Union of South Africa. Australia has tho Commonwealth Bank—not quite tho same thing because it competes for business with other banks. It even proposed to do business in New Zealand, ■ and went so far as to secure options over suitable premises in Wellington and Auckland. Canada and. Newfoundland have no central bank.