THE RESERVE BANK

Otago Daily Times, Issue 22053, 8 September 1933, Page 10

THE RESERVE BANK

GOVERNMENT'S PROPOSAL FUNCTIONS OF THE INSTITUTION (Communicated by the Minister of Finance.) 1.--CENTRAL BANKING. Although much that is written and Bpoken on the subject is unsound, the public interest in matters of currency and banking is evidence of the growing recognition of the fact that banking and currency play a very important part in our economic life. In fact, all our business and all our values are in terms of money, and, as Is now generally recognised, If the currency is not kept sound and relatively stable in value, trade anil Industry are seriously upset, and there Is grave disorganisation and trouble. Our banking system, like that of most other countries, has evolved with the development of the Dominion, and adequate facilities for commercial banking (deposits, advances, and exchange operations) are offered by the six commercial banks doing business in New Zealand. These banks are organised primarily to make profits for shareholders, and the control of our credit and currency, which at present remains with them, Is only incidental to maintaining the soundness of their own business. The commercial banks have not altogether neglected the public interest and pursued the course which seems best in the interest of their shareholders. In the long run the banks' interest must coincide with the interest of the Dominion as a whole, and it may be said to their credit that the banks operating in New Zealand have in the past acted together in pursuing a common policy that perhaps was not always in the immediate interest of their shareholders' dividends. Some of the great banks of the Old World, notably the Bank of England, started as purely profit-earning concerns, but have now developed into national institutions in which profitearning is quite subsidiary to serving the public interests in the regulation of credit and currency. In modern times the control of credit and currency has become so fundamental to the welfare and prosperity of the people that it has been recognised in country after country that such vital matters should not be left in the hands of the commercial banks. To meet the need the art of central banking has been evolved. A central or reserve bank is sometimes described as a bankers' bank. It is certainly part of its job to hold the reserves of the commercial banks and consolidate and co-ordinate the banking system of the country; but more than that is required of a central bank. It is really a national institution set up to maintain the stability of the currency, and carry into effect the monetary policy as determined by Parliament. This is its real function, and, to ensure that it acts solely in the best interests of the country, the Reserve Bank, in the absence of the binding traditions (which obviously could only be acquired over a long period), is hedged round with various stringent restrictions designed to keep it free from other interests and any bias or influences other than economic considerations.

The control of a central bank is made effective' not by means of any judicial authority, but by its power to cut across the business of the trading banks. In order that its -weight may be felt when necessary the Reserve Bank cannot compete regularly with the trading banks. Its funds are normally held in reserve to be brought into active use if necessary to make its policy effective or as a stabilising factor. The Reserve Bank, however, regularly offers, but normally only as a lead to the market, to do certain classes of business, such as discounting of bills and exchange operations at rates fixed by its board from time to time. For such purposes it will be readily understood that the Reserve Bank in its capacity as regulator does not require branches all over the country like a trading bank. , So far as New Zealand is concerned, one relatively email office in Wellington will probably be sufficient.

Sir Ernest Harvey, a director of the Bank of England, when visiting Australia in 1927, summarised the accepted functions and conditions of a central bank as follows: —

1. A central bank should possess the exclusive right of note issue.

2. A central bank in. its management and policy should be free from Government control and the influence of politics. 3. A central hank should be entrusted with the entire banking business of its own Government.

4. A central bank should be the banker of the trading banks, and should act as a settling agent for clearing differences between such banks. 5. A central bank should not ordinarily compete with the trading banks for general banking business. 6. A central bank should ensure to the public the provision of adequate hanking facilities on reasonable terms. 7. A central bank should not take moneys at interest on its own account. 8. A central bank should quote

publicly the rate at which it is prepared to discount approved bills, and should publish at regular and frequent intervals a clear statement of its position.

9. The assets of the central bank should be of the most liquid character possible. 10. A central bank should not draw or accept bills payable otherwise than *on demand. 11. A central bank should not engage in a general exchange business on its own account for the purpose oi earning profits. 12. A. central bank should not engage in trade nor have any interest in any commercial, industrial, or other undertaking. 13. A central bank should have no branch outside its own country, but may have agencies abroad.

It should be understood, however, that the powers and duties of any particular central bank are governed by its statutes, and naturally vary according to the monetary system as laid down by the Parliament of the country concerned. XDn broad issues the over-riding control always remains in the hands of the Government.

A central hank would enable us to have a uniform and absolutely secure note-issue. A uniform note-issue would he a commercial convenience. Eut what is of greater importance, a centralised note-issue backed by the combined banking resources of the country would jnepTre the utmost confidence and have a prestige that would be of great value in emergencies. In addition, a single control of the note-issue is an important factor in the maintenance of sound economic conditions. The centralisation of the cash resources of the commercial banks not only provides a method of control for the central institution, but greatly strengthens the whole banking system. In one pool the combined reserves •will safely support a much greater credit structure than the same aggregate amount held by half a dozen banks. The analogy of a water supply is appropriate. If everybody hi. a town had a few buckets of water and held on to them when a fire started, the whole town would be destroyed. If, however, the whole supply is collected in a central reservoir the outbreak could be dealt with

effectively as 60on as it was discovered. At present each commercial bank has to carry sufficient reserves to meet any possible financial strain, but with the central intitution to fall back on an appreciably smaller cash reserve is needed. Holding the reserves of the other banks is not only economy, but puts into the hands of the central bank the power to make its credit policy effective. Under modern conditions control of the credit structure is the keypote of sound banking. The idea is to obtain deliberate control quite apart from profit-earning or other influences, whereby the credit structure is expanded or contacted in accorddance with the needs of business and in the interests of national economic welfare.

Any monetary action in the direction of raising world prices is to a large extent dependent on international cooperation, and a great deal might be possible given co-operation among the central banks of the world. Incidentally it appears likely that we will shortly see a great forward movement in this direction.' Individually, however, even the largest of such institutions is powerless to prevent a major world-wide depression like the present one; but, internally, expert control can do much to prevent or flatten out violent fluctuations in trade or anything approaching panics. It is generally accepted that cyclical fluctuations in business activity are to some extent associated with credit policy and business psychology, and these can be influenced by central banking operations. The functions of a central bank are thus all designed to promote stability, without which business is unsettled and haphazard and steady progress is impossible.

In addition to these general, but farreaching advantages, the setting up of a central bank in New Zealand will undoubtedly lead to cheaper credit. For instance, a considerable saving will assuredly accrue to the State from a lowering of Treasury bill rates which at present are high in comparison with those ruling in London and Australia. Further, the organising of a bill market by the reserve bank must result in cheaper discount rates for commercial and agricultural bills, and consequently savings for farmers and traders generally.