CENTRAL RESERVE BANK

Otago Daily Times, Issue 22058, 14 September 1933, Page 10

CENTRAL RESERVE BANK

SHARP CRITICISM EVOKED A DANGEROUS EXPERIMENT LONDON DICTATION SUGGESTED (Pss United Pbess Association.) WELLINGTON, September 13. On the publication of the concluding Motion of Mr Coates’s Central Bank statement, comments were issued to the Evening Poet by Mr R. W. Gibbs (chairman of the Bank of New Zealand). Mr Gibbs said he considered that the Minister had carefully avoided any useful criticism, and had failed utterly to give any satisfactory reasons for setting up a Central Bank in New Zealand or the advantages to be derived therefrom, “unlees, indeed, the maze of volubility which his official essayists prepared for him to launch on the public is thought to do so. Certainly we are told that a uniform note issue would be a commercial convenience. . In what way? The trading public is quite satisfied to get hold of the well-backed notes of the trading banks, and would show no greater preference for notes of the proposed new proprietary institution. The main thing in these days is to get hold of the notes. " The Minister denies the dictation of London financiers. Suppose we substitute the word pressure. He, perhaps, may not be so ready to deny that. It is possible that this was couched in diplomatic language akin to our voluntary conversion. He may have been asked kindly to introduce the legislation voluntarily, but if you don’t ! But my experience of London finance language is that it is invariably strictly honest, straightforward, direct, and unequivocal. “The Minister denies that there should bq any restriction on credit due to the requirements of a central bank —another proof of how little he knows about the question and how deplorably incapable he too often is of seeing the obvious. The events connected with the South African Reserve Bank are recent history, as also are those relating to the American Federal system, and my remarks thereon were statements of well-known fact. • The proposed dangerous interference with the banking structure in New Zealand at the present time, I still maintain, warrants my repeating the .Chancellor of the Exchequer’s remark that this is no time for rash experiments in monetary matters.” Speaking at the annual meeting of the Bank of New Zealand on June 23 last, Mr Gibbs advanced a number of reasons why the establishment of a Central Reserve Bank was not only considered unnecessary, but was regarded by himself and his colleagues as an unjustifiable financial experiment. “•As was anticipated, he said, a Bill was introduced into Parliament for the establishment of a Central Reserve Bank in New Zealand. It passed its first reading, but was not further proceeded with, which, in the present state of the Dominion’s finances, was a wise course to follow. As, however, the Bill may again be heard of, a short reference to it may not be amiss. • , , . “ In the first plaoe, has the desirability, the necessity, or even the advantages of the establishment of such an institution for New Zealand ever been demonstrated? Has not the action proposed been at the dictation of London financiers who have little or no knowledge of the Dominion’s special needs? Is it reasonable to require the trading banks to hand over to another proprietary bank 7 per cent, of their demand deposits and 3 per cent, of their fixed deposits, to he at the disposal of a board of directors, the majority of whom would have no banking training nor be likely to possess any special financial experience? It is true the governor and deputy-governor who would constitute the executive of the bank would be appointed by the Gov-ernor-in-Council and possibly in consultation with the Bank of England, but would this ensure the selection of men thoroughly conversant with New Zealand s financial requirements? , „ . .. ~ “It must be assumed that the upvernmnt has fully considered the question of the loss of note tax revenue—no inconsiderable item in the face of a difficult Budget—also the restricted accommodation the reserve institution would be able under the Bill, to afford it, as compared with the liberal assistance it has hitherto received from the commercial banks in times of stress. Further, can the restriction of credit which would he imposed on the trading hanks have been taken into serious consideration at a time when the country requires all possible assistance obtainable? ' . , , “ in our opinion, Mr Gibbs concluded, “this is no time for financial experiments which elsewhere, notably in South Africa and America, have signally failed in their objective. Both in Canada and New Zealand the present hanking system gives infinitely more elasticity, both as regards currency and credit, than is obtainable through most of the present-day central banks. As the British Chancellor of the Exchequer said at Ottawa: This is no time for rash experiments in monetary matters.” GENERAL MANAGER’S VIEW BANK’S ASSISTANCE TO STATE UNWISDOM OF INTERFERENCE. (Per United Press Association.) ■ t "WELLINGTON, September 13. Interviewed with reference to the statement made by the Minister of Finance (Mr J. G. Coates) on the subject of a Reserve Bank for New Zealand, Sir Henry Buckleton, general manager of the Bank of New Zealand, expressing a personal opinion, said he could not agree that Mr Coates’s statement would enable the public of New Zealand fully to understand the effect of the Bill. For instance, Mr Coates did not say how the revenue of the country would be affected if the Bill should be passed. A detailed statement of the losses and gains to revenue likely to result from the passing of the Bill should be made public. •‘Mr Coates has not alluded to the heavy commitments made by the bonks to finance the Government,” proceeded Sir Henry. “ In justice to the banks he should do so. The Minister complains of the rate of discount charged on Treasury bills, but he does not say that by a special and unusual arrangement for the rebating of the bills the Government obtains a substantial reduction of the rate; nor does he say that the banks are willing to reduce the rate provided the banks are put on the same footing for income tax as other joint stock companies. “ It is also important to bear in mind the proprietary interest, of the State in the Bank of New Zealand. Of the bank s paid up capital of £6,328,125, the State owns one-third, viz., £2,109,375. Since it became a shareholder the State has received dividends from the bank aggregating £3,515,878, equal to 10| per cent, per annum. Based on the latest dividend and valuing the gilt-edged security on a 4 per cent, basis, the market value of the State’s interest in the bank may be set down at £4,687,475, representing a goodwill of no less than £2,578,100. It is obvious from these figures that anything which might detrimentally affect the Bank of New Zealand is an important factor which should he taken into consideration when enacting legislation affecting the existing banking system. The Government appoints four of the six directors of the bank, thus ensuring that the policy of the bank is what its board believes to be in the best interests of the country.” The Bill provided that the Reserve Bank should be exempt from taxation, continued Sir Henry. There was only one reserve bank in the British Empire on the lines proposed for New Zealand, namely, the Reserve Bank ' of South Airica. Owing to Britain going off the gold standard in September, 1931, the South African institution lost in a short period nearly £1,500,000, though it was true that much of that loss had since been made good (at the expense of South Africa) by working on a very wide margin between buying and selling rates of telegraphic transfers on London. The reserve bank system was instituted in the United States in 1914, 12 such banks being established. Those banks failed to regulate credit, to control interest or exchange rates, to check the wildest speculation, or to prevent the United States from going off the gold standard. Further, last year

the whole of the banks in the United States suspended payment for 10 days, and some thousands of them had gone into liquidation. In Australia, the Commonwealth Bank, a purely State institution, acted in some respects as a reserve bank, but it could not be said that the monetary conditions there had been as stable as in New Zealand. It allowed the State Savings Bank of New South Wales, an institution with over £55,000,000 oc deposits spread over nearly 1,000,000 depositors, to suspend payment. Many ol the depositors suffered much loss through having to sell their deposits, and many more suffered great inconvenience, until, some months after the suspension, the Commonwealth Bank took over the Savings Bank. “ Monetary conditions the world over are so unsettled and the outlook is so obscure,” Sir Henry continued, “that to interfere with a banking system that has served and is still serving the country so well would be most unwise. Sir Oto Niemeyer has stated that the establishment of a Reserve Bank in New Zealand would provide an instrument for co-opera-tion with the central banks of other countries and that at present there is no suitable point of contact with New Zealand. What need is there for New Zealand to be in contact with the centra! banks of other countries save England? The London authorities found no difficulty in establishing contact with the New Zealand banks when in November, 1931, the Government was informed that as a condition of renewing £4,000,000 of Treasury bills then about to mature it must compel—not ask, but compel—the banks in New Zealand to find in London £1,000,000 per month during the following 12 months to meet the Government’s requirements there. This the banks agreed to do because the credit of the country was at stake. “If the dictatorial attitude of the London authorities in 1931 is an example of what New Zealand may expect from contact with the central banks of other countries,” concluded Sir Henry, “ the less the Dominion has to do with the latter the better. The banks have made extremely heavy commitments to finance the Government’s requirements and the question of Government finance and the ability of a Reserve Bank to finance the Government to as great or a greater extent than the_ Associated Banks are matters of major importance.”