FINANCE BILL

Otago Daily Times, Issue 22325, 27 July 1934, Page 10

FINANCE BILL

SECOND READING DEBATE THE EXCHANGE POLICY "A BREACH OF FAITH” (Peb United Press Association.) WELLINGTON, July 20. Urgency for the passage of the iBill was granted in the House of Representatives this evening. Most of the, clauses of the Bill deal with the Reserve Bank, and, as the bank begins operations on Wednesday next it is necessary that the legislation should pass both Houses before that date. The speeches on the second reading were practically confined to the Government’s exchange policy, which the Opposition members criticised as a breacn of faith with the country, and as a harmful form of currency inflation. The Minister of Finance (Mr J. G. Coates) moved the second reading of his Bill, and explained its full intent. THE MINISTER’S STATEMENT. Mr Coates said that most of the provisions relating to the operation of the Reserve Bank were technical or machinery" in character, and were designed to remove anomalies which were found to exist with all new projects. It was almeet inevitable that the necessity would arise to amend the original enactment from time to time. Under the Bill the Banks Indemnity Exchange Act was repealed a s from August 1, when the Keserve Bank commenced operations apu assumed the responsibility for maintaining the exchange rate, and accordingly the liability of the Government to the trading banks automatically , lapsed. Furthermore, the trading banks would be able to buy and sell exchange from and to the Reserve Bank, so there would be no occasion for the Government to do any more business of that nature with the trading banks. The Reserve Bank would handle the whole exchange, allowing for the sterling used for the normal requirements of the Government. The surplus sterling purchased under the Banks Indemnity (Exchange) Act amounted approximately to £23,000,000. It was proposed to hand this amount to the Reserve Bank under the section of the Reserve Bank of New Zealand Act, under which the bank undertook to buy sterling at rates fixed by itself. Inis amount was in no sense to be a burden to the bank. On the. contrary it would be a decided acquisition, for without a substantial amount'of sterling the funds of the bank would be relatively powerless. and in the ordinary course it would have taken it a considerable time to accumulate funds by buying in the market. The Reserve Bank would pay the Government for the sterling funds taken over at the current rate of exchange. This would be used to pay off the Treasury bills owing to the trading banks which would then possess credits at the Reserve Bank. These credits could be drawn against, and Reserve Bank notes obtained if the banks so desired. Thus the whole position under the Banks Indemnity Act would be liquidated, and the suspense account extinguished. GUARANTEES AGAINST LOSS. Referring to the provision which guarantees the bank against loss in the event of exchange dropping and ensures the Government's receipt of any profits arising out of appreciation, the Minister said that legislation on those lines would have been necessary, quite apart from the handing over of the funds accumulated under the Banks Indemnity Act. New Zealand currency was based on sterling, and no legal rate had yet been fixed. When that had been done by statute the duty of maintaining that value would be imposed on the Reserve Bank. In such circumstances no guarantee of the bank s position would be needed, as the credit structure would be controlled by the Reserve Bank to keep the exchange rate within certain limits on either side of fixed par. Where a permanent exchange rate was not fixed by statute, as was the position in the Dominion, there was a definite onus on the State to protect the Central Bank from loss. This was particularly so in a case like New Zealand’s, where the Reserve Bank was practically compelled by law to keep a large proportion of its assets in sterling. Furthermore, it was a fundamental principle that the decisions of the Reserve Bank, made in the general interests of the Dominion, should not be influenced by the effect on its bwn financial position. It was primarily for this reason that the Reserve Bank Act provided for only a limited dividend to the shareholders, and for the oalance of the profits to go to the State. Mr Coates said the profits or losses on the exchange affected the Consolidated Fund only until the definite relationship between the currency of the Dominion and sterling was fixed by statute —that was, it was not a permanent provision. In the meantime the Reserve Bank fixed the exchange rate at 125 for a long period. There seemed little prospect of any loss being borne by the Consolidated Fund. Until the exchange rate was fixed by statute without a guarantee the Reserve Bank’s decisions on the rate could not possibly be unbiased with the relevant clause in operation. However, 'the bank could take neither profit nor loss from the exchange movements for any loss was to be made good by the Consolidated Fund, and any profit wag to go to it. • The board of directors already fixed the exchange rate at a level which it considered to be in the best interests of the country. This provision would continue in operation until such time as the definite relationship between the currency of the Dominion and sterling- had been fixed by statute. The wording of the clause under review, the Minister continued, referred to the appreciation or the depreciation in the

assets in the Reserve Bank, bub it would be understood that the only assets that could be affected by changes in the rate were those which were held abroad. Obviously, the changes in the exchange could not affect the value of the assets held in New Zealand. The object of drafting in this language was for simplicity. The bank would keep its accounts entirely in New Zealand currency, and its sterling assets in the books would be increased by the ruling rate of exchange. Thus any alteration in the rate would increase or decrease the value of these assets, and this change in the value of foreign assets was what the clause covered. MORTGAGE INTEREST.

Insofar as mortgage interest was concerned, Mr Coates said it was pointed out that by 1937 the currency of most mortgages affected by the legislation would have expired. The market rate for mortgages was now down to a per cent, basis for good security, which was J per cent, lower than the .minimum rate fixed by the National Expenditure Adjustment Act. Thus the continuation of the Act would not impose any hardship or restrictions in regard to the renewal of mortgages that fell due. At the same time, it was desirable to obviate the possibility of hardship being inflicted by allowing the restoration of mortgage rates as high as 6$ and’ 7 per cent, in respect of those mortgages coming under the legislation which were still current. The general tendency in the interest rates was now definitely downward, and when the Reserve Bank commenced operations the movement was likely to be accelerated to the benefit of the Dominion. At the same time, to allow the Reserve Bank sufficient time to obtain firm control of the situation, it was considered advisable for the control by legislation to be continued. Accordingly, power to fix the maximum rates for building societies, investment societies, and trading companies was to be extended until March 31, 1937. If necessary or advisable, however, the regulations made under the Act could be repealed earlier. STABILISING THE EXCHANGE.

The Bill repealed section 25 of the Finance Act, 1932, which empowered local bodies to retain in New Zealand sinking funds which otherwise would have been used to redeem loans maturing in England. This section was passed at a time when the exchange rate had risen to 10 per cent., and was largely based on the assumption that it would be only a temporary phase. In view of later developments, however, and the present position and outlook for the exchange rate, it was not considered that the practice of holding back moneys that should be remitted to England should be allowed to continue. In other words, the intention was to stablise the exchange position, and local bodies, in common with the public generally, must carry out business at the current rate in a normal manner. It was not in the interest of New- Zealand, and it was unsound financially, to postpone (he remittance of moneys indefinitely. The last clause required that any local body which had sold an asset to devote the proceeds of such sale to liquidate the debt incurred in_ creating the asset or otherwise for capital purposes. It would be quite unsound to allow a local body to use capital moneys in relief rates. The clause merely remedied a weakness in the present law. THE OPPOSITION’S PROTEST.

The Leader of the Opposition (Mr M. J. Savage) registered a protest against the methods adopted. He said a measure of that kind needed some careful explana tioon, which it had not received. It was impossible for any member to follow what the Minister had said. A private bank w-as to be guaranteed for all time by the State, according to the provision for the liability to be borne by the Consolidated Fund. The Treasury Bill aspect was also important. The Government had got into a muddle in London, and now those bills were to be met by Reserve Bank bills. The Minister should have used the credit of New Zealand for the farmers of New Zealand. Why was the State not used in the first place instead of raising the exchange rate and fattening those who already were fat? After having spent millions which had landed the country in a blind alleyway in London, the Government was now coming to what it should have done at first. Labour had said previously that the exchange waa not increasing the money in the country by one penny piece, but w-as only shifting it from one pocket to another. If the Government* increased the exchange to 130 or 230 it would not increase the volume of money in the country. The House was asked to place the Consolidated Fund behind the Reserve Bank without knowing what the accumulations in London were.

Mr Savage added that the Govermneut had accumulated £23,000,000 in London, and had to issue Treasury bills to use. It was now going to redeem them by the use of Reserve Bank Bills. The issue of Treasury bills and their redemption b> an issue in New Zealand did not dispose of the accumulations in London. He was concerned about the banking transaction because public credit was asked for under cover of that Bill to get them out of that blind alleyway. Mr F. Langstone (Waimarmo) said the Government had to pay £28,750,000 to get that £23,000,000 in London, and it had to pay 5 per cent, to the banks on that £28,750,000. The Government had to give the banks £5,500,000. He thought that currency should be entirely separated from sterling and he attacked the Government for bringing down such an important alteration as part of the Finance Bill when it should be an amendment to the Reserve Bank Act. ~ , _ , , . Mr R. A. Wright (Wellington Suburbs) said that Mr Coates had carefully prepared his explanation, but he did not tell members what they wanted to know. They were still left in doubt as to what the exchange had cost the country up to the end of last year. The Minister said he did not know. So far as he (MrWnght) could make out it was nearly £4,500,000, and nearly another £1,000,000 in interest payments in London. Where was the money to come from? Would the Reserve Bank issue notes to make it good or would the Government raise a loan? It the Minister took the country into ms confidence he would straighten out his own position. Was the Government preparing the way for permanent currency depreciation? The trouble in New Zealand to-day was lack of confidence. Mr W. Nash (Hutt) said the fact that the Reserve Bank was paying the Government so many notes in New Zealand to take over a certain sum of credit in London did not in any way alter the tact that £23,000,000 in sterling was lying in London. He thought each country should have a Reserve Bank, but it should be entirely removed from private interests. The Gdvernment had not saved the working farmers by its policy. The only advantage was that some farmers received money from the people of New Zealand to pay some of their debts. The fanner was entitled to help, and Mr Nash thought the farmer would realise that the townsman must also be helped to the same extent. Mr F. Lye (Waikato) said that the British importers carried the burden o the additional exchange. Currency depreciation was in progress m «veiy country of consequence in the woild today. The advantage of the Reserve Bank was that the Government could get finance through the bank and auy profit after interest on the £SOO 000 inscribed capita! had been paid would go to the Consolidated Fund. The cost of public finance would be mere administrative cost. Mr Lye said there had been no loss on exchange and there could be no lo»s while the rate was maintained. VIEWS OF OTHER SPEAKERS. Mr H T. Armstrong (Christchurch East) said the raising of the exchange lowered the standard of living of the people without giving the benefit to the XW&rlb, (Edo,) uM Minister if local bodies were aware ot the provision in the Bill regarding the »inkhU fund and if any opposition had been expressed by them. It was serious matter to many local bodies and placed an extra burden on the ratepayers. Seal* bodies should have been J.yen an opportunity to express then opinion if thev desired to do so. THE MINISTER’S REPLY. Replying to the debate Mr Coates said the Leader of the Opposition was misguided when he said that private banking institutions Were to be guaranteed for airtime bv the State. The guarantee to the comjnercial banks ceased with the Bill before the House and the guarantee to the Reserve Bank covered only the period in which the exchange rate remained as at present. If New Zealand s currency were permanently devalued there would be no guarantee that the assets referred to were external assets in sterling held in London—there was no reference to internal assets. When Mi Savage asked why the Government had not issued currency instead of raising the rate of exchange he was evident.y aa-

vocating calling on iho printing press. That was direct and definite inflation. Mr Savage: What is the Minister doing himself? Mr Nash; You are inflating our currency. Mr Coates: It is devaluation—that is true, but is it inflation? Mr Nash: You propose to Issue £29,000,000 in notes. Mr Coates: But the assets are there. That is altogether different from calling on the printing press. Once that process was started it could never be held. Mr A. M. Samuel (Thames): Will the Minister admit that his policy is controlled inflation? Mr Coates: I have yet to learn that it is inflation. The issue is tied to sterling assets. Mr Coates said the Government intended fo issue £29,000,000 worth of notes, but they were tied to sterling, which was in another country. That, ho said, was not inflation. Replying to Mr Wright, Mr Coates said that New Zealand’s finances were quite sound. New Zealand 1940 bonds were giving a return ot £2 19s. He had never defended the rate of interest paid on Treasury bills, but the trading banks had demanded that i-ate. The rales were higher than were paid in other countries. The Government did try to have the rate reduced. He claimed that the farmers had benefited from the exchange. He admitted that if local bodies had large external debts the position was hard on them. The Bill was read a second time.