RESERVE BANK

Otago Daily Times, Issue 22326, 28 July 1934, Page 14

RESERVE BANK

QUESTION OF STATE CONTROL A LABOUR AMENDMENT “STUDY CIRCLE” UNDER FIRE (From Odb Parliamentary Reporter.) WELLINGTON, July 27. Caustic comment on the somersault turned by members of the Coalition “ Study Circle ” on the issue of State control of the Reserve Bank was expressed in the House of Representatives early this morning during the passage of the Finance Bill. This clause will give the Government control of the bank,” said the Leader of the Opposition (Mr M. J. Savage) speaking to an amendment which he had promoted to ensure that the governor and deputy-governor of the bank should always he appointed by the Government without action being taken on the reconn mendation of the board of directors. If the governor and deputy-governor were Government nominees the State would have five votes to four. Mr Savage recalled that several Coalition members last session had pressed the Minister of Finance (Mr Coates) to make an amendment, and said that all he asked "as that members should be consistent. Mr Hargest said it was quite right that some members had made a request on the lines indicated by Mr Savage, but that had not been carried out by the Minister. While some of those membeis might be of the same opinion still the fact must be appreciated that the bank had been set up and the Act had been operating for nearly a year. The machinery was there and if experience showed that a change were necessary that could bo effected. “That kind of reasoning is too specious altogether,” said Mr Fraser; The question is whether the, bank is to be carried on now by the Government or by the shareholders. No side-stepping will get over that.* It is not a question of waiting for seven years for the position to arise. If the governor or his deputy were to die or had to give up their jobs for some reason or other their successors would be appointed in a different way.” Recalling the incident of last session, Mr Fraser said he could see no reason why the Upper House could not have inserted the amendment promised by Mr Coates unless it was reluctant to do so. The “ Study Circle had discussed the question and Mr Fraser asked why its members had now changed their minds. A frank confession of their sins and a plea for forgiveness would have been understandable, but to try to make the House believe that the situation had altered wds too much for members to swallow. Mr Fraser said he wondered what attitude was being taken by Mr Hargest’s colleague, Mr Lye, who was reported to be breaking his way into the Cabinet. He thought it would have to be admitted that the “Study Circle” had led to confusion instead of enlightenment. Mr Poison said he would support the amendment. In the light of recent events he was more strongly of the opinion than ever that the bank should be controlled by the State. “I am amazed at Mr Hargest,” said Mr Stallworthy. “As one of the ‘ Study Circle ’ he held up the House last year in a sham fight. If circumstances have •changed as Mr Hargest says, they have changed in the direction of making .t more imperative than ever that the bank should be State controlled.” The contention was advanced by Mi Langstone that if Mr Coates had failed in an attempt to put the matter rignl in the Legislative Council last year the 'Minister would surely accept the amendment now put forward unless he were “ jockeying ” with the position. The Chairman of Committees (Mr Smith) : Order! . Mr Langstone: I will say he is not sincere.

The chairman; That is worse. Mr Langs tone: Then I will say it was make believe. , , Speaking again, Mr Hargest asked if the matter was so important now why the Labour Party did not support him last year. The Labour members had taken no interest whatever in the .matter. (Labour cries of dissent.) Mr Fraser had said at the time that it was a private quarrel and that be was willing to arbitrate. Mr Hargest said he was an innocent member, but he recognised that the Labour Party was endeavouring to set a trap for young members. If there was any reason why he should vote against the amendment it was necause Mr Stallworthy was supporting it. “ Some young members have been w.PI spanked since last session,” said Mi Armstrong. Mr Mason: There is a Cabinet vacancy in sight. _ Mr Armstrong; The Labour Party this year, last year, and all the time is against private shareholders in the bank at all. They have been allowed in to let private interests control a State institution. Mr Fraser said that Mr Hargest would have been well advised to have swallowed his principles and said no more about the matter. The Labour Party had enjoyed the comedy of last session because the incident had had all the appearance of a sham fight seething insincerity. “These gallant men. he said, “ were masquerading as modern Dick Turpins, presenting toy pistols at the heads of the Coalition, and they ended like the nursery rhyme highwayMr Lye: You were remarkably quiet. Mr Armstrong: Hear the budding Minister! , ... Mr Fraser: They are all budding Ministers. but there is someone in the Government who makes it his habit to nip the buds. They knew last year that if they had forced the issue the Labour Party would have helped them to defeat the Government. Reference was made by Mr stallworthy to Mr Hargest’s remark that me reason why he would vote against the amendment was because Mr Stallworthy would be in the other lobby. “ I apojo; gise to the member for Invercargill, said Mr Stallworthy. “I thought he was a gentleman.” The chairman: That is not in order. Mr Stallworthy: Very well, I will withdraw it. , , . , , ... The amendment was defeated by a votes to 28.

EFFECTS OF THE LEGISLATION » ■ ■ "- PROFESSOR TOCKER’S EXPLANATION SAFEGUARD AGAINST EXCHANGE FLUCTUATIONS. (Special to Daily Times.) CHRISTCHURCH, July 27. Some of the effects of the Reserve Bank legislation on the workings of Government finance arid on the operations of the trading banks were described to-day by Professor Tocker, Professor of Economics at Canterbury College, in an interview. The professor said that the arrangements announced by Mr Coates made it appear probable that the exchange rate would remain at its piesent level for a long time to come. “ When the exchange rate -ns raised in January, 1933,” said Professor Tocker, “ the commercial banks in New Zealand feared that by discouraging im-

ports tlie higher rate would lead to an accumulation of funds in London. There was a danger that the banks might lose heavily by buying sterling funds at the exchange rate fixed (about £125) and having to sell them subsequently at some lower rate. In order to remove the fear of loss on this account it was necessai'y for the Government to undertake the liability of meeting any such loss should it occur. Actually, the arrangement entered into under the Banks Indemnity Act was that the Government should buy from the banks at about £125 all the surplus sterling funds accruing after the date on which the exchange rate was raised.

“Mr Coates now states that the amount of sterling accumulated is £23,000,000. At the rate of exchange now ruling this is roughly equivalent to £28,500,000 in New Zealand. Under the Reserve Bank Act a statutory obligation is laid on the Reserve Bank to buy and sell exchange. Hitherto, the Government bad not been able to sell this accumulated exchange. It was obliged under its agreement to buy these funds from the banks and in order to do so it had to raise the necessary money by means of Treasury bills in New Zealand. “ Now, the Reserve Bank is being established and one of its first tasks will be to take over the London funds from the Government. In effect, the Government will deposit £23,000,000 with the Reserve Bank (or its agent) in London. The Reserve Bank will thereupon credit the Government with the New Zealand equivalent of that amount, rougnly, £28,500,000 in New Zealand. The Government will have a deposit at the Reserve Bank of this amount and need merely draw a cheque or series of cheques on this deposit and pay of! the Treasury bills in New Zealand. The banks and other institutions which have lent money to the Government on Treasury bids will then have, instead of Treasury bills earning up to 5 per cent., deposits at the Reserve Bank earning nothing. If they wish to draw on the deposits they may have cither Reserve Bank notes in New Zealand or they may buy sterling funds at the ruling rate. It would appear probable that the commercial banks will use the funds at the Reserve Bank, first to provide the deposits which the Reserve Bank Act obliges them to hold at that bank, and secondly to secure any Reserve Bank notes needed in excess of what they buy when they surrender their gold holdings. “ But the transfer of the London funds to the Reserve Bank and the repayment of the Treasury bills in Nnv Zealand will definitely close the account and release the Government from any liability of loss under the Banks In demnity Act. So far, the Government has lost nothing under the arrangement by which it accumulated these funds in London except the difference between the interest earned by the London funds and the interest paid on the Treasury bills floated in New Zealand to buy those funds. So long as the rate of exchange remains at the present level the Government can lose nothing on these funds. “ But a new liability has been undertaken, one that is common in arrangements made between Governments and reserve banks. A similar agreement exists in England, where the Government has an arrangement with the Bank of England to take any profit and to meet any loss on the Exchange Equal isation Fund,

“The funds transferred to the Reserve Bank in London may be regarded as the Dominion’s exchange reserve. They are likely to increase or decrease in future as the balance of payments is favourable or unfavourable; but the amo mt held is large in relation to the total resources of the Reserve Bank. A further rise in the exchange rates would mean an increase in the New Zealand value of sterling, which the Government and not the Reserve Bank would get. Conversely, a fall in the exchange rate would mean a reduction in the New Zealand value of sterling assets and a lost, which the Government and not the Reserve Bank would meet.

“ It is obvious that the Reserve Bank should be safeguarded against any prospect of heavy profits or losses on account of future exchange fluctuations. The arrangement made gives this safeguard and just as the British Government takes any profit or loss on its Exchange Equalisation Fund —profits or losses which will accrue in future only if the exchange rate is varied —so the New Zealand Government will take any profit or loss on the New Zealand value of the sterling assets of the Reserve Bank. The New Zealand value of a given amount of sterling assets can change only if the exchange rate is altered. The arrangement made thus appears to strengthen the probability that the exchange rate will remain at its present level for a long time to come.’*