STABLE FINANCE

Otago Witness, Issue 4026, 12 May 1931, Page 29

STABLE FINANCE

CENTRAL BANK PROPOSAL SIR 0. NIEMEYER’S REPORT. When the International Financial/Conference met in Brussels in 1920 one of the resolutions passed was that “ in countries where there is no central bank of issue one should be established.” In the last 10 years the advice of the Brussels conference has been widely followed, new central banks have been formed, and many existing banks have been drastically overhauled. The reorganisation of the Reichsbank was an integral part of the. Dawes scheme; the countries that previously formed part of the Austrian and Russian schemes as well as certain of the Balkan States have established new central banks. Similar steps have been taken in some of the South American States, and in South Africa, while the creation of a reserve bank in India has also been proposed. In other countries, such as Belgium and Norway, though the previous structure remains, important changes have been introduced. In Australia the Commonwealth Bank combines in certain respects the role of a central bank and a commercial bank, and this arrangement is not considered altogether satisfactory. Thus the recommendation by Sir Otto Niemeyer, of the Bank of England, who recently investigated the banking, currency, and exchange problems of New Zealand, and whose report has arrived from England, that the Dominion should establish a central bank will come as no surprise to those who have followed the trend of banking and currency in other countries during the post-war period. His proposal to recast the whole fabric of New Zealand banking simply means that he considers that this country should step into line with a world-wide movement. The lack of a central bank is exceptional in highly developed commercial and industrial countries. DANGERS OF DECENTRALISATION. The banking system in New Zealand at present, like that of Canada and that of the United States before 1907, is decentralised, and (says the Evening Post) as has been pointed out by Kisch and Elkin in their book “ Central Banks,” there are serious drawbacks to this system, as it involves a divided responsibility and a lack of leadership. Whether there is a gold standard or whether there is not, the control of the credit and monetary system involves the solution of many problems of policy and detailed administration. But if there are many issuing authorities, there cannot be one controlling force to direct the monetary policy of the country, and this is bound to be a source of weakness, especially at a time of serious crisis, when a well-devised and coherent plan of action is essential.

One would not say that our position is analogous to that of the United States during the economic crisis of 1907, but there is no harm in illustrating the position there at that timej because the New Zealand system to-day has many points of similarity. There was in the United States at that time a large number of national banks, each with the right of note issue, but their interests were predominantly local, and there was little co-operation between them (New’ Zealand, of course, has an association of its banks). The leadership that alone could have dealt effectively with the problems of that crisis were lacking, and one aspect of this lack of leadership was seen in ’the handling of the gold reserves. There was at that time more gold in the United States than in any other country in the world, but each bank clung jealously to its owm holdings. The gold was consequently ineffective since it was scattered, and could not be brought to bear at the points at w’hich it was most needed. The concentration of reserves and the control of the money market, imperative for the mitigation and avoidance of a financial crisis, demand a central or reserve banking organisation. Such an organisation standing behind the commercial banks is able, by use of the reserves held against the contingency of a crisis, to bring support to any threatened point and to avert the lose of confidence, the continuance of which is necessary for the stability of any credit system. This was a conclusion that the United States authorities drew from the experience of 1907, and the Federal Reserve system was devised in order to prevent the repetition of such a catastrophe. In adopting this system America simply followed the banking technique of England, where the Bank of England had long been the central bank of Great Britain. DUTIES AND FUNCTIONS. In view of the fact that England has led the world in banking technique, and that Sir Otto Niemeyer, who is now recommending a change of system for New Zealand, is connected with the Bank of England, it is interesting to note the-13 propositions laid down by Sir Ernest Harvey, comptroller of the Bank of England, concerning the functions and duties of central banks. These are: — 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 bank should be entrusted with the entire banking business of its own country. 4. A' central bank should be the banker of the trying 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 banking 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 of earning profits. . 12. A central bank should not engage in trade, or 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. AUSTRALIAN INFLUENCE. So far, Sir Otto Niemeyer’s report has not been considered by the Government, but it would appear that one of the first junctions of the bank will be to stabilise the exchange rate between England and New Zealand. As pointed out by Professor Murphy in his “Outlines of Economics, four of the six banks operating in isew Zealand are branches of Australian banks, and “ the fact that so much ot our banking business is done in Australian banks makes the Dominion somewhat sensitive to financial difficulties arising in Australia.” This difficulty could be got over by the establishment of a gold exchange standard, and it may be taken for granted that this will be the next step after the establishment of the bank.