CENTRAL BANK.

Pahiatua Herald, Volume XLI, Issue 12453, 20 September 1933, Page 2

CENTRAL BANK.

AND THE MONETARY STANDARD.

The Hon. J. G. Coates says: Many people seem to have the idea that the setting-up of a central bank implies tiie adoption of tlie gold standard as a matter oi monetary policy, or, alternatively, means handing over the whole question of currency and banking to tbe central bank with power to act as it thinks fit. Both of these ideas are mistaken. The central bank is nothing more than a machine nr device for co-ordinating and controlling the banking system m accordance with the monetary policy as laid dofln by Act of Parliament. No matter what monetary system was adopted it could best be given, effect to through the medium of a central institution. In fact, it is being increasingly recognised throughout the civilised world that a central bank is essential whatever " the monetary system of the country. Parliament determines the system to be adopted, but the management of that system should be non-poli-tical.

The essentials of a good monetary system can be briefly stated as a stable unit of value and an efficient method of maintaining that value. Money evolved out of the idea of using some generally acceptable object of value to facilitate the exchange of goods in general, and throughout the ages in different countries many things have served the purpose. The pound originally meant a pound of silver by weight. We ha.ve-'now reached a stage, however. when money is represented for the most part by' nothing more than pieces of paper bank-notes," cheques, bills, etc., and intricate machinery to preserve its value has become necessary. The value of money is, of course, the quantity of goods or services, that can be obtained with it, and from the nature of things it is obvious that the unit of value can never be fixed in tire same hard-and-fast way as the unit of length or weight is fixed. As we know to our cost, values do change considerably. and for the infinite benefit of all mankind it is to be hoped that with the advance of monetary science

better methods of preserving stability of values will be evolved. Bell cerate control by a central bank is a step in that direction. To start with, however, there oust be a definite standard on which the controlling authority can base its operations. It is for Parliament to say what that measuring-rod shall be, but as money is only a tool to facilitate trade, obviously tlie vise thing to do is to look at our particular trading circumstances and choose a basis for pur monetary l;n l~ thar will best suit our purposes. On this point it is interesting to note that the farmers of our present permanent banking legislation, the essential portions of which are contained for the most part in the private Acts governing the several banking institutions, evident! v intended that the complete ~ gold standard should operate in this country. Our trading conditions, however, led m fact to the adoption ol a purely voluntary sterling exchange system. The permanent statutory provisions are for the most, part still suspended by war regulations but -such suspension had no : eaj. effect, as the provisions had always been practically inoperative. juv principal pre-war regulative (provisions provide, in effect: (a ) I nat the notes in circulation snail not exceed the total of the com, bulhon, and public securities held m New Zealand, or more than zZalnJ™ 3 the g ° ld - >-ew V be , debts, engagements, V- liabilities shall not exceed three iSVJ 2 ’- b dd°-- and public securities held m New Zealand +IC a-regnUitive point of view + .K provision says, in effect, Vtdc not e-issue shall not exceed three times the gold reserves. The d' f< dd 1C ? t0 + Government securities V™ + - y „ to ensure ultimate reClemption of the fiduciary part of the issue m the case of a bank fail-

HnT,t e +^ COnc Vf ee J ,on is intended to Jimit the credit structure that might he created by the banks. In Great ill l i-i-i'; c °nrse, the ratio of cash to liabilities is governed not bv nolicV o°r n, + t, bU n b i v the traditional P oi \ , or banks. In Xew Zeaand, it- was arn'irpntl-u intended to provide bv ?aw thlt credit expansion through advances should not exceed three times the amount of coin, bullion, and public securities held by the banks. Thus a high ratio of cash to liabilities was to be maintained. unities It is easily demonstrated that oWob? J’ r , e i‘ W .i 1r * imes the amount of gold held by the banks in New Zealand was not, in fact, the con-f-redd g *2*2! ° f . the volume of red it and the price-level. For the -June quarter of 1914, for instance! iinin no^f* lssue amounted to £1,700,000, whereas coin and bullion held stance I th *° £ . 5 ’?50,000. In this instance the note-issue could legally increased to £16,500,000, pro\ ided the required amount of chase r d m Thi a SeCUrl *it S had been P ur * .V 113 P°, ss,ble maximum isin V- d not ha , v f been advisable Litrt'V as - gold was circulation at that time, and could be defact d t ho/ r, H” the banks - Still, the amounted maximum note-issue aT L d c l ° ° V t r half the deposits (at that time about £29,000,000) is exnan!iou dlCati ° n that furtber credit expansion was not prevented by Jack of cash resources Further a study of th© published banking ’figih!t °d^nbc-r riod ? f y , ears wiU .show e and advances have varied without any apparent relarn^ Shlp to not€ Bin circulation or "cash resources, and, in fact, in a manner that would be quite inexplicable m a self-contained banking: system. The explanation, of course, is that our banking system is not selfeonfained in that the banks normally hold a large amount of funds in London. In Tact, these London balances are the real regulative factor and the key to our whole banking system.

Tn New Zealand there is no bul--1 ' on market, no bill-market, or short-loan market, and generally no money-market in the full sense of the term. The all-important work

of our banks is financing our external trade, which per head is one of the highest, if not the highest, in the world. Furthermore, a very large part of our trade is with Great Britain, wherein is situated the premier international money-market of the world. Under these circumstances. supported by the ties oi Empire and the fact that this country has been borrowing steadily in Great Britain practically ever since these islands were brought under the British flag, the dominating portion of our banking business has centred m London.

The deposits and advances which constitute the credit system of this Dominion are thus governed predominantly by the rose and fall in the aforesaid London balances, but up to the end of 1930, at least, the system was rendered definite and complete on a voluntary basis by the uniform traditional exchange policy adopted by the banks. This traditional exchange policy consisted of maintaining steady, even rates of exchange, unaffected 'by any but very exceptional trade disturbances. -ni instance.. the rates of exchange ior telegraphic transfers New Zealand on London stood at 17s 6d per cent, for at least ten years prior to 1914 despite marked variation in the trade balance between 1907 and Ihll. This exchange policy was the real regulative factor in controlling the volume of credit, and through credit the issue of currency in New Zealand. The result was to keep the i\ew Zealand pound at approximate parity with sterling. ~A s is now well known throughout -Ins Dominion, a decline m British pnees results in a lessened yield in sterling for our exports. This means so much less added to the London balances of the banks, and correspondingly so much less added to the deposits m New Zealand With less credit available in New Zealand, there is Jess scope for the purchase of imports, and less spent ‘ on imports, which means less drain on the London balances. When British prices rise the effects are in the reverse direction. Wide swings in prices bring booms and slumps alternately, and while international co-operation between Governments and central banks may do much to prevent such undesirable features it has to be recognised that this Dominion has no option but to accept the prices ruling in the British markets. In fact, the London balances must obviouslv increase or decrease by the amount of the balance ol international payments, but this of course, does not prevent us from taking any necessary appropriate action to tms end to cushion the shock and spread the loss involved m a heavy fall in sterling prices. All these facts definitely prove that the New’ Zealand banking sys- ! tern is operating on a sterling ex- ; change standard. Credit is not* con- i trolled through the currencv, but, : on the contrary, the volume of the i currency is controlled through ere- j cut, which in turn is controlled through the operation of the ex- 1 changes with London. Further, the banking habit is well developed in ! this country, and notes and coin j are definitely subsidiary, being re- ’ qin red for little beyond payment of wages and tdl-money in the retail trade.