CENTRAL RESERVE BANK

Poverty Bay Herald, Volume LIX, Issue 17953, 3 December 1932, Page 12

CENTRAL RESERVE BANK

AUSTRALIA’S EXAMPLE APPROVAL BY TRADING BANKS The remarks made by Mr. Thos. Buckkind, chairman of the Bank of New South Wales, at the annual meeting in Sydney this week are particularly interesting in view of the proposal to establish a central bank in New Zealand. '

' Considerable progress,” said Mr. Buckland, “has been made of late toward building up in Australia an efficient system, of central reserve banking. With the active co-operation of the trading! banks, the Commonwealth Bank of Australia has made considerable progress towards providing Australia, with this recognised method of credit-regula-tion through a central bank. “A central reserve bank acts as the community’s lender of last resort, adapting the national credit and currency tothe nation’s needs. The bank, acting as ultimate custodian of the nation’s credit, must take its own decisions as a brink, and in reviewing the recent steps in the evolution of such a bank in Australia I of necessity pay tribute to the courage displayed' during a critical period of our financial development by the chairman of the board and the • governor of the Commonwealth Bank. In these days of too much timidity it is indeed a,pleasure to do so. Sonic things still remain to he achieved before Australia can claim, to have a fully operating central reserve banking system, but the steps already: taken in this country-, considered in conjunction with the progress of British practice in the management of sterling, have already opened the way to a stable money that will provide the whole community, as far as banking practice, can do so, with tlie means to A .steadier advance in prosperity > and. will obviate in some measure; the ups and downs so conspicuous in the.-past, i “As it- fully develops, into a; central bank of reserve, tbe Commonwealth Bank will become the centre of the Australian financial and banking structure, and its responsibilities become ever greater. In a world of decreasing '.nternational trade,- central bank action must in each national economy, become the dominant and fruitful principle of monetary regulation.

GOVERNMENT FINANCE “The direct responsibility for government finance, which rightly belongs to the central reserve bank, is no longer required to be undertaken by the trading banks. The Commonwealth Bank negotiates with- the Loan Council, the Premiers’ Conferences, and the Commonwealth and State. Governments. The trading) brinks, of. course, have a vital interest in all such negotiations, and In Australia it is usual for the Central Bank to consult with the trading banks before taking ariy important or decisive step on questions'of government finance. The interests of a central reserve batik and of the trading hanks are closely bound up together, and it- Would seem that the trading brinks, by reason of their close ooririectioh with the everyday life of every srictioii of the community, are well plriced to report the actual conditions of affairs .from t-iwife to time, and to iiiform the mincl of a Central Bank operating in its special sphere. “Their accounts With the Cortifttdnwealth Brink are used by the trading banks for the clearing of cheques, etc., and the consequent settlements to bo made among themselves. The credit balances with the Commonwealth Bank are the banks’ cash. This banking procedure was recognised by the Commonwealth Bank Act of 1924, and made it the more feasible for the trading banks to hand over their gold holdings to the Commonwealth Bank y.t the close of 1929. The value-of the gold handed over was credited to deposit accounts with that hank, and it was provided by law that the credit balances of such accounts were available to the trading banks as cash;

TREASURY BILLS “The discounting! of Treasury Bills provides a very necessary and yet sound expansion of central bank credit ;in a period of depression and of falling prices, when it is particularly badly needed It creates new cgdh which tends to check the fall in prices, and thereby to mitigate the increasing burden of indebtedness, and to prevent the full effect of the depression from being shown in the contraction of business turnovers and of employment. Incidentally, the discounting of Treasury Bills provides a useful source of strengtl to tiie financial structure by utilising banking resources. “The development of the Treasury Bill is the first step toward creating in Australia a short-term money market without which it is difficult foi' a central banking system to operate efficiently This desirable development will be carried a step further when the governments reduce the rates of stamp duty on hills, and proniissOi'.V notes, thus opening the wav to u. greater pise- of these negotiable.-documents in financing private trade and industry, and in providing a supply, of first-class trade bills In he bought and sold m the money market in addition to ’treasury Bills.

“The tunctidii ’<!>' a central reserve bank most recently taken over bv the Commonwealth Bank from the trading banks is that of fiuimtgilff the exchange rate, The external trade of a .primary producing country is generally marked by a pronounced ebb and flow, the result of seasonable influences. A large excess of exports comes with the harvest season, but is. followed hv a. tendency lo an excess rtf imports in the remainder of the year. The exchange rate' in such a country, it allowed to vary blindly with supply and demand from 1 day to day, would be subject to very wide variations throughout each year, 1 Moving to one extreme during the exporting season, and to the other extreme elite _ the exports had been got away. It is in the interests of all that such great changes should be avoided. By managing the exchange rate in the general interest

rather than manipulating it in , their own, the trading banks have, iu $0 past, prevented such marked movements. The responsibility has now .•passed to the Commonwealth Bank with the increasing centralisation of the London reserves through which this management was effected.

“An exchange rate cannot be managed successfully year in, year out, unless those responsible for “making the rate” are prepared at all times to buy and sell all the exchange offering. Tnis calls for the maintenance of large funds both' at home and abroad. For Austral|j| this presents special difficulties owning to the effects of the great changes in climate upon our exports. The centfal reserve bank has therefore not only .to maintain such funds in. the external centre—London in the case of Australia and New Zealand —as are necessary to meet with ease any and all demands that may be made upon it to finance- the yearly cycle of external financial add trading operations. It must also provide in the event of need what may' fee called a drought reserve. This drought reserve is required to avoid a shortage of Australian exchange funds abroad,-if one or more bad seasons in Australia Cutdown appreciably the volume of ptM exports. It is therefore of pafajhotrpf importance to the welfare Of- Australia that the policy of building up a large exchange fund in Bondoii should be pursued in times of bounteous harvests. PRICES AND COSTS' “In addition to this immediate aim in the management- of exchange, the C'efitral bank, following the recent practice of the Bank of England, will, no dOrtfefe administer this part of its lesporisibili-, ties with the object of restoring ; and maintaining the equilibrium between prides and costs in Australia. . Drily?® % such means can industry ancl production be carried on at a profit.- It 'ifpy he found that this £ssGftf-ial objeetiyFiS best achieved by the central bank varying the rates of exchange as the relation between the internal and external pricelevel changes..: By this method Of management 1 the' rates of exchange would more or Jess constantly represent the disparity betdreen the purchasing (lower of Australian and foreign currencies. It is necessary that the exchange rate should roughly be equal to the difference between the value of Australian and other currencies in order that marked movements in overseas prices may be prevented from disturbing the equilibrium between Australian prices and costs. In other words, by , exchange management on the lines suggested the profit margin in. production generally in Australia can be restored , and maintained. This, of course, would, mean much greater activity for .all classes of businesses with a marked diminution of niiefiipldymenlt, a. greater purchasing power throughout the community, and a steady and prorioUheM improvement in government revefiue.’ “OPEN MAfiKET fOMOf ”, “As the Australian mon6y niafkdt develops and public; opifiicM becblfies educated to the functions proper to k centfal reserve bank, we may expect the : Commonwealth Bank to quote discount- rate for Teasury Bills and'ni*st-, class commercial paper. Such a rate when combined with an open market policy should be effective in cotitfoHifif the rate of interest. Jly ‘an ogM -market policy* I mean {head operations by which a central bank provides Midi; tioiial cash fitods iii thd fhdriey Market by the purchase of Gov'efriflifMt stoiiii-. ties from the market,, or reduces the amount of cash available in the Market by the sale of securities W the market* The c6iitf.ll batik thereby takes' gMffto inefense the Cash funds availafile when it desires to' make credit cofiditidfis easier and so to set up influences tend-, ing to khvef fates of ifitefest idf sliOfttefm money. iviteti it desires to restrict the fends itvilabli to the market Of to force lip the rate .of interest, a fifMer to*: diScoiiht ffttC policy is pppiCfliCtitffd Jitf, withdrawing cash, i.e«j by seHifig stiSatities in the market. , - “This feViev*. t>f, the developnvtot of central reserve banking ill Australia will establish; 1 hope,” said Mr. BttefcWttd; “both the degree of progress already achieved, and the power inherent «t this method of publicly contrdllihg the tv hole banking system. Here rather than through political schemes of eredituatioiiftfisatibh is to be found a happy recoimiiiiition of vigorous private iUijjiative with disinterested public control.