CENTRAL BANKING

Poverty Bay Herald, Volume LX, Issue 18191, 12 September 1933, Page 7

CENTRAL BANKING

THE BILL EXPLAINED PROJECT NOT EXPENSIVE GRADUAL CHANGE-OVER IV. It has been suggested that New Zealand's too small to have a central bank, but people who say this do not realise the true purpose and functions of such an institution. One might just as well say that a throttle and brakes are necessary in a large motor-bus, but are superfluous in a small car. The banking habit is as highly developed in New Zealand as in many much larger countries, and there is the same need for regulation and control. A collapse of New Zealand currency might not shake the world- to anything like the same extent as a collapse of sterling or of the dollar, but it would, nevertheless, be disastrous to our people. It might be pointed out that we have managed reasonably well without a central bank up till now, but to say that is to deny all progress. Our forefathers got along, reasonably well with, very primitive forms of barter, but now the credit system ,of the - commercial banks has become practically indispensable. The central bank merely represents another stage in the evolution of monetary science, and in due course it will probably become just as indispensable as the trading banks are to-day. Apart' from the important negative aspects of safeguarding the currency, there are distinct possibilities of positive benefits to be derived not only from internal co-opera-tion, but also from Empire and international co-operation in monetary mattery As explained in previous articles, the control of credit plays such an important part in the welfare of the Dominion that unbiased control on a national basis, is essential, in addition to which substantial savings from cheaper credit will accrue to the State, the farmer, and the commercial community generally. In short, there are many advantages to he obtained from setting up a central bank and 110 disadvantages.

PROVISIONS OF THE BILL The Reserve Bank of New Zealand Bill provides for the setting-up of a central bank as a national institution to co-ordinate and control our banking system oa‘ a" sterling-exchange ' basis, which is the basis on which the trading banks are at present operating. Thus no fundamental change of system is involved. Furthermore, in practice the dealings of the reserve bank when established will be confined to the trading banks and the Government. Thus the banking and exchange business of firms or individuals will not be affected in any way.

From the nature of its business it is evident that the reserve bank will require Only one small office in Wellington with a staff probably not exceeding 20 in number. Thus, although its functions are very important and its powers and benefits far-reaching, the bank will not be expensive. , It is proposed to incorporate the bank by statute and provide that it cannot be wound up except pursuant to an Act of Parliament. The bank will have a capital of £500,000 to he subscribed by the public, .while £1,000.000, to be subscribed by the State, will be paid into the reserve fund. The State’s quota goes into the reserve fund in order to keep the bank entirely free from the possibility of political influence in the management. This is considered to be essential by all authorities.

HOLDING OF CAPITAL. The bank is intended to be a national institution, and private capital and shareholders are brought into the scheme to obtain stability and provide a non-political franchise for the election of directors. If the' shareholding is spread far and wide through every section of the community the bank will have its roots in every branch of our economic activity and representatives of every section of society will have a personal interest in the bank. though the interest will be more of a public nature than private. The shareholders. however, will be in unite a different position to the shareholders of a trading bank or other private company. The operations of the bank are restricted and safeguarded by statute in all directions, and to ensure that the private interests of the shareholders shall always be definitely subordinated to the public wcllare the dividend on the shares will be limited by law to a per cent, cumulative, and all surplus prolits over and above this, normally the bulk of the bank's earning.'- 1 , will go to the tate. Only shareholders who are British subjects ordinarily resident in New Zealand will be entitled to vote at meetings of shareholders, so there will be no possibility of a controlling interest being acquired by people of other countries. To guard against any person or group in New Zealand securing a. controlling interest it is provided in the proposed legislation that no shareholder can have more than 500 votes, representing £2500 of capital, and cannot hold a proxy for more than 500 votes. The initial allotment of shares will be in the hands of the Minister of Finance, and later the board of the bank will have power to refuse transfers without giving any reason for doing so. A list of shareholders must he submitted to the Treasury annually. ELECTION OF DIRECTORS. As to the directorate, the proposal is that the bank shall be managed by a board consisting of a governor, a deputy governor, and five directors, of whom two at least shall be persons who are or have been actively engaged in primary industry and two who are or have been engaged in industrial or commercial pursuits. Not more than one member of the board can be a director of any other bank. No person shall hold olfiee as a member ol’ the board who —

(1) Is not a British subject by birth; (2) Is or becomes a member of Parliament or a public servant; (3) Is employed in the service of any other bank.

The first governor and deputy governor, who must be persons of actual banking experience, are to be appointed by the Governor-General in Council for a term of seven years, and thereafter shall lie appointed by the shareholders, subject to the approval of the Governor-General in Council. The governor, of course, is the managing director. The other board members in the first instance are also to be appointed by the GovernorGeneral in Council, to retire in rotation at the end of one, two, three, lour, and five years respectively, the order of retirement to he determined by ballot. 1 As to the method of appointment thereafter three courses are open: (a) Straight-out election by the shareholders, (b) election by the shareholders subject to approval by the Governor-General in Council, and (c) election of some directors by the shareholders' together with appointment of others by the GovernorGeneral in Council. NOTE-ISSUE BIGHT On a day to be appointed by proclamation, but six mouths' notice to be given, the reserve bank will be given the right of note-issue, ami the trading banks will hand over their gold reserves in exchange for reserve bank notes and use these notes to retire their own notes. The change-over will take place gradually as the trading banks’ notes come in. The reserve bank notes will be legal tender in exactly the same manner as the present note-issue. Eventually, however, to ensure the stability of value and formally establish the .sterling exchange standard, the bank will be required by law to convert its notes on demand into sterling and vice versa accept sterling for notes within definite exchange limits corresponding to the cost of shifting gold. 'Flic effect will be exactly the same as a gold standard bank being required to give notes for gold and gold for notes at a fixed price. We will get the benefits without the heavy cost of keeping our own gold reserve. This provision lias been put in the bill to indicate the basis on which the bank is to operate, but it is not to com® info force until a date to be fixed by the Governor-!leueral in Council, and thero is no intention of tying our currency down until such time as the present crisis is over and steps have been taken to definitely stabilise sterling on some basis or other.

At present sterling is off gold and floating free under the control of the Bank of England, and in view of what is happening at present in the United States of America and the uncertainty as to the reactions in Great Britain it is impossible to foresee the ultimate position of the pound sterling. While this continues it would be unwise to consider stabilising our currency by Lying it down to any definite ratio to sterling. Such a position, of course, is purely temporary and is by no means free of risk, but it is the only practicable course we can adopt in the meantime. IRADfN'O BANKS’ DEPOSITS The bank will immediately assume responsibility for the management of our exchanges, but until such time as the definite link with sterling is established by the Government there will be no limitation of the rates of exchange that may be fixed. If the clause concerning the convertibility of the notes is not to come into force perhaps for years, it may be wondered why it. is in the bill at all. hut a. currency system -must have some basis, even if it is a suspended one, in order to determine the mode of doing business and the form in which reserves are to by kept. On the day the bank acquires the sole right of note-issue it will be entitled to commence business. As from a day to he appointed within 12 months thereafter the trading hanks will lie required to maintain halanes with the reserve, hank at. least equal to 7 per cent, of their demand liabilities and 3 per cent, of their time liabilities. Such balances will not he lost to the trading banks, but will figure in their balance-sheets as balances at reserve hank. The balances will he paid over in the form of gold or sterling, hut, if necessary, to ease the introduction of the reserve hank, provision has also been made for part of the payments being made in Goverui incut secuiities. In turn, a statutory

duty will l>e cast upon the reserve bank to maintain a minimum reserve of not less than 25 per cent, of its notes and other demand liabilities. This reserve will consist mostly of liquid assets held iu London, for, as the system is to he based on sterling, the reserve bank will be relatively powerless until it acquires a substantial balance in Loudon.

The other important function of the reserve bank is the taking-over of the Government accounts. The bill provides lor this being accomplished within a period of 12 months, with a possible extension to 18 months, after the bank is entitled to commence business. The Government accounts are usually kept at the central bank wherever there is one, partly for the reason that it is a national institution and partly because the Government's financial operations are so large that without a complete inside knowledge of them control ot credit and currency would be difficult. GENERAL BUSINESS As already indicated, the reserve bank will not open accounts or do general banking business with the public. To do so would not only be unfair to the trading banks, but would seriously weaken the power of the reserve mink to carry out its proper functions. The whole idea is that the bank’s funds shall he held in reserve in a liquid form ready to be brought into action whenever required to meet an emergency, to act as a stabilsing force, or to enforce its banking policy at tile time. Obviously the reserve bank could not give much assistance to the trading banks when their assets are frozen if its own assets were in much the same condition.

As lead to the trading banks and the market generally the reserve bank will be required to make public the rates at which it will discount bills, etc. The bank will also facilitate the business of the trading banks by organising a clearing-house for the clearance ot cheques between banks. To ensure that the bank is always in a position to perform its important functions, the classes of business it may and may not undertake and the securities in which it- may invest will be definitely prescribed by statute. It will be prohibited from buying or making advances on the security of real property, making unsecured advances, or allowing interest on deposits. The lastmentioned provision is to obviate the possibility of the hank being in any way forced tci seek profitable investment of its funds, and thereby tying them up in undesirable ways. ‘ A definite limit will be placed upon the extent of the assistance that may be granted to the Treasury or other Departments of State. As to investments, provision will he made to permit the investment ot capital and general reserves in longterm Government securities,, but otherwise the bank will be largely restricted to first-class commercial paper and Treasury Bills of limited currency. To meet the special needs of the primary industries, however, up fo 40 per cent, of the commercial paper may be agricultural' hills with a currency up to six months. Liquid securities will doubtless he purchased by the bank as investments. but its chief business on the commercial side will be rediscounting paper to facilitate the operations of the commercial banks. Above all things, however, liquidity must be the guiding principle of the reserve bank.