CENTRAL BANKING

Poverty Bay Herald, Volume LX, Issue 18192, 13 September 1933, Page 4

CENTRAL BANKING

RESERVE BANK SCHEME ;W ;; CRITICISM ANSWERED DUE TO MISUNDERSTANDING

Much of the criticism of the proposal to establish a reserve bank in New Zealand is undoubtedly due to a misunderstanding of the functions of such an institution, but it is hoped that the articles preceding this one will clarify the position and thus disarm criticism of this nature.

Some of the objections that have been raised, however, are more general in character, and it is perhaps advisable to deal with them specifically. For instance, it is said that the setting-up of a central bank means placing the control of our ..currency, under the domination of the Bank of England. This idea is fallacious. The bulk of our trade is with Great Britain and we have large debts, payable in sterling. In addition, we are also linked to Great Britain by strong ties of ancestry and sentiment. As is only too evident at present, the prosperity of the Dominion hinges to a great extent on the course of events in Great Britain, and it is useless to pretend that we can be indifferent to the monetary policy of the Mothercountry or do other than work in close consultation with the British authorities. We do it, however, because it is in our own interests to do so, and not because we are dragooned into it by .pressure from the Bank of England. : That great institution is always ready to give us the benefit of its experience and knowledge, but that does not alter the fact that we are quite free to manage our own affairs as we think best. We lay down by Act of Parliament the basis of our monetary system and appoint a New Zealand board of directors to manage that system in the best interests of the Dominion. If we take care to appoint men of upright and resolute character to the board there is surely no reason to suppose that they would allow the interests of the Dominion to be sacrificed at the bidding of anybody in or out of New Zealand. MONETARY INDEPENDENCE. In fact, our monetary independence is much more likely to be obtained under a sound and well-managed central bank than under the present haphazard arrangement. Consider the present position. All matters pertaining to our currency and credit are at present largely in the hands of tho six trading banks carrying on business in the Dominion. These banks are commercial institutions and as suph are naturally primarily concerned with earning profits for their shareholders. The banks act together in fixing rates for deposits and ..exchange and in other matters conducive to their common welfare, but otherwise there is strong competition between them for business. In such circumstances, they cannot have any defined or conscious policy relating to the volume of money and credit as a whole or take into consideration the effect of their united transactions on the pricelevel of commodities in general. This is particularly the case when only one of the six banks has a New Zealand board of directors and four of the remaining five are predominantly Australian institutions with much larger interests in the Commonwealth than in the Dominion.

Another statement given wide circulation is to- the effect that tt> establish a central bank means 'bringing our people within the ambit of a vast conspiracy alleged to bo operating through central banks for the economic enslavement of the world in general. The whole idea is fantastic, but if there were anything in it we could not hope to avoid our full share of the consequences unless we could make ourselves economically independent of the rest of the world, and that, of course, is impossible. In fact, we are more dependent than most countries on international trade, and our present position is eloquent testimony to the effect on this Dominion of a fall in the overseas prices for primary products whatever may be the cause of such fall. If we do need any defence on the monetary side, should we not organise and properly equip our forces? Well, the way to do this is to co-ordinate and consolidate our banking system under the control of a national institution in the form of a central bank. On broad issues the responsibility for monetary policy rests with and cannot be taken away from Parliament, but any policy decided upon cannot be effectively carried out without the machinery of a central bank. SPECIFIC CRITICISMS, f The chairman of the Bank of New Zealand in his last annual report to shareholders offered certain criticisms, his main points being as follows: — (a) That the bank is being set up at the dictation of London financiers. . 'i , *

(b) That it is not reasonable to require trading banks to hand over to another proprietary bank 7 per cent, of their demand deposits and 3 per cent, of their fixed'deposits. (c) That a restriction of credit would be imposed on the trading banks. (d) 'That the South African Reserve Bank had failed to meet the situation, and had lost a large part of its capital. (e) That the Federal reserve system of America was unable to avert the rot occasioned by the closing of some 5000 banks, neither was it able to prevent America having to go off the gold standard. (f) Quoted British Chancellor of the Exchequer as saying at Ottawa, “This is no time for rash experiments in monetary matters.'’ ’ As to these points, the first is definitely incorrect. The proposal is being undertaken because it is considered to be in the best interests of the Dominion. The idea originated in New Zealand, and a British expert was invited to come here and advise the Government on the matter. It is true, however, that practically every monetary conference since 1920 has recommended the step to all countries that have not already got a central bank. The monetary sub-commission of the recent World Economic Conference unanimously adopted the following resolution: — “The conference considers it to be essentia], in order to provide an international gold standard with the necessary mechanism for satisfactory working, that independent central banks, with the requisite powers and freedom to carry out an appropriate currency and credit policy, should be created in such developed countries as have not at present an adequate central banking institution.'” CREDIT NOT RESTRICTED. On the second point, the description of the reserve bank as “another proprietary bank” is hardly appropriate; and, as to the alleged hardship on trading banks being required to keep minimum deposits with the resorve bank, tho following extract from the report of the Macmillan Committee on finance and industry is fairly conclusive: —

“It is to the interest of every commercial banker that, in the short-run, his reserves should be as small as possible consistently with safety. It is equally to the advantage of each banker that there should be one institution carrying a large reserve available for the use of all in moments of emergency, provided that this institution is willing to utilise its reserve for the common safety when tho emergency does arise. Hence the onereserve system, the foundation of all central-banking practice, arose in this country to meet a practical need and found its organ in tho Bank of England. The immense importance of this system has had to be recognised, in newer areas in which commercial banks preceded the institution of central banking, by the system of compulsory resorve deposits at the central bank. ’ ’

As to the suggestion that the set-ting-up of the reserve bank involved a restriction of credit, thore is no justification whatever for such a statement. With the gold and sterling assets available the trading banks will have no difficulty whatever in meeting all their commitments to the reserve bank for notes and reserves against their present volume of deposits. In fact, the assets handed over when pooled in the hands of the reserve bank will bo sufficient to form the basis for an expansion of credit if such a necessity is desirable. The bank will be required by law to keep a minimum reserve in gold or liquid sterling assets of at least 25 per cent, of its demand liabilities, but when it commences operations the reserve will .probably be treble that percentage. OVERSEAS EXPERIENCE. Concerning the references to the South African Reserve Bank, inquiries addressed to the Government of that country brought tho following reply:— “The ability of the central bank to function as intended was proved when South Africa remained on the gold standard and Great Britain abandoned it, and also when it was decided to link Union currency with sterling. The central bank has performed successfully its primary function of maintaining the country’s currency as by law established. The central bank affords machinery for giving effect to the Government’s currency policy. The central bank was called upon td face losses on sterling balances when Great Britain left the gold standard and South Africa decided to remain on gold. The Government has stood aside from participating in profits of the bank pending the restoration of the bank's position which is now almost complete. The bank is covered under Act of Parliament against losses in maintaining parity between South African pound and sterling in a similar manner to that in which the exchange equalisation account operates in Great Britain.” . As to the position in America, it is well known that the United States ’ Government departed from the gold standard as a deliberate act of Government policy and not from necessity. Furthermore, all the information received shows that while many member

banks of the Federal system failed, by far the largest number were nonmembers. In fact, it is recognised that the fundamental weakness of the American banking system is the existence of a large number of small independent banks outside the Federal resorvo system. Authorities agree that otherwise the Federal reserve system is sound and beneficial, and it is difficult to say what would have happened during the recent crisis if it had not been in existence. Similarly, •when Great Britain was forced off the gold standard, tho Bank of England was not able to prevent it, but a disaster of much greater magnitude would probably have happened if the bank had not been there to control tho situation.

On the last point being referred to the British Chancellor of the Exchequer, he stated that his remarks in question had not reference to tho proposal to establish a reserve bank in Now Zealand, but, as the context shows, were directed to policies of a totally different character. In fact, his remarks were directed at novel and untried monetary systems such as are being urged in this and most other countries to-day. (Concluded.)