CENTRAL BANKING

Poverty Bay Herald, Volume LXIII, Issue 18087, 7 August 1936, Page 10

CENTRAL BANKING

CURRENCY GUARDIAN ■ «c. HYTTEN’S VIEWS NOTE ISSUE CONTROL Professor T. Hytten, economic adviser to'ihe Bank of New; South Wales, in his evidence before the Royal Commission on Mjihetary and Banking Systems vosteiday,‘;£aitf that S' central bank should first aimj foremost be the guardian of the currency of the - country. That meant ccrtttWjh.fjf' the' note issue, and oi the system. Jts iftinaamehtal objective, he added, shTotttd\ltJ6‘Td‘achieve the maximum emplijyttkrit of men and natural resources, consistent with long-term stability. ■TjVithess said the best method of eoinbatjfig depression was to ininimise infiatfohit f° r t° sGnie ' extent inflation contaideil jtjtf/Seed of -reaction. In the endeavhiirAo temper trade cycles, it should not be forgotten that it was only a means of.: maintaining r v t ho full employment of the faettits of pioduction. Stability at. a higli level* not, at a low level of activity, wai desirable. ■ ■ Nevertheless, complete stability was neither desirable mor attainable in a living organism- ilk would mean stagnation to edohomic life arid the elimination of prioress. Instability was inherent in progress. ALfrinririltriity would always

have to choose, to some extent, between ] safe sterility and the risks attached to I advancement. In the past a spurt ahead iiad usually coincided with abnormal enterprise and business inflation, and had later been Followed by intensified depression. Professor Hytten said there were definite limits to the efficacy of central bank control. Large fluctuations were caused by such lion-monetary factors as weather and seasonal conditions, particularly in Australia. Australia was vitally dependent on overseas markets, which were quite beyond her control. The hanks were only part of the monetary system. GOVERNMENT’S OBLIGATIONS ; When depression occurred, witness pro- j l eeeded. despite all efforts to avoid de- ! llatiou, active steps were necessary to , remedy the situation. Governments could assist by undertaking public; works, t and by deliberately seeking Budget dej fieits. Taxation should be reduced, and all salaries and expenditure maintained. , The cost should be borne by an addi- . tional issue of Treasury bills. As trade , revived, the public works should be slowly curtailed and taxation increased, . until, finally, at the peak of prosperity, . Budget surpluses were achieved com- . mensurate with the preceding deficits. Once a monetary policy had been deI cicled upon, the greatest difficulty was to L obtain the necessary co-ordination be* f tween the authorities. Unless close Co1, ! operation between the* Commonwealth Bank, the trading banks, the savings banks, the Loan Council, and Govern--3 merits was secured, they might easily off- . set the effect of one another’s actions, ini ducinst dislocation and wasted effort. A f central bank should be able to vary inII terest rates directly. The Coiimions; wealth Bank has complete powers to

j hasten changes. It could buy and sell I Government securities, inducting Treasury bills, in the open market, and could a ho vary interest rates by direct action, using both its trading advance and deposit rates, and the deposit rate of the. commonwealth Savings Bank. It also bad power to vary the exchange rate. CENTRAL BANK’S POWERS “These powers,” added witness, “together wiln full power over the note issue, should ue adequate for the control of currently and credit m Australia. 11 tile Central Bank uses its persuasive) powers, which should generally he adequate to meet anything nut extraordinary situations, there should be no need to use force. ! “The Commonwealth Bank, as at present constituted, should he able to achieve the desired objective with slight alterations in structure. More power should he given to the management ot ; the bank as distinct from the directorate; ; the offices of governor and chairman should he united. The present division of responsibility seems to be a source of ; executive weakness. Tile board of direr- . tors would bo strengthened by less restriction in their appointment. Rather, than representatives of industry and commerce, they should be men with knowledge of finance and widely representative of the people rather than of interests. Further, care should lie exercised not to select a board consisting cm-. lirely of rentiers, whose outlook is likely to prove detrimental to progress, i Eiually, as a Central Rank needs to he exceptionally well informed, wise deei- 1 sions only being possible on the basis of sound knowledge, the Commonwealth Rank should be provided with a very etlicient intelligence service of a much J wider scope than it possesses at present.” !

. ; Replying to Professor Mills, witness ■said Unit there should, be greater cooperation between the Governments and ilnc trading banks generally. He sug- { gested thill- something might he done to j give the Loan Council a greater voice Milan it possessed at present in general j monetary policy. ! UNEMPLOYMENT ! “General indications are that we are i now approaching a delicate stage at : which a misstep may lead us into fur- , titer difficulties,” proceeded witness, j “Unemployment is an important index, • which cannot be disregarded. There are almost insuperable difficulties in curing it by monetary action, but it can probably be bettered. To put a complete stop to recovery now would, therefore, be highly undesirable. But I do think that there has been some justification for the slowing down of the rate of recovery. If we are to progress at all, we must take risks. But it is not necessary to expose our- : selves to such major risks as are involved in going headlong into another boom. “My feeling is that I lie brakes are now • on so liard that wo may come to a stop ahead of time. With the precautions ; already taken there seems to he no reason to fear a boom.” Witness said that a serious contraction of bank credit im'iier present conditions might cheek recovery, reduce imports too severely, and increase unemployment. If ; the contraction was brought about quickly the health of /.heir whole economy would be jeopardised. The ideal policy for Governments was to spend heavily 1 during a depression when private enterprise was slack, and gradually to curtail expt nditure as private enterprise revived. In prucii that was extremely difficult ) for democratic Governments to carry out.- ! Political pressr.ro forced them to spend