MONEY AND BANKING

Poverty Bay Herald, Volume LXIII, Issue 19135, 2 October 1936, Page 9

MONEY AND BANKING

I NEW ZEALAND'S COURSE INTERLOCKED INTERESTS STATE TRADING RISKS A penetrating analysis of the effects of the New Zealand Labour Government's economic and financial programme in relation to tho Dominion s export, trade and the banks is contained in the final August number of the Economist, which devotes a considerable amount of attention to the subject,. Pointing out that the Government, after nearly a year in power, had completed the "first stages of its programme, mo Economist gives an accurate summary of the enlarged powers the Government has taken under the Reserve Rank Amendment Act. and the Primary Products Marketing Act. Tho price of butter fixed under the latter measure it regards as in. reasonable relationship to the current London prices (then 122 s per cwt.), adding that it is apparently realised that New Zealand by no means possesses a monopoly in the British market. Prom that the article proceeds to comment, upon the statement,, of Sir George Elliot, chairman of the Rank of New Zealand, at its last, annual meeting, upon tho effects of the transfer ot the financing of New Zealand's export trade iit dairy produce from the trading banks to the Reserve Bank.

•'Sir George Elliot hinted," the Economist states, "that the loss of this business might render unprofitable certain of the bank's branches, whose existence, was dependent on the bank's dairy connections. Though Sir George naturally does not say so, such a development might impel* the Government, either directly or through the Reserve Hank, to open its own branches. This might involve the Reserve Bank in the dual and incompatible business of central and commercial banking. FOREIGN EXCHANGE CONTROL "The future of the New Zealand foreign exchange market is also affected by the Government's new powers," the article, continues. "The Reserve Bank is to exercise general control over foreign exchange operations. Within welt-defined limits, sueli a function is not opposed to modern central banking practice. The Primary Products Marketing Act, however, suggests wider possibilities. While the trading banks will still have to meet the foreign exchange requirements of their customers, it, would appear thft the supplies of foreign exchange emanating from New Zealand's exports will [ tend to become concentrated in the hands of the Reserve Bank. The trading banks will no longer be able to replenish their London funds through their own daily business and that of the customers. Instead they will need to apply to the Reserve Bank for sterling and other foreign exchange, according to their needs. Such a denouement may still be some way off, but it is easy to see why the trading banks should already feel a certain uneasiness.

"Another possibility, of a more general character, is that, to the extent that tho Government becomes the sole shipper, it may be tempted to sell in bulk and even to conclude special agreements with tho Governments, of importing countries. Such action might well enhance the modern tendency toward bilateral trade, which has flourished in proportion to the growth of world economic nationalism. INTERCEPTION OF PROFITS

"Finally, if the world market price 1 moves one way, the Government will ; make a profit, while under less favour- ! able circumstances it may incur a loss on its marketing operations. There is nothing morally wrong in this, but the Government may find itself blamed either for intercepting profits which should reach the primary producer, or alternately for throwing any loss incurred on to the. general taxpayer, which it will be alleged is tantamount to giving a. subsidy to the primary producer. These are the political risks which await a Government which engages in trade, and their existence should be recognised in advance.

"borne of these dangers may be remote. But the New Zealand Government is certainly navigating uncharted waters, and it should at least be willing to consider the possible consequences of its decision. To say this is not necessarily to condemn the Government's policy, root and branch, in advance. There is a case to be argued for closer Governmental control over national credit and exchange, and another for giving the New Zealand farmer an assured market for his produce. But there are dangers in combining central and commercial banking under one roof. "French experience has shown how this can lead to serious monetary confusion. Anil is it entirely just to the trading banks to deprive them of part of what has hitherto been remunerative business and to expect them, nevertheless, still to provide complete banking facilities to customers at little, or no direct cost?' All things considered, the New Zealand Government might be well advised to temper natural zeal, at the outset, with circumspection, and, throughout to avoid any crippling restriction of the scope of the existing machinery oT commerce and finance."