RESERVE BANK

Southland Times, Issue 25306, 8 June 1935, Page 6

RESERVE BANK

FIRST YEAR’S REPORT ACTIVITIES REVIEWED BY GOVERNOR DIVIDEND OF 5 PER CENT. (Per United Press Association.) Wellington, June 7. At the first ordinary general meeting of the Reserve Bank, held to-day, on the motion of the Governor, Mr Leslie Lefeaux, seconded by Mr L. O. H. Tripp, the report and accounts were adopted unanimously. A dividend of 5 per cent, was declared on the paid-up capital for the financial year ended March 31, Mr J. G. Duncan, one of the State directors, seconding Mr Lefeaux’s motion. Mr Lefeaux moved and Mr M. C. Barnett seconded and it was carried that fees amounting in the aggregate to £4OOO and allowances amounting to £666 3/1 be authorized for the directors for the past year and also for the current year. The two auditors were voted 200 guineas each for the past financial year and were reappointed. In submitting the board’s report Mr Lefeaux said he regarded it as highly desirable in the Dominion’s interests that now the bank was in being, all traces of any atmosphere of controversy that might have surrounded its establishment should be completely eradicated, and that one and all should determine to do their utmost to make it a complete success. He reviewed events since the Reserve Bank Act. Referring to the alleged risk of confusion in the two colours of 10/- and £5O notes, he said the question had been carefully considered and the board was satisfied that the supposed risk was being greatly exaggerated in certain quarters. It Was not proposed to take any further steps in the matter until such time as a completely new series of notes was put into circulation. When that action was taken, it was hoped to have the higher denomination note larger in size than those used for ordinary everyday purposes, He. also stated it was the wish and intention of the bank that notes should be maintained in a satisfactory condition and within reasonable limits notes in circulation should be regulated by the general public. ‘ Notes that become unfit for further use should be paid by banking customers to their accounts in any branch. He said the reason for not providing notes of more denominations were twofold. It was practically impossible to arrange for more than three small denominations in the limited time available before the date fixed for the commencement of business. Also, it was relatively expensive to provide numerous denominations of notes in small quantities. However, if there was clear evidence of a widespread need for other denominations, steps would be taken in due course to provide them. Rate of Exchange. The rates announced by the bank had remained unchanged without any noticeable pressure in either direction, and he thought that the fact might be regarded as an indication that in the circumstances the approximate correct level was selected. During the same period there had not been any important alterations in the basic rates of exchange on London and in the other dominions or any of Ne.w Zealand’s principal competitors in the export of primary produce. Thus one of the conditions regarded by many competent observers as a prerequisite of economic recovery, namely, currency stability, had in a measure been fulfilled, and he thought the improvement which had so far taken place in certain directions had been facilitated thereby. It was extremely hazardous in these unsettled days of opinion, but there was not at present any clear indication of an early change in conditions such as to justify upsetting the degree of stability thus attained, and in the absence of any such change, the bank’s aim would be to maintain its rates on London at the existing levels. In acting as the bank both of the Government and trading banks, the Reserve Bank was now exercising one of its principal functions, and the board wishes to render them the most effective service possible so that one and all might realize the advantage of a central bank. He wished to make it clear that they did not wish in any way to interfere with the legitimate business of trading banks or enter into competition with them. Their functions were complementary. He paid a tribute to the manner in which the trading banks had served the Dominion hitherto. That the central bank could serve a useful purpose in New Zealand he had no doubt, and he thought it could fairly be claimed that even in its year of existence the bank had not been altogether unfruitful. Smallness of Surplus. i Mr Lefeaux said he did not think the profit and loss account called for much comment beyond perhaps an explanation of what some might possibly regard as the smallness of the surplus. In the first place, the Reserve Bank did not commence business until August I, 1934, although certain expenditure was incurred as far back as the beginning of that year and inevitablj’ various preliminary expenses of a nonrecurring nature fell within the first year. On the other hand, the rates obtainable in London on short term investments fell to an abnormally low level, British Treasury Bills at one time being issued at a discount rate of only 3/10 per cent? per annum, and as one of the primary duties of the Central Bank is to maintain its assets in a liquid position, the sharp fall in short term rates naturally had a very important effect upon our income. Moreover, the Central Bank must always resist the temptation to engage in any transactions solely with the object of making profits, if such transactions are not deemed to be in the public interest, in fact it might even be necessary in certain circumstances to incur a loss on some transactions in attempting to exercise control over the credit situation. “I do not wish to infer that the profit aspect of all operations should be completely ignored, but rather that such considerations must always be subordinated to the financial needs of the country as a whole.” Mr Lefaux said he thought it advisable to utter a warning against either over-estimating or underestimating what the Central Bank could do. “That one can serve a useful purpose in a country such as New Zealand I have no doubt, and I think it can fairly be claimed that even in the first year of its existence, the Reserve Bank has not been altogether unfruitful in assisting in straightening out the financial position of the Dominion and in creating a more settled fueling. “I mention the repayment of the Government’s Treasury Bills with a consequent large saving to the State interest as one benefit which has resulted, but it is well to realize there is a definite limit to what can be achieved by monetary action alone. For example, to take an extreme illustration, if all the markets in the world were suddenly closed to our principal exports, no amount of monetary manipulation would save the country from disaster. Apart from the benefits derived from invisible exports, such as tourist traffic, real prosperity can be assured only by producing commodities of a kind which can be sold profitably in the world’s markets at competitive prices, in addition to those which can be consumed domestically. Therefore, our

aim must be to do whatever is possible in the monetary sphere to facilitate and promote development along such economic lines. Non-Political Attitude. “Then I think it must be clearly understood that the Reserve Bank should always maintain an entirely non-political attitude. The board accepts the view that the ultimate responsibility for the monetary policy of the Dominion -must rest with the Government of the day, but holds that it is the duty of the bank to tender to the Government impartial advice on monetary and financial matters and to exercise its own judgment in carrying out those functions entrusted to it. The objective of the Reserve Bank is the promotion and maintenance of the economic welfare of the Dominion as a whole and not merely sectional interests of any one particular class or group.” Mr Lefeaux continued: I have heard it asserted that the Reserve Bank is under some form of domination by the Bank of New Zealand , acting on behalf of some mythical and malign international power. I can assure you that there is not even a shadow of truth in that assertion. The Bank of England acts as London agents for the Reserve Bank and we deem it a privilege to enjoy that relationship, but they would never dream of attempting in any way to interfere in the affairs of the Reserve Bank, and even if they were so ill-advised as to do so, I am sure you could confidently rely upon the board maintaining its independence. It may be, however, that on certain occasions the special interests of New Zealand and the welfare of the British Empire as a whole will best be served by co-operation between the various central banks of the Empire. In such event, the Reserve Bank would wish to co-operate wholeheartedly with the Bank of England and other central banks which have been established in the Empire. Holdings of Shares. A shareholder asked how many shareholders at present held more than 200 shares. In replying, Mr Lefeaux said he did not think the board was called upon to disclose any particulars regarding the holdings of shares. It was not that the board had any sinister motive, but the register was not open to the public and he did not think it would be in the interests of the shareholders as a whole for the information to be given. He thought he could go so far as to say, however, that the number of persons holding more than 200 shares was quite small, in fact he thought it could be taken that the number was probably not more than about two dozen. Beyond that he did not think the board was called upon to give particulars of the actual holdings. Another shareholder asked whether it would not be possible to explain the item , “contingencies” more fully, and also whether it would not be possible to give some indication of the bank’s future policy regarding discounts and advances. He also asked how the valuation of securities was arrived at. Mr Lefeaux said he was afraid he must once again fall back on the contention that the balance-sheet had been definitely drawn up in its present form because the board considered that in the public interest that was the best form in which to show it. The board had the benefit of precedent as far as that went. He thought it would be found upon examination of the balancesheet of any other central bank that neither “contingencies” nor the manner of valuation of securities was in any way disclosed, and the reason for that was that it was felt it was not desirable in the public interest to do so. Regarding discounts, and advances, Mr Lefeaux said he thought it was hardly t n occasion for announcing the board’s policy in such matter. As regards discounts the position was fixed by the Statute. As regards advances, the board was enabled by the Statute to make limited advances to the’ Government or to any public bodies in the ordinary course. The Reserve Bank would not compete with the other banks in making advances to ordinary private customers, nor would it open accounts for them unless some very good reason was shown. The Reserve Bank had power to do that, but it wanted to leave the field quite clear to the other banks in that respect, so long as they were providing reasonable facilities.