RESERVE BANK

Taranaki Daily News, 31 July 1931, Page 6

RESERVE BANK

PROPOSAL FOR DOMINION

effect on note issue

THE STERLING EXCHANGE

USE FOR DORMANT GOLD

SIR O. NIEMEYER’S VIEWS

By Telegraph.—Preaa Association. Wellington, Last Night. The Minister of Finance has disclosed in the Financial Statement the principal features in the report of Sir Otto Niemeyer, the eminent banking authors ity who visited the Dominion some months ago. Arising out of the economic depression and° the fairly general dissatisfaction at the present unprecedented rates of exchange on London, the question of bankina- and currency is at present receiving 0 a good deal of attention throughout the Dominion . (Mr. Forbes states), and I have received many—and in some cases distinctly novel suggestions for remedying matters. In fact, many seem to think that the quickest way out of our present troubles lies in the direction of a reform of our bankina and currency legislation; but I am afraid no change in our banking system could possibly compensate us for the shrinkage in the value of our exports in the overseas markets or overcome the fact that the relative wei"ht of fixed charges for interest and debt-repayments has been proportionately increased by the fall in world price levels. A change m monetary policy at the other end of the world, and more especially co-operation between the principal central banks of the world, may, however, materially benefit us m these matters. At the same time, our difficulties are beiii" accentuated by rates of exchange bcin° at present up to 10 per cent., and it is within our power to do somethin" to hasten a return to more normal “rates and make such provisions as will greatly minimise the chances, if not entirely obviate the possibility, of a recurrence of such abnormally lugh rates of exchange. There is no doubt that the high rates of exchange and especially the uncertainty as to future movements in the rates, are a considerable factor in the business stagnation that prevails. REPEAL OF WAR REGULATIONS. Apart from such questions, however, I consider it is time steps were taken to repeal the war regulations, still governiiia- banking and currency in the Dominio'n, and place thig vital factor in our economic life upon a permanent and secure basis. As it appeared that a return to the pre-war basis was not alto"ether practicable, or even desirable, the Government took the opportunity of the visit of Sir Otto Niemeyer of the Bank of England, to this end of the world to seek his advice on the matter. This gentleman, who is a banker of international repute, was able to visit New Zealand and investigate our problems on the spot. Following his return to London, he has forwarded to me a report and certain definite recommendations. The main recommendations are summarised in the report as fol(1) That permanent legislation should be passed making the New Zealand note inconvertible in New Zealand but convertible into sterling at rates fixed within certain limits. (2) That an independent Reserve Bank should- be set up charged with responsibility for the stability of New Zealand currency, invested with tne prjvile"e of note issue, and charged with holding the Government account and the banking reserves of New ZeaU11 (3) That the note issue should be unified and concentrated in the Reserve Bank, the note issuing powers of existing banks being abrogated. 71) That the trading banks should be required to transfer to the Reserve Bank the gold they now hold in New Zealand in exchange either for Reserve Bank notes, with which they can pay off their own notes, or for credit at the Reserve Bank. (5) That the trading oauks should be required to keep with the Reserve Banx minimum reserves of 7 per cent, of _their demand liabilities in New Zealand and 3 per cent, of their time liabilities in New Zealand. . - (6) That thereafter the existing prohibition on the export of gold coin from New Zealand should be withdrawn. “ It is believed these recommendations will provide the basis for the amendments required to our legislation to secure for this Dominion a sound and well organised banking system in keeping with modern developments throughout the rest of the world. At the same time, as some far-reaching changes are involved, and the matter is a very im portant one, it is felt that it should not be rushed. NEW ZEALAND'S CREDIT POSITION FUNCTIONS OF RESERVE BANK. Wellington, Last Night.. * Sir Otto Niemeyer’s report was laid on the table of the House of Representatives to-night. -He expresses the opinion that the factor actually determining the volume of the currency in New Zealand is not the physical amount of gold held by the banks but the general credit position as represented by the 'balances held by those banks in sterling. It is clear that the credit position in New Zealand must to a great extent be governed by the balances held in the London market. (He states that internal gold circulation is not merely an unnecessary luxury from New Zealand’s point of view, but also would be contrary to modern views on currency and likely pro tanto to be a factor in bringing about a world gold-shortage, from which New Zealand, among other countries, would suffer.. He considers the question as to the medium into which New Zealand notes should remain externally convertible is the easier to answer in view of what is now in fact a practice of some years’ standing. New Zealand is in practice already on the sterling exchange. He recommends that this should be formally adopted, thereby bringing the regulations governing the currency system into accord with the standing practice, and providing a separate basis for New Zealand exchange, dependent only on her own balance of payments, and incidentally transforming into an earning asset the present holding of dormant gold. ' I Dealing with the note issue Sir Otto

Niemeyer says the status, constitution and functions of the body which should manage the unified note issue obviously depend to a great extent on the size and complexity of the unit involved and the purposes which it is desired to achieve. He does not think either a notes board or a currency and exchange 'board would offer a permanently satis-'-factory solution in New Zealand. The defect of a notes hoard is that it could have no influence on the development of the credit system, nor would it have effective means, of regulating exchange in accordance with that situation. A currency and exchange board , would have slightly larger scope, but it has the defect that credit conditions which might make for unstable exchanges could not directly be influenced (by an exchange board, which could only operate to the extent of the assets its actually held. CONSIDERABLE ADVANTAGES. The course he w’ould recommend would be the establishment (as in other Dominions) of a reserve bank of a size appropriate to New Zealand 3 conditions. The general advantages of such an institution if based on sound principles were, he thought, very considerable. It would, in addition to other advantages, provide machinery which was not only useful but also indlspensible for the gradual development over a period of years of a short-term money market in New Zealand. Finally such a bank would provide an instrument for cooperation with. the central banks of other countries, which were becoming of increasing importance. He states that the absence of such factors as a short-term market and. * Ibill-market leaves a gap in the financial structure of New Zealand, and there is no more effective way of closing this gap than by the establishment of » reserve bank. He considers that & fundamental condition to the establishment of a reserve 'bank is that’it must be entirely free from both actual fact and fear of political interference.. Experience has shown that the best method of safeguarding the Of a centralbank is to constitute it a? * private corporation, with capital subscribed by i-he general public and an independent board of directors elected by the shareholders. Such an institution does not mean the bank is conducted for the private profit of a few individuals, for it is perfectly competent to limit the maximum dividends, to provide for payment to the State of any excess profits, to limit the voting rights of the shareholders so as to prevent the undue prominence of any single group, to place restrictions. on the choice of directors and, if desired,, to provide, for confirmation of the appointment of the governor or deputy-gov-ernor by the Governor-General..,, It must, of course, be recognised, Sir Otto Niemeyer adds, that the sphere and function of the reserve bank is entirely different from those of trading banks. The reserve bank must not- be expected or called upon to act as a trading bank, and it should itself be careful not to’ compete with trading banka. Statutes which are suitable for reserve functions properly exclude much that would be perfectly legitimate for trading banking, and the distinction J 3 vital. L