The Daily News MONDAY, AUGUST 3, 1931. BANKING AND CURRENCY.

Taranaki Daily News, 3 August 1931, Page 6

The Daily News MONDAY, AUGUST 3, 1931. BANKING AND CURRENCY.

The report o£ Sir Otto Niemeyer on banking and currency in New Zealand has at last been made public. It recommends the setting up of an independent reserve bank, charged with the stability of the Dominion’s currency, holding the Government account and the banking reserves of the country, and invested with the sole privilege of note issue. Also the report recommends the transference of the gold held by the banks to the proposed reserve bank, in exchange either for reserve bank notes or for credit at the reserve bank. Sir Otto points out that the credit position in the Dominion must to a large extent be governed by the balances held in London, and for that reason the holding of gold here is quite unnecessary and an expensive luxury in these days of gold shortage. He suggests the supply of gold should be transformed into an earning asset, by being used where it can be most profitably employed, viz., in London. New Zealand being actually in practice on a sterling basis, Sir Otto suggests that this fact should be formally recognised and adopted, thereby bringing the regulations governing the currency system into accord with standing practice and providing a separate basis for New Zealand exchange, dependent only on her balance of payments. In conclusion, this great banking authority points out that the sphere and function of a reserve bank are entirely different from those of a trading bank, and that statutes which are suitable for a reserve bank’s functions properly exclude much that would, be perfectly legitimate in trading banking. Sir Otto’s proposals and recommendations follow the lines of other financial authorities as to what is required in the Dominion, whose banking system has for years been lagging behind world banking practice. Perhaps the Government’s connection with the Bank of New, Zealand has been the principal reason for this state of affairs. It is one that in this respect has operated to the distinct disadvantage of the . country. Few members of Parliament have sufficiently studied the banking question to make it a live one and thereby arouse public interest in it, and Ministers have been too preoccupied with less important matters to give the subject any consideration., Yet the economic life of the country is bound up with the banking system. Apart from other losses inflicted on New Zealand by this general apathy or ignorance, the gold lying sterile in the vaults of the banks has been costing the public some £330,000 to £350,000 a year, sufficient, as we have previously pointed out, to enable the banks to reduce interest charges on advances by a half per cent, without affecting their deposit rates or dividends. Not only that but the transference of our seven millions of gold to London would react to the credit of Great Britain and directly benefit New Zealand through an improvement in the prices of our exports. The gold deposits ceased to perform any useful function when the circulation of gold coin ceased in the Dominion. Gold circulation is not likely to be resumed, for in every country that has adopted the gold standard the circulation of gold coin has ceased. In former days gold was supposed to act as a regulative factor and as a guarantee of ultimate redemption, in. value of the note issue. But the note issue, in practice, has not been regulated by the amount of gold held, but by the volume of credit arising from the state of our trade in London. For the whole of our external trade is cleared through London, and so the London balances of the banks are the chief factor in regulating the volume of credit in New Zealand. Notes arc quite subsidiary to this credit, being used in the Dominion for little beyond petty disbursements and wages, and being kept at parity with sterling through the operation of the exchanges. There have been various restrictions placed on the note issue from time to time, particularly during war time, but they have been quite inoperative, as the demand for notes has always been considerably less than the maximum amount the banks were au-

thorised to issue. In fact, the regulations, for all the economic good they were, need never have been made, for sterling exchange governed the whole of our financial operations. Nine persons out of ten regard it as essential that we continue to hold the large stock of gold we have in the country. Economically it is quite unnecessary and wasteful in the extreme, as Sir Otto Niemeyer now reminds us. Its proper place is in London, where it can be profitably employed, and not in New Zealand, where it is lying dormant and not fulfilling its proper function as a basis of credit in the larger monetary and credit system of which we in the Dominion only form an insignificant part. The setting up of a reserve bank, with the definite and limited functions outlined, free from political control and uninfluenced by the trading banks, must prove of benefit to the Dominion. Were it in existence to-day, for instance, it is unlikely that the present very heavy exchange rate would be operating against the Dominion. Four of the six trading banks are primarily Australian institutions, and necessarily the financing of the trade of the two countries in London is from a common fund. In the past the six banks have been in the habit of fixing practically the same rates of exchange for New Zealand as for Australia. When the. acute financial trouble developed in Australia, however, the rates naturally swung more heavily against. that country, yet there is substantial evidence available that Australian conditions have adversely affected our own exchange, as well as our credit. New Zealand should be financially independent of Australia, more so now than ever, and our exchange rate should be fixed on our own trade position and outlook. But we cannot expect it to be whilst the fixing of tlie rates is in the hands of the associated banks, in which Australian influence is predominant. If the separation took place then, of course, the rates between New Zealand and Australia would have to be the difference between the respective rates in London. This might affect the trade between the two countries, but the volume of that trade is very small compared with that between New Zealand and the rest of the world, all of which is settled through London. Just now our interests arc suffering through our financial connection in London with Australia, and will continue to- suffer until we free ourselves and establish our own reserve bank, which could form an integral part of the British financial system. Sir Otto Niemeyer has exposed the weaknesses of our banking and economic system, and shown us how to remedy them and bring the system up-to-date, and it is for us, not to delay taking action, as suggested by the Prime Minister oh Thursday night, but to give immediate consideration to a matter that vitally affects not only the commercial and producing interests, but the whole community.