CENTRAL RESERVE BANK

Taranaki Daily News, 5 August 1931, Page 3

CENTRAL RESERVE BANK

VIEWS OF ECONOMISTS LACK OF SHORT-TERM MARKET. EXCHANGES A TEMPORARY BAR. The detailed proposals of Sir Otto Niemeyer for a central reserve bank in New Zealand are intensely interesting to Auckland economists, and various addresses and reports on the subject are in course of preparation. Opinions were sought, says the New Zealand Herald, from two leading authorities in Auckland. The recommendations in the report followed the usual practice regarding central banks, said Professor H. Bel§haiv, of Auckland University College. They embodied the customary safeguards limiting the nature of the bank’s business to dealing in liquid securities, through which control of the money market could be exercised. In recommending provision for a cash reserve and legislative requirements respecting the reserves, which the member banks must deposit with the reserve bank, the report followed the federal reserve system of the United States rather than British practice, which left the matter to the banks themselves. For practical purposes, however, this would make little difference. - So far as New Zealand was concerned, the absence of a short-term market and a bill market would mean that the central bank would not be able to exercise such close control as in the larger countries of the world. On the other hand, as Sir Otto Niemeyer pointed out, the establishment of a reserve bank was a necessary pre-requisite to the growth of a short-term market. . ■ < . Whether or not such a mai'ket would develop could not be determined in advance with any degree of certainty, but the fact that central banks appeared to be functioning effectively in countries no larger than New Zealand would suggest’ that a wisely-administeredi bank might improve the financial organisation of this country. An example was South Africa. With the founding of the cen-, tral bank there, he believed, Sir Otto had had a good deal to do. Professor Belshaw said that Sir Otto had told him the volume of hanking business in South Africa was little, if any, greater than that of New Zealand. < ■ LOSS ON GOLD RESERVE. - The recommendation that- the note issue should be centralised and the opinion that the present gold reserve was no longer necessary were closely in accord with the opinions expressed by economists in New Zealand before Sir Otto was called upon to report, continued the professor. The former was' necessary if the central bank was to exercise control over currency and credit. The latter was desirable because foreign gold exchange and securities were just as satisfactory cover for notes, and. because they represented in a large measure interest-bearing assets, whereas a gold reserve represented a dead loss to the extent of the interest which securities Of equivalent value could earn. Even in the absence of a short-term market, a central bank might be expected to exercise a more sensitive control over currency and credit than the commercial,banks, especially as it would not be primarily a profit-making institution and could determine its policy by the financial needs of the country as it saw them. It was open to argument whether exchange rates should not be allowed to fluctuate more than the 30s. per. cent, either way within which limits Sir Otto proposed to restrict them. Professor Belshaw said he agreed that in normal times- the limitation of movement was desirable, but he thought that in times of severe crisis provision should be made, 'by Treasury minute or other meaps, to vary the rate within wider limits. It was probable that the necessity for such variations would be less with a central bank in existence, but nevertheless the contingency should 'be provided for. THREE METHODS OF CONTROL. The three methods of controlling currency and credit open to a central- bank in New Zealand would be: (1) Variation of the exchange rate; (2) variation of the discount rate; (3) the 'buying and selling of securities. The third method would not be fully operative, however, unless a short-term market existed. The normal procedure should be to use the discount rate as the main instrument of control, ’ but if the country were faced with a sudden depression, such as that which had existed for the past two years, there would be something to be said for using adverse exchange as a means of protecting the London 'balances and then, gradually reducing the rate to a normal margin, thereby permitting a policy of deferred, deflation. The report appeared to make no mention of the present structure of the Bank of New Zealand. In view of the necessity for avoiding political pressure of any sort, the fact that the Government was a large shareholder in th© bank would create an anomalous position, and it seemed desirable that the Government should dispose of its shares if a central bank were set up. In view of the fact that the new institution would become the Government banker, the Bank of New Zealand would suffer through the change, at least for a time. THE GOLD STANDARD. The most controversial point in the report concerned the principle whereby it was not possible to stabilise the internal price-level and exchanges when world prices generally were fluctuating, said Dr. E. P. Neale, secretary of the Auckland Chamber of Commerce, in an expression of his personal views. The report seemed to contemplate fixing exchanges within narrow limits, as had been the practice in New Zealand prior to a year or so ago. This had been practicable under the sterling exchange system in India, on which Sir Otto’s suggestions were largely/ based. , “So long as the gold standard is operating, any adverse movement of exchange could be met; as gold would be shipped at the first substantial movement sufficient to warrant the expenseof transfer.”

In Dr. Neale's view, Sir Otto’s suggestion in regard to the shipping of gold from New Zealand was sound. Future policy regarding a return to the gold standard should be cleared up as soon as possible. However, the present adverse exchange w - as, of course, an obstacle to the immediate operation of Sir Otto’s proposals.