VALUE OF GOLD

Taranaki Daily News, 20 October 1933, Page 7

VALUE OF GOLD

TRADING BANKS’ RESERVE TERMS FOR TAKING OVER CLAIMS FOR CENTRAL BANK WHICH BASIS OF VALUATION EFFECTS OF DEPRESSION By Telegraph—Press Association. - Wellington, Last Night. In a statement to the House of Representatives on the profits on gold reserves the Rt. Hon. J- G. Coates in introducing the Reserve Bank Bill tonight said that in order to clarify the situation in respect to the profits on gold reserves he would like to draw attention to the undisputed fact that the issue of currency, whether in the form of notes or coin, was a prerogative of the State. Mr. Coates’ statement continued:— The rights of note issue were granted the trading banks, but they are subject to a tax and to certain conditions regarding redemption in gold coin. Such right of note issue is a matter quite apart from commercial banking, which in most countries is carried on without it. Furthermore, it is a recognised principle that the value of the monetary unit aud, in fact, the monetary policy generally, are entirely matters to be determined by the State, which must stand all the losses involved and should take all the profits accruing therefrom. . Any profits that may be obtained from the sale of our gold reserves arise not out'of banking but firstly out of Great Britain going off the gold standard, and secondly out of the depreciation of New Zealand currency in terms of sterling. Both are matters of monetary policy. The premium on gold in comparison with the mint par value is the measure of the depreciation in the value of the notes. This depreciation has been at the expense of the people and not at the expense of the banks. It follows that any profit on gold reserves arising out of Government action should accrue to the State representing the people as a whole. THE VALUE OF GOLD. The sterling value of gold in London is approximately 130 s per fine ounce. At mint rate fine gold would be approximately 85s per ounce. It is with the latter figure that the market rate for gold should be compared under the permanent banking legislation. Each of the note-issuing banks is required to redeem its notes in gold on demand. The published returns for the September quarter show notes issued at £6145,203, whereas coin and bullion held amounted to £5,076,254, of which about £600,000 is silver coins. Under special war legislation (the Banking Amendment Act, 1914) provision was made whereby the Governor-Gen-eral in Council may from time to tune declare by proclamation that the notes of any bank shall during the peiiod limited by such proclamation be legal tender everywhere in New Zealand, and during the validity of such a proclamation the notes of the bank in question shall be inconvertible. Before making such a proclamation the Governor-Gen-eral may require that adequate security be given by the banks that they shall pay their notes in gold on demand after the expiration of the period limited by the proclamation. In the event of default of payment by any issuing bank this war legislation provides that the Minister of Finance shall pay the notes when presented in gold.

. PROMISE TO HOLDERS. Thus when notes were made legal tender the note holders were still promised Ultimate redemption in gold coin at face value, and as the profit on the gold only arises out of the abrogation of this right it is clear that such profit should go to the people as a whole and not to the banks. Thus the commercial banks have no established statutory right to the continuance of the inconvertibility of their notes. The present proclamation expires in 1935, but it contains special provision for earlier termination if a reserve bank is established during the period covered by the proclamations. The export of gold (other than uncoined gold) is prohibited unless specially authorised by the Minister of Finance. The reason underlying this is that as the Government had guaranteed redemption in gold it was essential io ensure that the equivalent amount of gold was retained in the country. It follows,' therefore, that the gold holdings of the banks must be regarded as special reserves against the notes issued and not as part of the general assets of the banks. In view of the fact that the total gold coin and bullion now the commercial banks is actually less than the notes issued it is quite clear .that it the Government removed the proclamation the banks would very soon be in a position of having to pay out . the whole of their present gold holdings, giving a sovereign for each one pound note presented. Even if the present position was maintained and no reserve bank established the banks could only work on the assumption that the temporary war regulations would be allowed to lapse at any time, and accordingly apart from the necessity of protecting the Government guarantee it would ,be necessary to hold their present gold reserves in the country. Thus they would not be able to realise any profit by disposal. It is clear, therefore, that any profit to accrue from the disposal of the present gold holdings is contingent on Government action in providing permanent legislation to make and maintain notes as legal tender. ■OBLIGATION ON BANKS. The keeping of gold reserves was part of the obligation imposed on the banks m return for the right of note issue given them by the Government. The right to issue currency was an important concession carrying corresponding obligations. Gold was regarded as the backing for the note issue and not as an ordinary asset. Since the State has guaranteed payment of the notes in gold the banks thereby have surrendered liability for the ultimate redemption of notes. Therefore’ they have also surrendered the right to hold the assets covering that liability. The banks hold the gold coin on charge at the face value, and if they receive that value for it the banks suffer no loss. Any gain that accrues will be due to Governmental action, and therefore rightly belongs to the State. No genuine case can be made out for the banks to any share in this gain. World experts consulted recently in London were definitely of the opinion that the gold should be taken over by the Reserve Bank at par value only and that in principle any profits or losses should accrue to the State. In England and France profits on the reserve gold resulting from currency legislation were appropriate*. by the State without question. This is a well-established rule. The gold delegation of the financial committee of the League of Nations recommended the concentration of all

monetan' gold in tHe reserves of tHe central banks, and that. in those countries where gold lies locked up in the vaults of private banks measures of reform should, be adopted. The same delegation pointed out that an appreciable economy might be effected if all gold coin, gold holdings against certificates and gold immobilised in commercial banks were made available to perform the proper function of gold in the currency mechanism of to-day. Gold should be withdrawn into the reserves of the central banks and replaced by notes.

Finally I may say that it has been stated on behalf of the banks that their gold holdings are in excess of what they are required to hold under statutory authority. The permanent legislation provides, inter alia, that notes in circulation must not exceed the total of the coin, bullion and public securities, nor be more than three times the amount of gold held in New Zealand. This has been wrongly interpreted in the direction of stating that the gold holding may be one-third of the notes issued. The statutory provision in question deals with the note issue and as such must take into consideration not only the actual issue at any moment but also the possible issue arising out of credit fluctuations. Here I-may say that it is not possible to carry on banking without cash reserves, which in New Zealand consist of the banks’ own unissued notes, and in order to be in a position to issue additional notes the banks mus'. hold additional gold cover. The amount of such additional gold cover was decided by each bank for itself, and as gold, is a dead asset the presumption is that the respective amounts held were not in excess of what was considered to be a safe margin in each case. On this point also it is of interest to observe that since 1914 the note issue has more than trebled, while the coin and bullion held is to-day approximately the same as it was in 1914.