URGENCY GIVEN

Taranaki Daily News, 27 July 1934, Page 7

URGENCY GIVEN

PASSAGE OF FINANCE BILL FURTHER EXPLANATION MADE EXCHANGE RATE SURPLUS FIGURE QUOTED £23,000,000 STATEMENT BY MR. COATES By Telegraph—Press Association. Wellington, Last Night. Urgency was accorded the passage of the Finance Bill in the House of Representatives to-day when the Rt. Hon. J. G. Coates, Minister of Finance, moved the second reading. Mr. Coates said most of the provisions relating to the operation of the Reserve Bank were technical or machinery in character, and were designed to remove the anomalies which were found to exist with all new projects. It was almost inevitable that the necessity would arise to amend the original enactment from time to time. Under the Bill the Banks Indemnity (Exchange) Act was repealed as from August 1, when the Reserve Bank commenced operations and assumed responsibility for maintaining the exchange rate. Accordingly the liability of the Government to the trading banks automatically elapsed. Furthermore, the trading banks would be able to buy and sell exchange from and to the Reserve Bank, so there would be no occasion for the Government to do any more business of that nature with the trading banks. The Reserve Bank would handle the whole of the exchange, allowing for sterling used for the normal requirements of the Government. “The surplus sterling purchased under the Banks Indemnity (Exchange) Act amounted to approximately £23,000,000,” said Mr. Coates. “It is proposed to hand this amount to the Reserve Bank under the section of the Reserve Bank of New Zealand Act, under which, the bank undertakes to buy sterling at. rates fixed by itself. This amount is in no sense to be a burden to the bank. On the contrary it will be a decided acquisition, for without a substantial amount of sterling funds the bank would be relatively powerless, and in the. ordinary course it would have taken it a considerable time to accumulate funds. BUYING IN THE MARKET. “By buying in the market the Reserve Bank will pay the Government for ster- ( ling funds taken over at the current rate of exchange. This will be used to pay off Treasury bills owing to the trading banks, which will then possess credits at the Reserve Bank. These credits can be drawn against and Reserve Bank notes obtained if the banks so desire. Thus the whole position under the Banks Indemnity Act will be liquidated and the suspense , account extinguished.” Referring to the provision which guarantees the bank against loss in the event of the exchange dropping and ensures the Government’s receipt of any profits arising out of appreciation, the Minister said legislation on those lines would have been necessary quite apart from the handing over of the funds accumulated under the Banks Indemnity Act. New Zealand currency was based on sterling and no legal rate had yet been fixed. -When that had been done by statute, the duty of maintaining that value would be imposed on the Reserve Bank. In such circumstances no guarantee of the bank’s position would be needed,, as the credit structure would be controlled by the Reserve Bank to keep the exchange rate within certain limits on either side of the fixed par, where permanent exchange rate was not fixed by statute, as was the position in the Dominion. There was a definite onus on the State to protect a central bank from loss. This was particularly so in a case like New Zealand’s, where the Reserve Bank was practically compelled by law to keep a large proportion of its assets in sterling. Furthermore, it was a lundamental principle that the decisions of the Reserve •Rank made in the general interests of the Dominion should not be influenced by the effect on its own financial' position. It was primarily for this reason that the Reserve Bank Act provided for only a limited dividend to shareholders and for the balance of the profits to go to the State. EXCHANGE PROFIT AND LOSS. Mr. Coates said the profits or losses on exchange affected the Consolidated Fund only until the definite relationship between the currency of the Dominion and sterling was fixed by statute, that was, it was not a permanent provision. In the meantime the Reserve Bank had fixed the exchange rate at £125 for a long period. There seemed little prospect of any loss being borne by the Consolidated Fund until the exchange rate was fixed -by statute. Without - a guarantee the Reserve Bank’s decisions on the rate could not possibly be unbiased. With the relevant clause in operation, however,. the bank could take neither profit nor loss from exchange movements, for any loss was to be made good by the Consolidated Fund, and any profit was to go to it. The board of directors of the bank had already fixed the exchange rate at the level which it was considered to be in the best interests of the country. This provision would continue in operation until such time as a definite relationship between the currency of the Dominion and sterling had been fixed by statute. “The wording of the clause under review,” the Minister continued, “refers to appreciation or depreciation in the assets in the Reserve Bank, but it will be understood that the only assets that can be affected by cnanges in the rate are those which are held abroad. Obviously the changes in exchange could not affect the value of assets' held in New Zealand. The object of the drafting in this language is for simplicity. The bank will keep its accounts entirely in New Zealand currency and its sterling assets in the books will be increased by the ruling rate of exchange. Thus any alteration in the rate will increase or decrease the value of these assets, and this change in the value of foreign assets is what the clause covers. “Insofar as mortgage interest is concerned,” Mr. Coates said, “it is pointed out that by 1937 the currency of most mortgages affected by legislation will have expired. Market rates for' mortgages are down now to a 4i per cent, basis for good security, which is J per cent, lower than the minimum rate fixed by the National Expenditure Adjustment Act. Thus the continuation of the Act will not impose any hardship or restrictions in regard to renewal of mortgages that fall due. At the same time it is desirable to obviate the possibility of hardship being inflicted by allowing the restoration of mortgage rates as high as 61 and 7 per cent, in respect of those mortgages coming under legislation which are still current. The general tendency in interest rates was now definitely downward, and when the Reserve Bank commenced operations the movement was likely to be accelerated. To benefit the Dominion find

at the same time to allow the Reserve Bank sufficient time to obtain a firm control of the situation it was considered advisable for control by legislation to be continued. Accordingly power to fix the' maximum rates for building societies, investment societies and trading companies was to be extended until March 31, 1937. If it were necessary or advisable, however, the regulations made under the Act could be repealed earlier. The Bill repealed section 25 of the Finance Act, 1932, which empowered local bodies to retain in New Zealand sinking funds which otherwise would have been used to redeem loans maturing in England. This section was passed at a time when the exchange rate had risen to 10 per cent, and was largely based on the assumption that it would be only a temporary phase. In view of later developments, however, and the present position, and the outlook for the exchange rate, it was not considered that the practice of holding back moneys that should be remitted to Englanc should be allowed to continue. In other words, the intention was to stabilise the exchange position, and local bodies in common with the public generally must carry out business at the current rate in the normal manner. It was not in the interest of New Zealand and was unsound financially to postpone the remittance of moneys indefinitely. The last clause required any local body which had sold an asset to devote the proceeds of such sale to liquidate the debt incurred in creating the asset, or otherwise for capital purposes. It would be quite unsound to allow a local body to use capital moneys in the relief of rates. The clause merely remedied the weakness in the present law.