FARMERS’ UNION

Timaru Herald, Volume CXXXVII, Issue 19379, 31 December 1932, Page 16

FARMERS’ UNION

NOTES AND COMMENTS, (Contributed).

CENTRAL BANKING (Continued)

A Central Bank is primarily an organ of National financial policy, and must so regard itself subordinating profit to safety,, conducting its operations primarily with a view to national financial stability.

The last few years have seen a considerable development in the technique of central banking, mainly to improve its efficiency and guard it from political interference. Central banking is closely connected with general financial stability, and intimately bound up with National finance. Central banks must also be ill the position to bring pressure on the commercial banks, where necessary to bring them into line with its credit and general policy. The existence of a strong central institution of unimpeachable credit and unquestioned stability, in which public confidence never wavers, and of which the paper in the form of notes and deposits subject to cheque is always acceptable, in fair financial -weather as in foul, has a very steadying effect on the money market during periods of credit collapse, and practically eliminates the ruinous effects of the financial crisis. It is not desirable by authorities on Banking that the issue of paper money should be in the hands of either the State or the Commercial Banks, because both have motives and temptations to inflation. If Commercial Banks possess the right of note issue, the Central Bank is deprived of effective currency and credit control.

It is also desirable that the powers of the Government to borrow from the Central Bank should be of a restricted nature, and that it should not look to bank inflation as a substitute for the normal means of raising public revenue. In a crisis some Banks by taking fright and trying to preserve their own position may refuse their aid to others causing them to collapse and entail the ruin of all. Under the Aldrich Vreeland Act o' 1908, the United States Government appointed a National Monetary Com-

mission whose members travelled all over the world, examined a large number of banking systems, and after nearly four years of thorough investigation, issued their report in January, 1912, a i report which resulted in the Federal Reserve Act of the following year. This Federal Reserve Act re-arranged and centralised the banking system of the United States; it established 12 principal Banks called Federal Reserve Banks—which are really great Central Banks—in important centres like New York, Boston, and San Francisco. Each of these is compelled to keep as a special reserve of gold a minimum of 40 per cent, of the amount of Federal Reserve Bank notes which it has circulated. It has also to keep a reserve against deposits of not less than 35 per cent, of “gold and lawful money.” The banking system of Germany is one of Central Banking; the Reichsbank functions as the national reserve bank, but is independent of the State. The Bank of France is the great central reserve bank, and keeps the Government’s balances. The banking system of South Africa has been centralised by the establishment of the South African Reserve Bank in 1921, which keeps the balances of the Union Government and possesses the sole right of note issue in the Union of South Africa. Canada has 11 great chartered banks, of which the Bank of Montreal is the recognised leader, but no Central Reserve Bank. In Australia the necessity for a Central Bank was recognised after the war; the Treasurer of the Commonwealth, the Hon. Earle Page M.P., introduced a Bill in the House of Representatives in June 1924, having for one of its objects the constitution of the Commonwealth Bank as a Central Bank. The Bill in an amended form was passed, and the Commonwealth Bank has constitutional' sanction to act as a Central Bank for certain purposes. The Bank of England possesses all the functions of a Central Reserve Bank for the banking system in England. The Macmillan Committee made the fallowing suggestions regarding Central Reserve Banks: —(1) That Central Banks should so regulate the volume and terms of bank credit, as to maintain as much stability as possible in the rate of new investment and enterprise, both at home and abroad.

(2) That the Central Banks should confer together at frequent intervals

to decide whether the general tendency of their individual policies should be towards a relaxation or a tightening of the conditions of credit.

(3) Each Central Bank should undertake to do its best to avoid the importation of unwanted and unnecessary gold merely as a result of leaving natural forces to work themselves out unchecked Ce.g. repercusions abroad of a contraction of credit to meet domestic needs might be mitigated by the Central Bank in question increasing its own foreign short term assets.)

(4.) Central Banks should consider the rate of long-term investment—as well as short term —as falling within their purview, and should take whateved steps may be within their power, and are suited to their local circumstances, to counteract any tendency which their own nationals may show either to keep their investible resources excessively liquid or to undertake longterm commitments.

(5) There should be a concerted policy between the Central Banks, and issuing houses of Great Britain, France, and the U.S.A. with a view to maintaining an abundance of cheap credit in their domestic money markets.

It is possible that a Central Reserve Bank may prove an expensive luxury of little real value; on the other hand it is also possible that it may be the means of providing more effective organisation of credit, and, in normal times, sounder and more stable exchanges.

Seeing that we in New Zealand have little knowledge and no experience of Central Banking we should not dismiss the Niemeyer recommendations without a strict and impartial investigation.