SALE OF GOLD RESERVES

Timaru Herald, Volume CXXXVII, Issue 19625, 20 October 1933, Page 8

SALE OF GOLD RESERVES

STATE ENTITLED TO PROFITS

ANNOUNCEMENT BY MR COATES By Telegraph—Press Association WELLINGTON, October 19. In a statement to the House of Representatives on the profits on the gold reserves, the Rt. Hon. J. G. Coates, introducing the Reserve Bank Bill, said: “In order to clarify the situation in respect to the profits on the gold reserves. I would like to draw attention to the undisputed fact that the issue of currency, whether in the form of notes or coin, is a prerogative of the State. Rights of note issue were granted to our trading banks, but 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 and, 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 staudaid and, secondly, out of the depreciation of the New Zealand currency in terms of sterling both as 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 the gold r< serves arising out of Government action should accrue to the State renresenting the people as a whole. The sterling value of gold in London is approximately 130/- a fine ounce. At the mint rate fine gold would be approximately Bb/- an ounce. It is with the latter figures that the market rate for gold should be compared. Security for Note Issue. "Under the permanent banking legislation (see the Banking Act, 1908 of New Zealand) 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 £6,145,203. Whereas coin and bullion held amounted to £5,076,254. of which about £600,000 is silver coin under the npecial war legislation (Tlx e Banking Amendment Act, 1914), provision was made whereby the Governor - General -in - Council may from time to time declare by proelation that the notes of any bank shall, during the period limited by such proclamation, be legal tender everywhere in New Zealand and during the validity of such r. proclamation the notes of the bank in question shall be inconvertible. Before making such a proclamation the Governor-General 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. Thus when notes were made legal tender the note holders were still promised ultimate redemption in gold coin at a 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. Government Guarantee. “The present proclamation expires in 1335, but contains a special provision for an earlier termination if a Reserve Bank is established. During the period covered by the proclamation the export of gold (other than uncoined gold) is prohibited unless specially authorised by the Minister of Finance (see Banking Amendment Act, 1914. Section 6). The reason underlying this is that as the Government had taranteed redemption in gold it was essential to 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 againat the notes issued and not as part part of the general assets of the banks. In view of the fact that the total gold coin and bullion now held by the commercial banks is actually less than the notes issued, it is quite clear that if 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. The keeping of gold reserves was part of the obligation imposed on the banks in return for the right of note issue given them by the Government. Not An Ordinary Asset. “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 their liabilities for the ultimate redemption of the notes, therefore they have also surrenderd the right to hold the assets covering that liability. The banks hold the gold coin on charge at 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 opinion that the gold should be taken over by the Reserve Bank at par value only, and that tn principle any profits or losses should accrue to the State. In England and France profits on the reserve gold resulting from currency legislation were appropriated 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 monetary gold in the reserves

of central banka, 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 and gold holding 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 holcTings 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 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 holdings may be onethird 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 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 must hold additional gold cover. The amount < f 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 i observe that since 19H, th note issue has more than trebled, while the coin I and bullion held Is to-day about approximately the same as It was in 1914."