RESERVE BANK BILL

Timaru Herald, Volume CXXXVII, Issue 19629, 25 October 1933, Page 2

RESERVE BANK BILL

SECOND READING DEBATE FINANCE MINISTER’S SPEECH By Telegraph—Press Association WELLINGTON, October 24. Moving the second reading of the Reserve Bank of New Zealand Bill in the House of Representatives to-day, the Rt. Hon. J. G. Coates said that it was similar to the previous one. The alterations it contained were improvements to the Bill. Its purpose was unified and disinterested control of currency and credit in New Zealand by New Zealand directors for the benefit of New Zealand. The banks had greatly helped the Government and were co-operating on the present measure. He expressed his appreciation of the attitude of the chairman of the Associated Banks in presenting a considered opinion on the subject. There was one point of difference between the banks and the Government and that was on the profits of gold, but It had not prejudiced the banks’ consideration of the main question. He had noticed very definite evidence of a need for an institution which would fill a gap between the Government and the commercial banks. The banks had been helpful, but there was certainly a big defect to be remedied. The central bank would assist and improve the normal financial operations of the Dominion, the community and the Government, and would be helpful in times of economic abnormality. It would provide cheap and abundant credit in periods of low prices and would be an influence in restraining speculation and unwise lending in boom times. It had been asked whether an extra banking institution was necessary and it had been argued that the (government could make the Bank of New Zealand a central bank. This attitude was entirely wrong. It was the defect of the Commonwealth Bank. A central bank was the banker for other banks. It could not at the same time compete with them, nor in times of crisis effectively help matters, unless its assets were liquid. The liquidity of its assets would be lessened if a central bank carried on ordinary lending to the public. No Reflection on Lending Banks. Mr Coates pointed out that in setting up a central bank there was no reflection on the trading banks, but the latter were private profit making institutions. Their main aim, so long as their business was stable, was to pay dividends to the shareholders. They had np conscious policy which took into consideration the effect of their united transactions on price levels. They did not exist for this purpose. A central bank would help to make New Zealand more independent of outside control, and for the first time would bring the Dominion’s currency and credit under control. This control would be exercised in accordance with the clause in the Bill which stated that “the economic welfare of New Zealand is to be promoted and maintain®:" The reserve bank would strengthen the trading banks because the cash reserves would be pooled, thus giving greater protection to any bank getting into difficulties. The granting of credit would be more flexible with pooled reserves and the bank's credit policy would be more effective. It would promote lower interest rates for the farming and commercial community. This was a gain which would lower producers’ costs substantially. For example £50,000,000 of advances at 5 per cent, cost in interest £2,500,000 a year. A reduction of 1 per cent would save £500,000 to the producer. Continuing, Mr Coates said that at present New Zealand paid 5 per cent, on Treasury Bills, which was the highest in the Empire. Even this was a result of the recent reduction In consequence of the Government having Brought down interest charges. Canada paid 31 to 3 7-8 per cent, on treasury bills, Australia 21 per cent., India 1 per cent, and South Africa 11 per cent, for fixed periods for bills taken up by the banking world, hence New Zealand could justifiably expect a considerable saving in this sphere. He added that all the profits apart from a small amount (£25,000) going to share holders accrued to the State, so that any interest the Government did pay would have a reasonable chance of coming back to the State. Main Advantages. Mr Coates said that the four main advantages of the reserve bank were control of our monetary system, coordination of the banking system, cheaper credit to the community and a saving to the State. He quoted the following figures to Indicate the anticipated saving. State losses.—Note tax £260,000. Interest from Investments in cash £60,000. Loss of income tax from banks £50.000. Interest on securities for reserve bank £37,500. Total £407,500. These losses were the greatest that would be made. For the purpose of comparison they might be reckoned at £400,000.

State gains.—(ln this respect working expenses had been calculated on the basis of South Africa's experience). Banks revenue £85,000. From Government stock £56,250. From treasury bills £200,000. From commercial business f (say) £30,000. Total £371.250. Less exf penses and dividend (£75,000) £296,250. - To this would be added the State's i share of the profits (say), £300,000. o Saving in Interest on treasury bills - and banks indemnity £740,000. Total, I £1,040,000. Less State losses £400.000. Resulting in a net gain to the State of £640,000. Appointments. Mr Coates said it was determined >.o - distribute the’ share capital of the 1 bank far and wide throughout the i Dominion, thus giving the Institution t definite roots. Referring to the appointment of the governor and deputygovernor. he said it had been suggested that these officials should always be I c.ppo nted bv the Government. There ; wci'e object:"-!'* to such a course. The i. Government would appoint the first governor and deputy-governor, and after seven years administration they would have to satisfy the shareholders that they had carried out their duties satisfactorily. The Government, on the - other hand would be watching the d position closely, and it also would have >, to be satisfied before consenting to r the reappointment or appointment of e other officials. Mr C. H. Clinkard (C., Rotorua): Is there a possibility of a deadlock? Mr Coates said that in all such r.: ingements there was a possibility of a deadlock, but In other countries n which had adopted the system of part State and part shareholder control, there had been no occasions when a I deadlock had arisen. The Government J wanted to give the system a trial, and it was best to take heed of the experience in other countries. Unless the confidence and co-operation of all interests could be obtained, the country would not get the full benefit of the advantage that should accrue from creating a central bank. He again enumerated the advantages of the

system and added that it would enable New Zealand to participate in co-ordinated action among the central banks of the Empire to raise prices. At the conclusion of his speech, which lasted more than two hours, Mr Coates was applauded. A Labour View. Mr M. J. Savage (Leader of the Opposition), said that the Minister of Finance had stated that he could see no alternative to the present banking system Mr Savage agreed that there was not much wrong with the present system apart from the manner In which It was controlled. If the Bill was going to do a quarter of the things the Minister had said it would, It must be going to be in competition with the other banks. The Minister had said that the reserve bank would contain machinery to give effect to the Government’s policy, but he had also said that it must be free from political control. Those statements seemed to contain a slight contradiction. He was not going to say, however that Parliament should not have some control over the banking system. In his opinion parliaments were still to be trusted. The difficulties being experienced by the world to-day were not due to parliaments. Mr Savage asked whether the reserve bank was really going to supply cheaper credit and, even if it was, what would be the use of cheaper credit unless the mass of the people had the means to purchase the product of employment credit. Was it not more correct to say of the monetary system to-day that insufficient money was finding its way into the hands of the mass of the people? “Financial Dictatorship." Continuing, Mr Savage said he wondered whether it was correct to say that there was going to be disinterested control of currency and credit. At the present time the Government had the right to appoint and did appoint four out of the six directors of the Bank of New Zealand, and that Bank did 50 per cent, of the country’s banking business. The Government already had more powers than were contained in the Bill so fax as the control of currency and credit were concerned, but it was not exercising them. The Bank of New Zealand was In a position to set the pace for the other banks. The Bill would seem to be strengthening the present financial dictatorship, although the great body of opinion In New Zealand to-day was asking for quite the reverse of financial dictatorship. It seemed that the Bill was going to be made ui excuse for perpetuating the private control of the monetary system. He asked whether it would not be a better thing for the community if the State were to run and control the whole institution. All the people of the Dominion would the,n be shareholders. The Minister had said that the bank would control speculation. Mr Savage said he wondered how much control had been exercised by the Federal Reserve System in the United States. So far as Mr Coates’s statement had gone it would appear that the new bank was going to assist in raising prices without assisting the people to be able to pay increased prices. Control of Banking. Mr Savage asked why provision should not be made for Parliament to control the whole banking system; then there would be no need for a central bank. He thought that the officials who were running the banks to-day would be able to do just as well for the Government, as for private individuals. He did not wish to reflect on these officials in any way; they had done a good job for those who were paying them. Unless there was a monetary system that would enable anyone whether he was a clergyman, lawyer or schoolmaster to buy the equivalent of service he rendered to the community, there would be no escape from the difficulties confronting the country to-day. He did not see much in the Bill that was going to benefit the people. Two-thirds of the capital of the bank was to be found by the people through the Government, and one-third was to be found by the shareholders, but the latter were to have the balance of power. That seemed to be reversing the position so far as it related to the Bank of New Zealand in which the Government held one-third of the capital and two-thirds of the management. He asked whether the object of the Bill was to strengthen the grip of private control on the monetary system of New Zealand. Labour’s Belief. The Labour Party believed that the State should be master of the situation, but he considered that the Bill would allow private enterprise to become the controlling force in industry and other activities. When the Labour Party took office it would put its policy into operation If the heavens fell. It did not suggest that the management of the banking system should be conducted from the Cabinet room, but It did contend that the policy should be laid down by the Cabinet. If it were In power to-day It would not be doing the Job from the Cabinet room, but it would formulate a policy and would insist on it being carried out. If it were not carried out it would very soon appoint some one else to put the policy into effect. Parliament must exercise its authority over the banking system. There were vast powers in the hands of the Government under the existing legislation, but they were not being used. The Hon. J. G. Cobbe said it had been stated that the central bank would take away the people’s right to control the currency, but that was what it would not do. The bank would be responsible for the maintenance of credit and currency for which purpose it would have the exclusive right *o issue notes. It would be the banker for the other banks and would exercise a restraining influence on speculation. Mr D. G. Sullivan (Lab., Avon) said that whether the bank would render any real service would depend on the personnel of the directors and the executives. He asked where the Government had obtained its moral authority to impose this legislation on the country, and declared that farmers, businessmen and working men had expressed opposition to the Bill. It seemed to be a form of dictatorship.

The debate was interrupted when the Hpuse rose at 10.30 p.m. till 2.30 p.m. to-morrow.