EXCHANGE FUNDS IN LONDON

Timaru Herald, Volume CXXXVIII, Issue 19862, 27 July 1934, Page 5

EXCHANGE FUNDS IN LONDON

TOTAL AMOUNTS TO £23,000,000 DISPOSITION UNDER FINANCE BILL By Telegraph —Press Association WELLINGTON. July 26. In the House this evening, urgency was accorded the passage of the Finance Bill. The Rt. Hon. J. G. Coates, who r%ived the second reading, said that most of the provisions relating to the operation of the Reserve Bank were technical or machinery in character and designed to remove anomalies which had been 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 Under the Bill the Banks Indemnity (Exchange) Act was repealed as from August 1, when the Reserve Bank commenced operations and assumed responsibility for maintaining the exchange rate.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 that 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 normal requirements. The Government surplus sterling purchased under the Banks Indemnity (Exchange) Act amounted to approximately £23,000,000. It was proposed to hand this amount to the Reserve Bank under the section of the Reserve Bank of New Zealand Act. under which the bank undertook to buy sterling at rates fixed by itself. This amount in no sense would be a burden to the bank; on the contrary, it would 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 by buying in the market. The reserve bank would pay the Government for sterling funds taken over at the current rate of exchange. This would be used to pay off treasury bills owing to the trading banks which would then possess credits at the reserve bank. These credits could be drawn against and Reserve Bank notes obtained if the banks so desired, thus the whole position under the Banks Indemnity Act would be liquidated and the suspense account extinguished. Guarantee Against Loss. Referring to the provision which guarantees the bank against loss in the event of exchange dropping and ensures the Government’s receipt of any profits arising out of appreciation, the Minister said that 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 nc legal rate had yet been fixed. When that had been done by statute the duty of maintaining that value 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 a fixed par. Where the 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 the Central Bank from loss. This was particularly so in a case like New Zealand’s where the Reserve Bank wai practically compelled by law to keei a large proportion of its assets in sterling. Furthermore, it was a fundamental principle that decisions of thi Reserve Bank made in the general in terests of the Dominion should not b< influenced by the effect on its own financial position. It was primarily foi this reason that the Reserve Bank Act provided for only a limited dividend tc sharebrokers, and for the balance ol profits to go to the State. Mr Coates said that profits, or losses on exchange affected the Consolidated Fund only until a definite relationship between the currency of the Dominior and sterling was fixed by statute; thal was it was not a permanent provision In the meantime the Reserve Ban! fixed the exchange rate at 125 for a loni period. There seemed little prospect o: any loss being borne oy the Consolid ated Fund until the exchange rate wa; fixed by statute without guarantee. Th< Reserve Bank’s decisions on the rati could not possibly be unbiased with i relevant clause in operation. However the bank could take neither profit no loss from exchange movements, for an loss was to be made good by the Con solidated Fund, and any profit was t go to it. The board of directors ha< already fixed the exchange rate at i level which it considered would be ii the best interests of the country. Thi provision would continue in operatioi until such time as a definite relation ship between the currency of th Dominion and sterling had been fixei by statute. “The wording of the clause unde review,” the Minister continuec “refers to appreciation or depreciatio: in assets in the Reserve Bank, but i has to be understood that the onl assets that can be affected by change in the rate are those which are hel abroad. Obviously changes in th exchange could not affect the value c assets held in New Zealand. The ban will keep its accounts entirely in Zealand currency and its sterlin assets in the books will be increase by the ruling rate of exchange. Thu any alteration in the rate will lncreas or decrease the value of these assets and this change in value of foreig; assets is what the clause covers. Mortgage Interest. “Insofar as mortgage interest is con cerned,” Mr Coates said, “it is pointe out that by 1937 the currency of mos mortgages affected by the legislatio will have expired. The market rate for mortgages are down now to a 4 per cent, basis for good security, whic is i per cent, lower than the minimur rate fixed by the National Expenditur Adjustment Act. Thus continuation c the Act will not impose any hardshi or restrictions in regard to the renews of mortgages that fall due. At the sam time it is desirable to obviate the possi bility of hardship being inflicted b allowing the restoration of mortgag rates as high as 6i> and 7 per cent, i: - respect of those mortgages comin *i under the legislation which are sti * current. The general tendency i: interest rates is now definitely down ward and when the Reserve Bank com mences operations the movement i likely to be accelerated to the benefi of the Dominion. At the same time, t allow the Reserve Bank sufficient tim to obtain firm control of the situatior it is considered advisaole for centre fc_ legislation to be continue! Accordingly, power to fix the maximur * rates for building societies, investmen societies, trading companies, has bee u*"til March 31 1937. If neces or advisable, however, the regula lions made under the Act can bo re -'pealed 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 outlook for the exchange rate, it was not considered that the practice of holding back moneys that should be remitted to England 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 their business at the current rate in the normal manner. It was not in the interests of New Zealand, and it 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 a weakness in the present law. Note Issue. Replying to the debate, Mr Coates said the Government intended to issue £29,000,000 worth of notes but they were tied to sterling which was in another country. That, he said, was not inflation. He had never defended the rate of interest paid on treasury bills, but the trading banks demanded that rate. The rate was higher than paid in other countries. He claimed that farmers had benefited from the exchange. If local bodies had large external debts, he admitted that the position would be hard on them. The Bill was read a second time. In committe on the Bill. Mr Savage gave notice of intention to move an amendment to provide that in future the governor and and deputy governor of the Reserve Bank be appointed by the GoVernor-General-in-Council. The present Act provides that they be appointer by the Governor-General on the recommendation of the directors of the bank. (Left Sitting)