The timaru Herald FRIDAY, DECEMBER 9, 1938. SIGNIFICANCE OF RESERVE BANK RETURNS

Timaru Herald, Volume CXLV, Issue 21215, 9 December 1938, Page 8

The timaru Herald FRIDAY, DECEMBER 9, 1938. SIGNIFICANCE OF RESERVE BANK RETURNS

Two points of the highest importance ought to be borne in mind by every New Zealander who is sufficiently interested in the financial welfare of the country to give a moment’s critical thought to the weekly returns of New Zealand’s Reserve Bank. The first point is that the structure of the bank invests it with immense power for good or ill. The second point is that if the financial position of the bank is rendered unsound by the burden placed upon its resources by the increasing demands of the Government, the soundness of the country’s banking system will be called into question. It is doubtful, however, whether the business community of the Dominion is fully seized of the paramount importance to them of the Reserve Bank statement, published every Friday, and the importance of watching carefully the weekly movement of the figures quoted in these returns. It is not unlikely, however, that the current week's return of the Reserve Bank will come in for an unusually widespread critical examination because of the decision of the Government to introduce control of the sterling exchange held in London. Attention will no doubt be,focused upon two items on each side of the ledger. For instance, the latest return discloses the interesting fact that at close of business on December 5, the Reserve Bank held deposits belonging to the trading banks to the amount of £5,740,377, and the notes of the Bank held by the public and the trading banks amounted to £14,694,982. These two amounts total over £20,000,000, and represents a definite and direct liability by the Bank to the people of New Zealand. The question will naturally be asked: What backing is there to this substantial debt to the people? It should be remembered that the trading banks are also included in the people—in whose debt the Reserve Bank is plunging deeper every day—in that the backbone of the whole banking structure is the tens of thousands of depositors who entrust their money to the trading banks. It is on the assets side of the ledger that a tale is being told of the movements that have placed the Government in difficulties. These are represented in gold and the sterling exchange. These two represent less than half the value of the notes in circulation, to say nothing of the Reserve Bank’s liability of £5,746,377 to the trading banks. It is true the Reserve Bank has made substantial advances to the State or State undertakings, which are generally regarded as assets, but when it is borne in mind that the sterling exchange is expressed in New Zealand currency which means a 25 per cent, reduction in currency value in London, and that the Reserve Bank’s proportion of reserve to notes and other demand liabilities has fallen to 29.834 per cent (which is within a narrow margin of the statutory low level of proportion), some idea of the problem confronting the Government will be gained. This phase of the conditions of the Reserve Bank’s finances is emphasised by the vefy large increases in the advances made by the Bank to State and State undertakings which have grown from £5,200,000 last year to the sum shown in the latest return namely £14,166,822, and the largely increased demands on the Reserve Bank have been made during the period in which the sterling exchange has shrunk from £16,184,000 on December 6 last year to £4,200,000 to-day—a decrease of more than half a million In a week.