THE NIEMEYER REPORT

Wanganui Chronicle, Volume 74, Issue 180, 1 August 1931, Page 7

THE NIEMEYER REPORT

BANKING A CURRENCY I RESERVE BANK ADVOCATED A UNIFIED NOTE ISSUE I Per Tress Association. ] WELLINGTON, July 31. The report of Bir Otto Niemeyer oil banking and currency In New Zealand was laid on the table of the House of Representatives last, evening. Sir Otto summarises his recommendations as follows: (1) Permanent legislation should b« passed making the New Zealand note inconvertible in New Zealand, but convertible into sterling at rates fixed within certain limits. (2) An independent reserve bank should be set up, charged with responsibility for the stability of New Zealand currency, invested with the privilege of note issue and charged with holding the Government account and the banking reserves of New Zealand. (3) The note issue should bo unified and concentrated in the reserve bank, the note-issuing powers of the existing banks being abrogated. (4) The trading banks should be required to transfer to the reserve bank the gold they now hold in New Zealand, in exchange either for reservo hank notes, with which they can pay off their own notes, or for credit at the reserve bank. (5) The trading banks should be required to keep with the reserve bank minimum reserves of 7 per cent, of (heir demand liabilities in New Zealand and 3 per cent, of their time liabilities in New Zealand. (6) That thereafter the existing prohibition on the export, of gold coin from New Zealand should bo withdrawn. Internal Gold Circulation. Sir Otto Niemeyer expresses the opinion that the factor actually determining the volume of currency in New Zealand is not. the physical amount of gold held by the banks, but the general credit position as represented by the balances held by those banks in sterling. It is clear, he states, that thf credit position in New Zealand must to a great extent be governed by the balances held in the London market. Internal gold circulation is not merely an unnecessary luxury from New Zealand's point of view, but also would bo contrary to modern views on currency and likely, pro tanto, to be a factor in bringing about a world gobi shortage, from which New Zealand, among other countries, would suffer. Sir Otto says ho considers that the question as to tho medium into which New Zealand notes should remain externally convertible is the easier to answer in view of what is now, in fact, a practice of some years’ standing. New Zealand is in practice already on tho sterling exchange standard. He iocommends that this should be formally adopted, thereby bringing the regulations governing the currency system into accord with the standing practice and providing a separate basis for Now Zealand exchange, dependent only on her own balance of payments, and, incident:! ily transforming into an earning asset the present holding of dormant gold. Dealing with the note issue. Sir Otto says the status, constitution and functions of the body which should manage ' the unified note issue obviously depend, to a great extent on the size and eotnplexity of the units involved, and the purpose which it is desired to achieve. * He does not think that either a notes board or currency and exchange board would offer a permanently satisfactory; solution in New Zealand. Advantages of Reserve Bank. The defect of a notes board was that it could have no influence on the development of the credit system, nor would it have effective means of regulating the exchange in accordance ’with that situation. A currency and exchange board would have a slightly larger scope, but had the defect that credit conditions which might make fo* u.-tal -■ exchanges count not directly, be influenced by an exchange board, which could only operate to the extent of the assets it actually held. 'lhe course he would recommend would be the establishment, as in other Dominions, of a reserve bank of a size iippropriatc to New Zealand conditions. The general advantages of such an inistitution, if based on sound principles, were, he thought, very considerable. It would, in addition to other advantages, provide, machinery which would not I only be useful but also indispensable tor the gradual development over a | period of years of a short-term money market in New Zealaml. Finally, such, a bank would provide an instrument for co-operation with the centra banks of other countries, which were becoming of increasing importance. Gap in Financial Structure. i lhe absence of such factors as a term market and bill market leaves a gap in the financial structure of New Zealand and there is no more effectivo way of closing this gap than by tho establishment of a reserve bank. He considers that the fundamental condition to the establishment of a reserve bank is that it must be entirely free from both actual fact and fear of political interference. Experience, ho >uys, has shown that the best method of safeguarding the independence of a central bank is to constitute it as a private corporation, with capital subscribed by the general public, and an independent board of directors elected by the shareholders. Such an institution does not mean that the bank is condueted for the private profit of a few individuals, for it is perfectly competent to limit the maximum dividends, to provide for payment to the State of any excess profits, to limit the voting rights of its shareholders so as to prevent the undue prominence of any single group, to placo restrictions on the choice of directors, and, if desired, to provide for the con firmation of the appointment of the governor or deputy-governor by the Governor-General. “It must, of course, be recognised,’’ adds Sir Otto, “that the sphere and function of a reserve bank are entirely different from those of the trading banks. A reserve bank must not be expected or called upon to act as a trading bank and it should itself be careful not to compete with the trading banks. Statutes which arc suitable for a reserve bank’s functions p-opcrly exclude much that would bo perfectly legitimate in trading banking. Tho J ,distinction is vital.” . J