Creation Of “Funny Money” To Pay Reserve Bank For Losses Incurred By Exchange Move

Wanganui Chronicle, 29 October 1948, Page 5

Creation Of “Funny Money” To Pay Reserve Bank For Losses Incurred By Exchange Move

Debate In The House On Sterling Funds Of N.Z. In London

PARLIAMENT BLDGS., Last Night (PA).—When the Finance Bill was debated in the House of Representatives tonight, the Leader of the Opposition (Mr. Holland) criticised what he termed the creation of “funny money” to pay the Reserve Banklosses incurred by the return of New Zealand exchange to world parity.

There was also some discussion about the state of New Zealand’s funds in London. Mr. Holland asked Mr. Nash if he wag satisfied with the state of New Zealand’s funds. This brought an interjection from the member i'or Karori (Mr. Bowden): “We know how worried he is!”

Mr. Nash, in reply, said that the return of exchange to parity had not reduced the New Zealand balances overseas. The fall in sterling balances of late had been inevitable due to the seasonal fall in exports. The funds would be built up again when the decline in production was overtaken.

Mr. Holland said that the Minister of Finance endeavoured to convey an impression that the clause providing for the issuing of stock to pay the Reserve Bank, due to the alteration in the exchange rale, was just tiddley winks.” 'TUNNY MONEY” Mr. Holland said he could not overemphasise the importance of having a sound financial system. This system however, could so easily be wrecked by the creation of what was now known as "funny money." There I would never be a stable price-level ' while the Government continued to create credit without a corresponding increase in goods. The Reserve Bank legislation of 1934 laid down that if ever the exchange rate was increased there was a statutory obligation on the Reserve Bank to pay the Consolidated Fund an amount equal to that by which its assets had been increased in terms of New Zealand currency. There, was also a provision that should the rate be reduced the Minister of Finance should pay to the bank out of the Consolidated Fund an amount equal to that reduction. The provision now sought was to liquidate the Government's obligation to the bank. it realised by the left wing of the Government that the trading banks were going to suffer losses and was the Government going to compensate them too? The Minister of Finance stated on Budget night that he had seriously considered the matter of bank losses, out. he did not indicate how lie was going to discharge the obligation. He asked how mucli the losses totalled when the exchange rate was adjusted. Mr. Nash said that there was £17.4 millions to the Reserve Bank, £2.5 millions to the trading banks, and £l.B millions on account of forward exchange, making a total of £21.7 millions. Mr. Holland asked how the Government was going to find that sum. The Minister did not even give an indication in his reply to the Budget debate. When prices decreased after reduction in the exchange rate, the amount available to purchase goods should also have been reduced. The whole eV the money in the Consolidated Fund was required to pay for social security, Government services, and subsidies.

Mr. Holland said the fact really was that there was no money in the fund to pay over to the Reserve Bank for its exchange losses, so the Minister was going to the Reserve Bank and asking it to create £21.7 millions of new money for which he would give as security some new Government stock.

In effect, the Minister, on behalf of the Government, owed £21.7 mil ions to the bank; the bank created the money, the Min-

1 ister paid it into the fund and the fund paid it back to the bank. Il was overwhelmingly important | that the men and women of New Zealand should realise that they were the unconscious victims of a financial system under which money was created without, corresponding goods and services. The provision authorising the bank, through the Minister, to create additional money through the printing press would affect the everyday life of all the people. One way they would understand it was when they went to buy goods. Reduction in the price of goods caused by the exchange adjustment would be counteracted to a considerable extent by the passing of the Bill. Statements from the Reserve Bank in earlier years had called attention 1o the need to provide, in times of prosperity, a pool which could be used in times of need. However, the sterling funds of New Zealand overseas were £63,000,000, expressed in New Zealand currency, which fell to £44,000,000 when the exchange was adjusted. What would the position be in six months if the decline was not arrested, whatever the Government might say about export credits being built up in the meantime? Replying, Mr. Nash emphasised that the return to parity did not alter New Zealand funds in London by £l. We still had the same purchasing power in London on August 20 as we had on August 19. The adjustment was only within New Zealand in terms of New’ Zealand currency As for a decline in sterling balances in recent weeks it was inevitable that there should be such a decline when * the importing season was at its height, but. as in past years, the funds would be built up again when the new export season got under way. Mr. Holland: Is the Minister cantent with the state of our funds in London? Mr C. M. Bowden (Opp., Karori): We know how’ disturbed ne is Mr. Nash: I don’t know anyone who knows that. Mr. Bowden: The tide wdll go out further vet. Mr. Nash said a seasonal decline occurred every year, but it was also inevitable that for a time we w’ould import more than we w’ould export. Did anyone suggest that we should keep a balance of £63,000,000 in London when we were in need of a wide range of goods? It was a question of watching our sterling funds and preventing any dangerous fall. Mr. G. H Mackley (Opp., Wairarapa): Like 1938. Mr. Nash: We will try not to let that happen again. Mr Nash said there had been no restrictions on the withdrawal from New Zealand of “hot” money previously sent here from Britain and which investors would now wish to remove from this country in view of New Zealand’s return to parity Such withdrawals would affect our sterling position, but the sooner this “how money w’ent the better. CONTINUATION OF CONTROLS Mr. Nash said there would inevitably be some difficulties in New Zealand during the period of adjusting our export income to our import expenditure. but he honed the difficulties would be resolved with a reasonable time. Continuation of exchange control and import selection were essential features of the Government’s policy for dealing with the situation. The Bill was read a second time.