BANKING & CURRENCY.

Waikato Times, Volume 110, Issue 18395, 31 July 1931, Page 7

BANKING & CURRENCY.

RATES OF EXCHANGE. SIR O. NIEMEYER’S SUGGESTION. AN INDEPENDENT RESERVE BANK. (By Telegraph—Special to Times.) WELLINGTON, Thursday. In his Budget speech to-night, the Finance Minister thus referred to the banking and currency problem, making reference to the recommendations submitted by Sir O. Nlemeyer, the London banking authority, who recently visited the Dominion. Arising out of the economic depression and the fairly general dissatisfaction at the present unprecedented rates of exchange on London, banking and currency is at present receiving a good deal of attention, and I have received many suggestion for remedying matters. Many seem fo think that the quickest way out of our present troubles lies in the direction of a reform of our banking and currency legislation; but I am afraid no change in our banking system could possibly compensate us for the shrinkage in the value of. our exports In the overseas -markets or overcome the fact that the relative weight of fixed charges for interest and debt-repay-ments ihaa been proportionately increased by the fall In world pricelevels. A change in monetary policy at the other end of the world, and more especially co-operation between the principal ' central banks of the world, may, however, materially benefit us. Difficulties Accentuated. At the same time, our difficulties are being accentuated by rates of exchange being at present up to 10 per cent., and it is within our power to do something to hasten a return to more normal rates and make such provisions as will greatly minimise the chances, if not entirely obviate the possibility, of a recurrence of such abnormally high rates of exchange. There is no doubt that the high rates of exchange and especially the uncertainty as to future movements in the rates are a considerable factor in the business stagnation that prevails. -It is true that exporters are receiving an exchange bonus of approximately 10 per cent.; but it Is not very long before -any temporary advantage obtained thereby is cancelled out In the higher rates and taxes, higher cost of goods, and the general reaction from slackness in trade. I consider it Is time steps were taken to repeal the War Regulations still governing banking currency and place this vital factor in our economic life upon a permanent and secure basis. As it appeared that a return to the pre-war basis was not altogether practicable, or even desirable, the Government took the opportunity of the visit of Sir Otto Nlemeyer, of the Bank of England, to this end of the world to seek his advice on the matter. This gentleman was able to visit New Zealand and Investigate our problems on the spot. Following his return to London, he has forwarded to me a report and certain definite recommendations, which I propose to lav on the table for the information and consideration of honourable members and the people generally. Main Recommendations Summarised. The main recommendations are summarised in the report as follows: 1 That permanent legislation should be passed making the New Zealand note inconvertible in New Zealand but convertible into sterling at rates fixed within certain limits. 2 That 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 That ithe note-issue should be unified and concentrated In the Reserve Bank, the note-issuing powers of existing banks being abrogated. 4 That the trading banks should be required to transfer to the Reserve Bank the gold they now hold in New Zealand in exchange either for Reserve Bank, notes, with which they can pay off’ their own notes, or for credit at the Reserve Bank. 5 That the trading banks should be required to keep with the Reserve Bank minimum reserves of 7 per cent, oif t/heiir defnand 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 be withdrawn. It Is believed these recommendations will provide the basl§ for the amendments required to our legislation to secure for this Dominion a sound and well-organised banking system in keeping with modern developments throughout the rest of the world. At the same time, as some far-reaching changes are involved, and tiie matter is a very important one, it is felt that it should not be rushed. SIR O. NIEMEYER’S VIEWSTHE RESERVE BANK. GENERAL ADVANTAGES. WELLINGTON, Thursday. Sir Otto Nicmeyer, in his report to the Government, expresses the opinion that the factor actually determining (he voluifie of currency in New Zealand is not tiie physical amount of gold held by the banks, but tiie general credit position as represented by the balances held by those banks in sterling. It Is clear, he states, that the 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 be contrary to modern views on currency and likely, pro tanto, to be a factor in bringing about a world gold shortage, from which New Zealand, among other countries, would suffer. Sir Otto says lie considers that tiie question as to tiie 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 the sterling exchange standard. He recommends Ilia! this should he formally adopted, thereby bringing Hie regulations governing flic j currency system into accord with the standing practice, and providing a separate basis for New Zealand exchange, dependent only on her own balance of payments, and incidentally transforming into an earning asset the present bolding of dormant gold. (Continued in next column.)

Unified Note Issue. 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 • complexity of the units involved, and ihe purposes which it is desired to achieve, lie does not think that either a notes board or currency exchange board would offer a permanently satisfactory solution in New Zealand. 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 exchange board would have a slightly larger scope, but had the defect that credit conditions which might make for unstable exchanges could not be directly influenced by an exchange board, which could only operate to the extent of the assets it actually held.

The course he would recommend would be the establishment, as In other Dominions, reserve hank of a size appropriate to New Zealand conditions. The general advantages of such an Institution, if based on sound principles, were, he thought, very considerable. It would, in addition to other advantages, provide machinery which would not only be useful, but also indispensable for the gradual development over a period of years of a short-term money market in New Zealand. Finally, such a bank would provide an instrument for cooperation with the central banks of ■ other countries, which are becoming of increasing importance. A Vital Distinction. The absence of such factors as a short-term market and bill market leaves a gap in the financial structure of New Zealand, and there is no more effective way of closing this gap than by the 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, he says, has shown that tlie 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 conducted 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 place restrictions on the choice of directors, and, if desired, to provide for the confirmation of the appointment of the governor or deputy-gov-ernor 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 are suitable for a reserve bank’s functions properly exclude much that would be perfectly legitimate in trading banking. The distinction is vital.”