WORLD CRISIS.

Waikato Times, Volume 112, Issue 18807, 1 December 1932, Page 11

WORLD CRISIS.

DOMINION’S POSITION. CENTRAL BANK PROPOSAL. ECONOMIST’S VIEWS. Part 3. (By Dr. H. Belshaw In an address to the Dominion executive of the New Zealand Farmers’ Union.) I would refer in conclusion to two matters—the proposal sometimes made to effect reconstruction by internal inflation and the proposal to establish a central bank. The Economic Committee recommended the balancing of the Budget by 1934. This proposal was coupled with arguments in favour of a higher exohangc. ‘ln the absence of a higher exchange sustaining the national income I am doubtful if this can be achieved without a measure of economy which would be very damaging, or added taxation which would impede recovery. If this is so some measure of inflation by deficit finance to the extent of £2,000,000 to £3,000,000 may he unavoidable, at least for 1933-34, as well as for 193233. It. is further imperative, If production is to be maintained, that bank credit should be sustained, and indeed extended, where reasonable prospects of profitable production exist. It is, however, a different matter to hope for reconstruction by a considerable expansion of Internal ourrenoy or credit. It Is a characteristic of additional credit that it precedes the production of additional goods, and any considerable increase in internal currencies and erred It would cause internal prices to rise, or at best prevent internal costs from falling in relation to export prices. The probability is therefore that the position of the farmer would be made worse instead of bolter, for his costs would rise, or at least a fall would be retarded. Under the present temper of the banks, supported by; the Treasury, the exchange would not rise, or a rise would be materially delayed. Hence the price disparity would if anything be increased, or at best be prevented from being: reduced. The better, plan would be lo raise the exchange and direct intornal/credit policy to preserving a more reasonable relationship between internal and external prices. If the new purchasing power represented a gift to farmers in addition to the credit required to maintain production the effects on the .farmers’..costs would he largely offset, but even tins, policy, if continued from year to year, wo urn eventually prejudice him in the same way by affecting .the ratio between his costs and' Ills receipts.

Case Against Present System.

The case for a central bank rests fundamentally on the need for having a single responsible authority to control currency and credit in the general interests of the community. The case against the present system of control by the Associated Banks Is—1. Commercial banks are profitmaking Institutions, and their main concern is that of safeguarding the interests,oi,their depositors and shareholders. ’ Frequently what appears to be their interest may conflict with general Interests, and the general interests suffer.

2. Commercial banks may become involved in the difficulties of industry and commerce, and all the banks are then embarrassed. A central bank is less closely involved and is in a better position to obtain assistance from other financial centres. It may therefore be able., to come to the assistance of the .other banks. 3. Even if the commercial banks wish to adopt a policy desirable from the community point of view they are more likely to be subject to strong public criticism because they are profit-making institutions, and hesitate to put it into effect. A central bank is more likely to be free from criticism on the grounds that its policy is dictated by self-interest. 4. The interests and viewpoints of commercial banks may sometimes confiict, especially as their policy may bo determined by head offices situated in different countries. The result may then be a compromise. One central institution is not faced to the same extent with this difficulty. 5. A central bank is less likely to exert direct or indirect pressure on the Government and to be more willing to put into effect Government policy, because — (a) It is specifically established to manage currency and credit in the national Interest—that is, it has an undivided loyalty. (b) .Whatever Its constitution, it should be directly responsible to Parliament for general policy. Limitations of Reservo Bank. The main limitations on the power and effectiveness of the central bank in Now Zealand are — (a) The small size of the country and the absence of a short-term money market through which control is normally exercised. (1)) The difficulty of obtaining sufficiently experienced Governors. Nevertheless, by contrast with the present situation, 1 believe that in the long run New. Zealand should benefit from the setting up of a central bank. Hence when Sir Otto Nicntcycr’s report was published 1 supported lno. proposal, though 1 disagreed with the report on one or two vital points. Since the report was issued, some 21 months ago, however, the world has experienced, and continues to experience, profound changes, and 1 am coining more and more to the view that the constitution of a central bank should not be finalised until a position of reasonable stability is reached. My main reasons are — 1. Conditions are changing so rapidly that views on the constitution and appropriate policies of central banks are in a stale of llux. To delay would enable us to profit from the experience of the rest of tho world and would avoid tho danger of crystallising a system and a policy which would be damaging to financial ami economic prosperity. For example, Hie Niemeyer report recommends a fixed proportionate reserve system. The more recent tendency, as evidenced by tin' writings of Mr .1. M. Keym's, is to leave the determination of Ihe reserve ratio to the central hanking an I Imril >, ‘ thus providing greater elasticity. The report also recommends the maintenance of parity of exchange with steeling. There is a considerable hoi|\ of opinion which would consider Ihe pn‘snwa I inn "I internal price staldlilx as more dr ■ sicaldc. as long as world prices conlin 1 1" to line 1 1 :a Ic. II would Im illlf >rI u 11 . i ! e if Hie wrong principles were crystallised in Ihe constitution ami policy of Lire bank.

Bank of England.

2. It seems very probable that the polioy of a central bank In New Zealand would be largely dominated by the Bank of England, and It Is more than likely that the first Governor would be a nominee of the Bank of England. At a time of great monetary uncertainty New Zealand should not be prepared to sacrifice her independence in monetary policy to the Bank of England, especially as the City of London most obviously does not appreciate the nature of the problem in New Zealand. It is extremely unlikely that a nominee of the Bank of England would be able to free himself from its traditions and outlook and become’ conversant with the New Zealand situation for some years. y. The danger is all the more real because the proposal of the Niemeyer report is to tie our currency to stciling, and existing predispositions towards a return to parity with sterling would bo fortified. Whatever may be regarded as the appropriate exchange policy at the moment, New Zealand should not limit her freedom in regard to exchange. Up to a few months ago the policy of the Bank of England was deflationary. Mr Montagu Norman, the Governor of Lhe Bank of England, is reported in recent cables to have confessed his inability to see his way out of the present problems. This is understandable, and others are in the same position, but 1 question tlie wisdom ol' hitching our monetary machine too tightly lo the Bank of England until the light is a lit Lie clearer and we know where we are going. So I suggest that we make haste slowly. It has been argued with some justification that dependence on the opinion of lhe City of London and a deflationary exchange policy are characteristics of the present situation, and that the position would he no worse if we had a central bank. I think, however, that the movement towards parity of exchange with sterling might well be strengthened if the first Governor were a nominee of the Bank of England, and that the advantages of unified control of currency and exchange might he achieved without crystallising the policy and constitution of a central bank through the establishment of .a Currency and Exchange Board. 1, therefore, suggest Hint it would be desirable, as a transitional measure, to establish such a board, which would perform some of the main functions of a central bank, more particularly in reference to Urn determination of an exchange policy and the issue of currency. This would enable us to obtain some experience before a central bank was established ami would not commit us for a long period to a constitution and policy which later might prove not. of Hie best, ami which might not he readily altered. Propositions for Action. If the Government decides to establish a central bank I suggest the following propositions with regard to action: — 1. The bank should be recognised as a national institution and the proiltrf of shareholders' should be rigidly limited. 1 sec no serious objection to providing some at least of Hie capital required by private subscription it n strict limitation of profits is enforced. 2. While detailed parliamentary interference must be avoided, the ultimate responsibility of Parliament for i general runamey and banking POll’i must be recognised, as il has been, for example, in England. For example, ; parliament, must not evade the duly ; uf determining whether stability of ! ~'.change is In be aimed at wr of interj mil prims .uni purchasing power. ] ;; \t the pres"ni lime there is no | ,j,, U ;,| that -.lability of 1 internal prices ; in l l purchasing pnw rr is more import - ■ , M || than sI; 1 1 >i 1 it > of exchange, and it | w j;i hr a grave error lo lie exchanges | sterling. I believe lhal ii would j jn> a mistake In include ill I tie Act I he I clause uf I lie Niemever report whi.-l! | j.; i,\ ides fur III" niaillieliauee of parity I of exchange with sterling, even if Hr; i safeguard were introduced that such

a policy should not be brought Into operation for the time being, for an objective would thereby be laid down which would provide a definite lead to future polioy. 4. To quote Mr Keynes: The day-to-day polioy of the hank, its statistics and its Immediate aims and objects should be as publio as possible and deliberately exposed to public criticism." 5. The appointment of the governor and deputy governor should requite the approval of the Governor-in-Council. . 6. In addition, the Government should have some direct representation on the directorate. It would he unwise, however, if any member of Parliament, civil servant, or other Government official, were permitted to act cither on the directorate or stau of Lite bank. Of 28 central banks the constitution of which 1 have examined 14 have directorates appointed whohy by the Government or the Government lias substantial representation; 14 have directorates elected mainly by the shareholders, though In many .of these the Government has some representation or possesses powers in regard to representation. The first directors will naturally be appointed by the Government for a period, and I suggest that it might be wise to defer decisions as to the final basis of representation until the end of suMi period. 1. The Government should submit its detailed draft Bill to independent authorities other than sir Otto Niemeyer and Professor Gregory, and not connected with the Bank of England, for criticism. I suggest Mr J.■ M. lveynes, as the world s outstanding authority on monetary problems. I believe it to bo in the best interests of New Zealand that a central bank should be ultimately established, but feel that at the present time it would be preferable to establish a Currency and Exchange Board. Iu any case, additional independent expert opinion outside New Zealand should be obtained. If the alternatives were to have a central bank now or not at all 1 should prefer to run the risk and have a central bank now, but these do not appear to be the alternatives. It seems to me that the establishment of a Currency and Exchange Board would definitely prepare Hie way for Hie establishment of a central bank when conditions stabilised, and would remove Hie disadvantages which would bo very likely to follow front Hie premature establishment of such a bank-