RESERVE BANK OF NEW ZEALAND. STATEMENT OF ACCOUNTS AND REPORT OF THE BOARD OF DIRECTORS FOR THE YEAR ENDED 31st MARCH, 1936.

Appendix to the Journals of the House of Representatives, 1936 Session I, B-16

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1936. NEW ZEALAND.

RESERVE BANK OF NEW ZEALAND. STATEMENT OF ACCOUNTS AND REPORT OF THE BOARD OF DIRECTORS FOR THE YEAR ENDED 31st MARCH, 1936.

Presented to both Houses of the General Assembly pursuant to Section 20 of the Reserve Bank of New Zealand Amendment Act, 1936.

ANNUAL REPORT.

To the Hon. tie Minister of Finance. In accordance with the provisions of section 20 of the Reserve Bank of New Zealand Amendment Act, 1936, the Board of Directors presents herewith a general report on the operations of the bank during the financial year ended the 31st March, 1936. After making such provision as the Board deemed to be proper in the circumstances for rebate on British Treasury bills not then due, depreciation in other assets, and superannuation and retiring allowances for the staff, the net profit for the year amounted to £98,012 7s. 2d. Of this sum, £70,000 was paid in advance to the Consolidated Fund in compliance with your request made under the terms of section 11 of the Finance Act, 1934, leaving a balance of £28,012 7s. 2d. outstanding at the end of the financial year. As provided by section 2 of the Reserve Bank of New Zealand Amendment Act, 1936, a dividend of 5 per cent, on the paid-up capital of the bank has been paid to the registered shareholders of the bank as on the 31st March, 1936. The remaining sum of £3,012 7s. 2d. has since been credited to the Consolidated Fund, making a total of £73,012 7s. 2d. so paid over in respect of the year. The profit was again affected very considerably by the low rate at which British Treasury bills continued to be sold in London, the average rate obtained by the bank from that source being lis. 2d. per centum per annum. Having regard, however, to the statutory provisions governing the investments and reserve of the bank, the primary need for a central bank to maintain a very liquid position, and the almost entire absence of any other more profitable yet suitable means of employing funds, the income of the bank could not but be dependent in a large measure upon the yield obtainable from British Treasury Bills. The principal changes in the balance-sheet as compared with the figures at the close of the previous year were as follows : — Liabilities. Bank-notes. An increase of £804,582 10s., which more than offset, a decrease of about £310,000 in the total amount of the trading banks' notes outstanding, thus reflecting an increase in the turnover of trade which took place during the year. Demand Liabilities. (a) State. —A decrease of £3,428,333 13s. 9d., which is accounted for partly by the sale to the Treasury of London funds to provide for the repayment on the Ist October, 1935, of £2,135,800 (sterling) of the New Zealand 5 per cent. 1935-45 sterling loan and the cost of converting the balance of £8,000,000 of that loan. (b) Banks. —An increase of £4,530,345 13s. 6d. Since the end of November the trading banks' balances have been maintained at a level exceeding by about £5,000,000 the total of their balances during the earlier part of the year. This increase was brought about by the sale by them of London funds to the Reserve Bank. The minimum balances required by statute in respect of the demand'and time liabilities as on the 30th March, 1936, amounted to £3,362,772. Assets. (а) Gold. —Two hundred thousand sovereigns were sold in London at the beginning of the year. (б) Sterling Exchange.—The sterling funds (calculated at the rate of £100 sterling equals £124 New Zealand) available for the purposes of the bank's statutory reserve, as defined by section 17 of I—B. 16,

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the Reserve Bank of New Zealand Act, 1933, increased during the year by approximately £2,418,000, the total at the end of the year being about £8,000,000 (New Zealand currency) higher than the lowest point touched during the year. (c) Investments decreased on balance by £268,653. The variations in the other items of the balance-sheet were unimportant. Shareholders. During the year the number of share holdings decreased from 6,300 to 5,699, and the average holding rose in consequence from £79 7s. 3d. to £87 14s. Bd. (nominal value). Legislation. The following two Acts which in part affect the Reserve Bank were added to the statute-book : — (i) Banking Amendment Act, 1935 ; and (ii) Finance Act (No. 2), 1935. The first-mentioned Act consists almost entirely of consequential amendments, of no particular importance, to earlier banking legislation following upon the establishment of the Reserve Bank. In addition, the nature of the offence of defacing bank-notes without authority lias been widened. The principal clause in the other Act which affects the Reserve Bank is one which fixes on the bank the liability for payment of all charges made by any other bank for performing any agency services in connection with the Government's banking accounts. As this report deals only with the financial year ended the 31st March last, no reference is made to changes brought about by the Reserve Bank of New Zealand Amendment Act, 1936, which was passed after that date. Bank-notes. No change was made in the design or in the denominations of the bank's notes during the year. As far as can be ascertained, the needs of the public in the latter respect are adequately met by the existing notes, and therefore it is not proposed to incur the expense of adding to the number of denominations of the original issue unless and until there is evidence of a reasonably widespread demand for notes of any other denominations. The question of a change of design for notes of a more permanent nature has engaged the attention of the Board ; but it is not proposed to take any definite action in that respect for the present. Silver Coin. The bank has now assumed the responsibility for the management of the silver coinage in the Dominion. Exchange Rate. The rates quoted by the bank, in accordance with the provisions of section 16 of the Reserve Bank of New Zealand Act, 1933, for the payment of notes in sterling, and for the issue of notes in exchange for gold or sterling, remained unchanged at the levels fixed in July, 1934, when the bank was about to commence business. The rates are : £125 and £124 New Zealand currency, respectively, equals £100 sterling. There were no changes in the basic rates of exchange quoted by any other of the countries in the " sterling " group during the year. In this connection it is of interest to note a statement reported to have been made at the recent annual meeting of the Bank for International Settlements to the effect that an area covering more than 85 per cent, of the world's trade enjoyed for a full year the benefit of practically stable exchange rates. Discount Rate. Under section 13, subsection (2), of the Act establishing the Reserve Bank the bank is required at all times to make public the minimum rate at which it is prepared to discount or rediscount bills. The qualifications of bills eligible for discount were defined by subsection (1) of that section as amended by section 6 of the Finance Act, 1934. The original rate quoted by the Reserve Bank when it commenced business was 4 per cent., which was 1 per cent, below the best rate then being charged by the trading banks for overdrafts. The Reserve Bank's rate was reduced to 3| per cent, in July, 1935, and further to 2| per cent, in March, 1936 ; and it is now as low as that of any other central bank in the " sterling " group of countries with the exception of the Bank of England, whose rate at present is 2 per cent. On the occasion of each reduction of the rate, attention was drawn to the difference between the nature of that rate and the overdraft rate of the trading banks. The principal distinction lies in the fact that the discount rate applies only to bills of exchange, which are for fixed amounts and are repayable on a definite date, whereas an overdraft can either be added to within prescribed limits or reduced in whole or in part at any time during its currency. Moreover, a bill of exchange is a document which is negotiable, whilst an overdraft cannot be so dealt with. The question of the use of bills of exchange requires to be viewed from various angles. Whilst the convenient operation of the banking system is an important factor, the interests of the various parties to the bills must not be overlooked. Another consideration is the suitability or otherwise of bills as a means of financing various transactions. And, further, the circumstances of various countries differ very considerably, so that a procedure which may be admirably suited to the conditions obtaining in some centres may not be capable of satisfactory adaptation in others. The history of bills of exchange has not been completely unchequered in some countries. That they have provided an eminently satisfactory medium for financing certain types of transaction is beyond doubt; but, unfortunately, the use of bills has not always been restricted to such transactions and, in consequence, there is a tendency in some quarters to look askance at them. If a bill market is to be developed along sound lines it is therefore imperative to scrutinize carefully the purposes for

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which bills are being used, and to exclude from the benefit of the comparatively low discount rate any bills which do not answer to the test of desirability. Apart from the financial standing of the parties thereto, the principal essential of a first-class bill of exchange used for trade purposes is that it should be self liquidating ; that is, the proceeds of the goods against which it is drawn should be available for payment of the bill at maturity. So long as this condition is observed, the improper use of bills should be avoided and the establishment of a sound market should be facilitated. Although a bill market is a useful adjunct to the financial structure of any country where banking is widely established, it is undesirable to attempt to force the use of bills upon the trading community unless that means of financing transactions can be proved to offer advantages over alternative methods. In other words, a bill market could hardly be expected to exist for the benefit of the banking system unless the users of bills were satisfied that their requirements were being met by that means better than, or at least as well as, by any other form of accommodation. Trade bills are divisible into three classes —namely, those covering exports, imports, and domestic transactions respectively. In the case of export bills the question of exchange enters into the transaction, as the bills are ordinarily payable in another currency ; moreover, such bills are in practice remitted forthwith for acceptance overseas, and they cannot therefore form the nucleus of a local bill market. Import bills and inland bills, however, would ordinarily be payable in the Dominion. They might therefore be eligible for discounting at the Reserve Bank provided they complied with the statutory requirements of two or more " good signatures " —that is, if they bore the signatures of at least two parties either of whom might be regarded as undoubted for his engagement. In the normal course, holders of bills who wished to discount them might be expected to offer them first to their ordinary bankers. The rate of discount which the banker would charge would no doubt be influenced by the Reserve Bank's published discount rate and by the nature of the bills. If the endorsement of the discounting banker were necessary to make such bills eligible for discounting at the Reserve Bank, that fact would doubtless be taken into consideration in quoting a rate to the customer. If, however, the bills already bore two signatures which would be regarded as " good " by the Reserve Bank, they might be expected to command a rate not appreciably higher than the Reserve Bank's rate. Thus, although the Reserve Bank might not actually be discounting any bills, its rate should have the effect of determining the maximum rate which the public would be charged for eligible bills. Moreover, eligible bills held by trading bankers would provide one of the best means of their obtaining accommodation at the Reserve Bank in case of need. A bill market implies, of course, the existence not only of bills but also of a group of persons or corporations prepared to deal freely in them. Whilst such a market in New Zealand may be regarded as a highly desirable objective, its complete establishment does not appear to be capable of immediate realization. Nevertheless, the Board is of the opinion that all practicable steps should be taken to promote such a development, and that the proper use of bills should be encouraged as much as possible. In reducing the rate of discount to a level considerably below that quoted by the trading banks for overdrafts, one object of the Board was to create conditions in which producers, manufacturers, and merchants would have the opportunity of testing whether the balance of advantage for them lies in the use of bills discountable at a relatively low rate or in the more flexible overdraft at a higher rate. In recent years the use of Treasury bills has been extended very considerably in many countries, and it is not unusual for such instruments to form the major part of the contents of the portfolios of dealers in bills in those countries. Treasury bills provide a useful and economical means of financing expenditure of a temporary nature ; and the Board is of the opinion that recourse to this means of borrowing, if kept within reasonable bounds, would not only be convenient and economical for the State, but would in addition assist in the development of a bill market, thereby facilitating the control of credit in the Dominion. It is, however, considered that the issue of Treasury bills should ordinarily be restricted to such extent as is necessary to cover expenditure incurred during certain periods of the year in anticipation of revenue or other receipts to be received later, and to such further strictly limited amount only as can be kept outstanding without risk to the financial structure. Recourse to the issue of additional Treasury bills may become a practical necessity in certain circumstances, and it is therefore regarded as most desirable that latitude should ordinarily be allowed for an increased issue to meet aii emergency. London Funds. Although naturally fluctuating on account of the usual seasonal demands, the combined totals of the London funds held by the Reserve Bank and those shown in the monthly returns of the trading banks as held in respect of New Zealand business varied only slightly over the whole year. The figures (in New Zealand currency) shown as on the last Monday in March of each year were as follows

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r, T, , Tiading Banks m * i Reserve Bank. (Nej . / igures) . Total. (000 omitted.) £ £ £ 25th March, 1935 .. 22,435 16,605 39,040 30th March, 1936 .. 24,830 14,143 38,973 -I £2,395 —£2,462 -£67

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According to the figures published by the Government Statistician, the values of exports and imports to and from all countries during the same period were-— N.Z. Currency (000 omitted). £ Exports .. .. .. .. .. .. ..49,676 Imports .. . . .. .. . . . . .. 37,440 Showing an excess of exports amounting to .. .. .. 12,236 Against this favourable balance of trade there must be set off the total of the London funds absorbed by interest on Government and local-body debt, and by the part redemption and part conversion of the Government's 5-per-cent. 1935-45 sterling loan, which together amounted to approximately 11,200 Leaving a net favourable balance of .. .. .. £1,036 It will be seen that the balance of payments arrived at in this manner corresponds more or less closely to the alteration in the combined holdings of London funds. Whilst this comparison suffices to indicate broadly the absence of any pronounced net movement of capital to or from the Dominion, it is not intended as an exact calculation, as various qualifying factors have been disregarded and, in addition, certain alterations in the method of arriving at the amount of London funds held by trading banks in respect of New Zealand business were agreed to during the year. There still appears to be a lack of understanding in some quarters as to the nature and significance of the London funds at present held on account of New Zealand. To regard them as lying idle is obviously incorrect in various respects. In the case of a country like New Zealand, which is on a sterling exchange standard, London funds serve the same purpose as do the gold reserves of countries on the gold standard —that is, they constitute the foundation upon which the credit structure of the Dominion rests, in addition to providing a reserve available for meeting commitments overseas in case of need. Moreover, the full equivalent of the London funds in New Zealand currency has been made available in the form of purchasing-power in the hands of the public in the Dominion ; and until required for expenditure overseas this purchasing-power is available for use within the Dominion. The following figures show the reserve position—that is, the ratio of gold to sight liabilities —of certain countries on the gold standard :—

These figures do not include any foreign currencies which may have been held in augmentation of the national monetary reserves. As compared with the above figures, the Reserve Bank's ratio stood at 98-46 per cent, at the end of the financial year, the lowest point touched during the year having been 96-56 per cent. But whereas the reserves shown for the above-mentioned "gold" countries were entirely held in the form of gold, which is unproductive, the bulk of the reserve of the Reserve Bank is revenue producing. It must be remembered also that the Dominion's sterling reserves accumulated at an abnormal rate during the years 1933-34, and they are therefore more than ordinarily liable to be drawn upon in respect of deferred purchases overseas. Moreover, the Reserve Bank's figures being relatively small, the effect, per £1,000,000, produced upon the ratio by the replacement of sterling assets by assets in New Zealand would be relatively great. Geneeal Survey. Indices prepared by the Government Statistician, upon which the following comparative statement is based, show that, with the exception of exports, the price-levels at the end of the year did not differ much from those at the beginning, although moderate fluctuations occurred during the year.

Base : 1909-1913 = 1000.

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Country. December, 1935. 4 • during 1935. Per Cent. Per Cent. Switzerland .. .. .. 85 96 Netherlands .. . . .. 76 81 United States of America .. 75 75 France .. .. .. 71 81

Pprnpn+aem Highest and Lowest Index. March, 193S. March, 1936. Point reached during Period. A. Wholesale— High. Low. Imported items . . .. 1312 1313 . . 1329 1311 Locally produced items .. 1409 1447 2-7 1522 1409 Combined wholesale index .. 1365 1386 1-54 1434 1365 B. Export prices .. .. 1090 1204 10-46 1242 1026 C. Retail prices .. .. 1409 1428 1-35 1453 1409

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Although the statistics quoted below may have been influenced to some extent by the fluctuations in prices which occurred during the year, there can be little doubt that, taken collectively, they indicate a considerable increase in business activity.

Despite the increase in business activity, easy money conditions prevailed in the Dominion during the whole of the year. The State accounts were always in funds, and there was therefore no need for the Treasury or any other public Department to borrow from the Reserve Bank. The trading banks likewise maintained balances at above the levels required by statute, and they also were not obliged to ask for accommodation. In addition to their balances at the Reserve Bank, the trading banks held Reserve Bank notes and silver coin, these three holdings combined forming their cash reserves in New Zealand currency. Over and above these cash holdings, they held substantial amounts of London funds in respect of their New Zealand business ; and, in accordance with the provisions of section 16 of the Reserve Bank of New Zealand Act, 1933, such balances, to the extent to which they were held in liquid form, were available for immediate conversion into New Zealand currency at any time. The position of the banks as disclosed by their statutory monthly returns was as follows : —

NEW ZEALAND TRADING BANKS. Monthly Return under Section 46, Reserve Bank of New Zealand Act, 1933. (000 omitted.)

Since the passing of the Banking Amendment Act, 1935, the totals of the trading banks' holdings of New Zealand Government securities in the Dominion have been added to their monthly returns. As these securities, which amounted to over £5,000,000 at the end of March, could in case of need be pledged as collateral for advances from the Reserve Bank, their existence has a bearing upon the financial situation. The figures given above indicate a state of liquidity of the banking system of the Dominion throughout the year. The fact that the total of the trading banks' advances at the end of March was only very slightly in excess of the corresponding figure a year before may therefore be taken as indicating the absence of demand for additional accommodation on the part of satisfactory borrowers. This position is further evidenced by the fact that the overdraft rate has never been lower during the present century.

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Year ended Year ended Percentage 31st March, 1935. 31st March, 1936. Increase. (000 omitted.) Exports (excluding specie) .. .. £(N.Z.) 44,918 £(N.Z.) 49,676 10-6 Imports (excluding specie) .. .. £(N.Z.) 32,568 £(N.Z.) 37,440 15-0 Sales tax .. .. .. .. £(N.Z.) 2,171 £(N.Z.) 2,468 13-7 Bank debits (excluding Government) .. £(N.Z.) 665,322 £(N.Z.) 712,809 7-1 Building permits (main towns).. .. £(N.Z.) 3,093 £(N.Z.) 4,988 61-3 Railway revenue .. .. .. £(N.Z.) 5,908 £(N.Z.) 6,244 5-7 Number of passengers — Road motor services .. .. 3,011 3,240 7-6 Railway .. .. .. .. 19,654 20,359 3-6 Railway tonnage .. .. .. 6,024 tons 6,189 tons 2-7 Coastal shipping .. .. .. 1,530 tons 1,611 tons 5-3 Motor-vehicles (licensed) .... 209 228 9-0 Calendar Year, 1934. Calendar Year, 1935. Retail trade* .. .. .. £1,425 £1,494 4-9 * Based on total sales of sixteen departmental drapery stores.

■Rankers' r»<sh Liabilities in Hew R ., . „ „ „ Hauliers oasn. London rnTv^,no ,, Zealand. Katio oi l< Tota , Funds C °™™> d : Holding of C ' ash (expressed lota!s Balances Holdings 01 in in Total To Kestve Reserve silyer ZeSnd. zSd «£ —* S Ban,. Ban. Silver Cmency , E. Tjme) Liabilities. "A." "B." "C." "D." "E." "P." "G." "H." "F" "F" to to 1935. £££££ £ ££" G." " H." April 29 .. 3,825 3,854 778 8,457 18,266 26,723 27,095 62,850 98-6 42-5 May 27 .. 4,195 3,879 794 8,868 18,746 27,614 26,375 62,260 104-7 44-4 June 24 .. 3,877 3,714 798 8,389 18,683 27,072 25,922 61,748 104-4 43-8 July 29 .. 4,258 3,437 676 8,371 18,034 26,405 25,196 61,187 104-8 43-2 August 26 .. 4,453 3,158 816 8,427 17,174 25,601 24,779 61,161 103-3 41-9 September 30 .. 4,633 3,034 816 8,483 16,206 24,689 24,635 61,386 100-2 40-2 October 28 .. 4,495 3,052 760 8,307 12,293* 20,600 24,922 61,115 82-7 33-7 November 25 .. 5,234 3,245 804 9,283 12,065 21,348 25,836 62,059 82-6 34-4 December 30 .. 9,676 3,691 744 14,111 9,755 23,866 27,168 64,303 87-8 37-1 1936. January 27 .. 10,247 3,788 812 14,847 11,150 25,997 28,828 65,862 ! 90-2 39-5 February 24 .. 10,663 3,497 761 14,921 12,726 27,647 30,469 67,630 90-7 40-9 March 30 .. 8,938 3,593 754 13,285 14,143 27,428 31,946 68,476 85-9 40-1 * Decrease due partly to alteration in basis of apportionment.

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In the easy money conditions which prevailed, the Board did not consider that any useful purpose would have been served by the expansion of Central Bank credit in the Dominion to any appreciable extent; nor did there appear to be any need for contraction. The Reserve Bank, therefore, aimed at the maintenance of a state of equilibrium rather than the attainment of any other object by monetary means. In all its actions the Board has been guided by its conception of the two primarv functions of the Reserve Bank as a Central Bank. In the first place, as banker to the State it has aimed at conducting the affairs of the bank in such a manner as to enable it to give as much assistance as is practicable to the Government of the day in putting its monetary and financial policy into operation ; and, secondly, as banker to the trading banks and custodian of their statutory cash reserves it has, within the limits of its powers, endeavoured to render to them all reasonable support in the conduct of their normal business and also to safeguard their cash reserves entrusted to its care. In the exercise of these functions, and in tendering any advice to the Government 011 monetary and financial matters, it is the constant endeavour of the Board to act in a spirit of complete detachment from any sectional interests of any kind whatever and to regard all such questions entirely from the point of view of what is most likely to promote the welfare of the Dominion as a whole. Staff. In conclusion, the Board wishes to avail itself of this opportunity of expressing its appreciation of the willing and efficient manner in which the staff as a whole has discharged its duties. For and on behalf of the Board of Directors— L. Lefeaux, Governor. Ist June, 1936. W. P. L. Ward, Deputy Governor. Profit and Loss Account fob Year ended 31st March, 1936. To General charges, including salaries, £ s. d. By Balance of profit after making pro- £ s. d. rent, cost of note issue, and other vision for rebate on Treasury bills not expenses .. .. .. 76,210 11 10 yet due, and for sundry liabilities and Staff Superannuation and Provident contingencies .. .. .. 183,222 19 0 Fund .. .. .. .. 9,000 0 0 Balance, being profit for year .. 98,012 7 2 £183,222 19 0 £183,222 19 0 Profit and Loss Appropriation Account. £ s. d. £ s. d. To Payments to Government in terms of By Balance from Profit and Loss Account 98,012 7 2 section 11 of the Finance Act, 1934 70,000 0 0 Balance .. .. .. .. 28,012 7 2 £98,012 7 2 £98,012 7 2 Balance-sheet, as at 31st March, 1936. Liabilities. £ s. d. Assets. £ s. d. Paid up capital .. .. .. 500,000 0 0 Gold (at face value) .. .. 2,801,733 0 0 General Reserve Fund .. .. 1,000,000 0 0 Sterling exchange .. .. .. 24,876,004 12 0 Bank-notes .. .. .. 10,187,304 10 0 Subsidiary coin - .. .. .. 201,126 9 8 Demand liabilities — Investments .. .. .. 1,801,118 0 0 (a) State .. .. .. 8,794,967 11 7 Other assets .. .. .. 22,005 16 6 (b) Banks .. .. .. 9,049,392 16 1 N.B. —Holdings of sterling have been (c) Other .. .. .. 79,919 9 6 converted into New Zealand curOther liabilities .. .. .. 62,991 310 reucy at the rate of £100 sterling Profit and Loss Appropriation Account 28,012 7 2 equals £124 (N.Z.) £29,702,587 18 2 £29,702,587 18 2 L. Lefeaux, Governor. W. F. L. Ward, Deputy Governor. W. R. Eggers, Acting Chief Accountant. Auditors' Certificate and Report. —We have audited the balance-sheet as at 31st March, 1936, above set forth and have obtained all the information and explanations we have required. We have accepted the certificate of the Bank of England as to assets held on account of the Reserve Bank of New Zealand. In our opinion the balance-sheet is properly drawn up so as to exhibit a true and correct view of the state of the affairs of the bank as at 31st March, 1936, according to the best of our information and the explanations given to us and as shown by the books of the bank. J. L. Griffin 1 . v , D. G. Johnston/ u 1 ors ' Wellington, New Zealand, Bth May, 1936. Approximate Cost of Paper.—Preparation, not given : printing (560 copies), £8 15s.

By Authority: G. H. Loney, Government Printer, Wellington. —1936.

Price 6d.]

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