8.—3.

the value of the currency by holding the exchange-rates within a swing of approximately 30s. per cent, either way, that being the approximate cost of shipping gold from London to New Zealand and vice versa. When the time comes to stabilize the currency —which will normally accrue when sterling is again stabilized on some definite basis—it will be necessary to amend the Act accordingly. Hitherto, parity has been pound for pound, but a sterling-exchange standard could function at any other ratio, provided the chosen ratio was in accord with the relative price-levels in the two countries. In recognition of the fact that notes are subsidiary to credit, no separate limitation is placed upon the note-issue, but the Bank is required to maintain a reserve of liquid sterling assets or gold of not less than 25 per cent, of its demand liabilities, including notes. It may be added that in the long-run, if not in the early stages of its operations, the reserve will probably consist mostly of sterling assets, which will mean that the volume of London funds will still be the governing factor of our credit structure. The trading banks are to be deprived of their rights of note-issue on Ist August next, and are required to retire their own notes in circulation. When this operation is completed, we will have a single note-issue as a liability of the Reserve Bank and the trading banks will have to buy all the notes that they require from the Reserve Bank. Thus in future, in their internal operations, the trading banks must have regard to their ability to acquire Reserve Bank notes, and this fact, coupled with the necessity of maintaining a minimum balance with the Reserve Bank, will give the latter effective control over the credit structure. Provided there is the necessary margin in the reserve, it is, of course, open to the Reserve Bank to increase cash resources generally by buying securities. Power to control the internal credit structure, especially if combined with a substantial balance of London funds, will give the Reserve Bank control over exchange-rates. Furthermore, the statutory returns which the trading banks have to make monthly to the Reserve Bank will supply the latter with all essential information in regard to the position of the trading banks. One of the items to be disclosed by each bank in such monthly return is the overseas assets in respect of its New Zealand business held in London and elsewhere respectively. This should be the means of overcoming a weakness in the banking system that has hitherto existed. This weakness arose out of the fact that four of the six banks carrying on business in New Zealand, from the point of view of their operations, are primarily Australian institutions. Australia is operating on a sterling-exchange system very similar to that of New Zealand, and the London balances to finance the trade of both countries, so far as these four banks were concerned, really formed one fund. In fact, some of the banks themselves did not know how much of their London funds had accrued from New Zealand business and how much from Australian business. As a result, the two countries have practically been regarded as one for the purposes of exchange on London, and the approximate uniformity of rates of exchange for both Australia and New Zealand fixed in the past by the six banks in association was presumably based on the average economic conditions and outlook of the two countries combined. Now, Australia is a much larger economic unit than New Zealand, and accordingly this country is much more affected by Australian conditions than Australia is by New Zealand conditions. Thus the rates of exchange New Zealand on London and vice versa were governed to a preponderating extent by Australian conditions. The implication was that the London balances built up by the banks from the good trading years of New Zealand were used to support the Australian exchange when Australian external conditions were adverse. At times the operations were no doubt the other way round, but as Australia is so much larger than New Zealand and liable to greater ups and downs from climatic conditions, the net result on balance worked out unfairly to the people of this Dominion. The Reserve Bank, in their actions generally, including the fixing of exchange-rates, will have regard to the trading position and economic outlook of New Zealand only, and to be able to operate successfully at those rates the trading banks will generally find it necessary to reserve the proper proportion of their London funds for their New Zealand business and deal with Australian business separately. The severance from Australia will be made more complete owing to the fact that, when the Reserve Bank takes charge, we will have a New Zealand board of directors exercising a deliberate and conscious control of our monetary system in the best interests of the Dominion as a whole. Hitherto all matters pertaining to our currency and credit have been largely in the hands of the six trading banks, of which only one has a New Zealand board of directors and four of the remaining five have much larger interests in the Commonwealth than in the Dominion. In the circumstances narrated it is obvious that the trading banks could not have any defined or conscious policy relating to the volume of money and credit as a whole or take into consideration the effect of their united transactions on the pricelevel of commodities in general. Although they act in association in fixing rates there is strong competition for business among the trading banks, and, as a result, the tendency has been in the direction of over-advancing in prosperous times and too drastic curtailment when conditions became adverse. At present our exchange-rate is pegged at 25 per cent, off sterling under an indemnity arrangement with the banks whereby the Government purchases all surplus London credits at the pegged rate. A considerable amount of surplus credits have been taken over to date, and the banks have received payment in New Zealand in the form of Treasury Bills. Now, as previously demonstrated, if a Treasury Bill is sold to a bank in exchange for credit in New Zealand, the expenditure of that additional money increases purchasing-power, and thus has an inflationary effect. This is not the case with the Bills given in exchange for London funds, as no additional expenditure in New Zealand is involved. The accumulation of sterling in the hands of the Government can, however, be used to place the Reserve Bank in a strong position from the outset. This can be accomplished by handing over the surplus sterling 'assets to the Reserve Bank, which under its statutory provisions must give notes for the same in New Zealand. These New Zealand resources can then be applied in paying off the Treasury Bills issued to the trading banks in payment for the sterling. These operations will lighten the interest burden of the Government, and so increase the sterling reserve of the Reserve

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