WHAT IS THE CENTRAL BANK?

Evening Post, Volume CXVI, Issue 102, 27 October 1933, Page 6

WHAT IS THE CENTRAL BANK?

ITS FUNCTIONS EXPLAINED

(To the Editor.)

Sir, —The man in the street wants to know what is meant by centralising the banking system. So to strip the question of- all technicalities, let us make the following explanation. To do so we would use a very elementary illustration: —Take a community that had no banking system at all; each citizen in such a community would be compelled to keep in some secret place all the money 'he saved. Then, when he wanted to buy anything, he would have to take actual coins to make tho purchase. Now the danger, risk of loss, and the inconvenience of such practice is obvious, and such a state of things would be impossible today. , . Into this community conies a banker, and he establishea a bank, by which means he actually centralises the financial resources o£ that community. His bank gives security, eliminates loss, and' provides the people with cheques and notes, bills o£ exchange, which enable .them to buy goods in any part of the world. The great benefit that such a bank can bestow on that community is obvious. Again, by experience the banker knows that he will not be called upon to keep in reserve for banking -.requirements more than a sma 1 percentage of the total deposits. The balance he can lend out to those whose business it is to carry on the development of the country's industrial life. Now, in New Zealand we have reached the position where we have six private banking companies. Each has centralised the financial resources of those with whom it does business.. Each, however, has a separate note issue; each holds a separate amount of gold, which today in a decentralised form is of no use to the bank or the country. Each has separate London agents with whom it arranges to buy tor its. customers the goods of other countries by- me&s of the bills of exchange. It is clear to the man in the street that if so much benefit has accrued to the community by the centralisation ot their individual financial resources, mucli greater will be the benefit to the banks, and through them to the community, of the. centralisation of the resources ot the banks. To do this we employ the machinery of a Qentral Reserve Bank. Such a bank becomes the sole note-issuing authority) the banker for the banks, the custodian of the gold reserve, and the discounting house for the trade bills ot the country's commerce.- As with the trading bank, so with the Reserve Bank. It increases the credit facilities of the country, and, what is much more important, it increases the velocity with which the credit circulates. If, instead of sending our export bills to different bill brokers in London for rediscounting, we can do this in Wellington in a day at our Reserve Bank,, we not only add to the velocity of turnover, but we do the business at'less cost. To explain this: We all' know that a credit instrument, such as a cheque,, a promissory note, a bill of exchange, a trade acceptance, is valued according to its backing; so, it our bills of exchange go forward to the London market for rediscounting accompanied by orir'shipments of produce, endorsed by the producer, his trading bank, and, in addition, the endorsement of the New Zealand Reserve Bauk, which represents the centralised financial resources of the Dominion iteelf, then their as a credit instrument for the discounting is greatly increased, and the saving to the producers of New Zealand on £40,000,000-£50,000,000 of bills a year can be added to the estimated saving to the taxpayers for this year of £640,000— making it over a million pounds a year. The position has been aptly stated by the Rt. Hon. Reginald McKenna, who said: "A Reserve Bank is a well from which springs the water of life. The commercial banks are the pipes thnt carry it to a thirsty economic system." Lot us. therefore, dispel from ouv minds the illusions which seem to envelop this grea.t question, and judge it in the light of international ejcperienee and the benefit of our country.—l am, etc., J. HISLOP. Auckland, October 26.