MAIN FUNCTIONS OF RESERVE BANK

Hawke's Bay Herald-Tribune, Issue 193, 1 September 1937, Page 3

MAIN FUNCTIONS OF RESERVE BANK

CURRENCY FACTORY Professor Murphy Explains System UNRESTRICTED POWERS "The sky is the lixnit. The bank is a currency factory, and there is practically no restriction on the power of the Government to create. legal tender money or to raise credit in New Zealand," said Professor B. E. Murphy, of Victoria TJniversity Codlege, Wellington, last evening when speaking in Hastings of the Reserve Bank Act of 1933 and its amendment of last year. Professor Murphy' s address was given under the auspices of the Chamher of Oonunerce and its title was "The Banking Situation and the Reserve Bank." Mr H. W. C. Baird presided over an audience of about 200 in the Assemhly Hall. Professor Murphy said that the present banking system in New Zealand had reached a yery interesting stage and this was only to be expected in view of the tendency towards.Socialism. It was obvious that if there was to be Socialism and planning of industry and commerce then there would have to be socialism of banking and finance. "Assume a society mainly capitalist in structure and function, under full socialism there would be banks and banking to keep the division of Jabour and the free consumer choice," continued the Professor. "On the other band, a socialist society would require a money and a policy to secure a price level, and also some means of making funds available for various enterprises. They would, however, work along somewhat different lines and apply different credit tests. In any society it is better that' money should be neutral, or that it be not employed as an implement of general policy. If it is so employed it will not function efficiently as a money. A faulty money system makes the general economic situation worse, and a sound money system couduces to welfare. Yariations in effe'ctive money supply can redistribute national income, but cannot in any direct way increase real national income or wealth." "A Thing of the Past." The speaker went on to sav that as the money system has developed, actual metallic money had lost importance, and that now, as a standard money. metal appeared to have disappeared ; in fact, metal money was a thing of the past, and the gold standard appeared to have gone for good. "Whether for good or for ill, gold ceases to be eirculated, and the world now has a currency of managed money," he said. This change virtually amounted to taking from the Government certain power, for it minted the metallic money, and gave it to those institutions which issued the modern paper money. The predominance of paper money presented' a problem oforegulation, for the bulk of modern transactions were settled by clieque, without the use of money at all ; thus banking becam» very important. The essence of banking was acceptance of money or credits, subject to withdrawal'by cheque. If afi institution did this it was a bank wjiatever it might be called, and if it did not then it was not a bank. The recession of actual money frotn the field of exchange had. greatly in-

creased it, notably regulation. these new duties were not quite compatible with some other functions of the bank there developed a differentiation of banking into two sets of institutions. Oue set dealt with public or monetary aspects of banking, and the other concerned itself withi the finance of private industry. "Thus we gct central banks and commercial or trading banks," he said. Functions of Central Bank., ✓ There was a trend to a broad differentiation of functions, public and private. he continued. So far as banks exercised public functions these tended to be centralised in central banks, and ordinary commercial functions were left to trading banks, but with increasing socialism there was a corresponding restriction of the aetiviticfcs of th® trading banks. The main functions of a central bank were; (1) Control the note issue and determine how many may be issued ; (2) act as custodian of gold rcserves, its own, that of the Government and also of the trading banks ; (3) regulato foreign exchange, or, iu other words, regulate the external value of national currency, and when there is no gold standard, or metallic standard, this was no easy task ; (4) regulate the voiume of credit internally ; and (5) act as banker i'or trading banks by beino; the compulsory liolder of their

gold and a certain proportion of their deposits, acting as their clearing house and the advancement and re-discount-ing of money to trading banks. ' 'There must be some institution that has the last say in matters of finance, and whether one likes it or not, if there is to be set up a central bank then it is essential that the central bank have efficient control," he said. "The central bank determines in the .last resort how much curreifby there shail be, and by its policy iniiuences the amount thereof. The trading banks distribute this. available credit and it is not right that trading banks, properly organised for profit and business, slwUld have the final say as to the amount of currency that they make a, profit from by lending." It was generally held, he said, that central banks should not have private customers, but that they should cleal exclusively with the trading -banks, other central banks, juid the Government, and not finance ordinary industry and commerce directly. In New Zealand at the present time, a different position had arisen because of the tendency towards socialised services. Where the State tended to interferc more and more in the economic life, and it might desire to do this in regard to banking, or through the bauking system, it was prcferable to bring its policy to bear through a central bank and not direct, thus ensuring that all necessary interests are considered and all factors taken inttj regard. As State debt grew the Government was more interested in the money market, and this might produce a confiict of interest betweeu public and private finance, which could be better resolved through a central bank for the management ol: public debt, the issue of loans and other national mattera. Two Separate Factors. "Credit control is one thing,, and distribution is another," said 1'rofessor Murphy. "The importance of credit in modern times wiJi be i'ully appreciatcd, for, in the vast majority of transactions there ie involved bank credit. In actual practice it is credit that determines the note issue, and not the note issue determining the credit. There can be little doubting that Government finance should fit in with the money markets and should work through the Heserve, or central bank. After all, as the metallic basis has gone, the Reserve Bank is in reality.a paper mint." The Professor then proceeded to deal with the associations existing between the Reserve Bank of New Zealand and the trading banks. He pointed out that prior to the emergency legislation being introduced, there were six trading banks in the Dominion, which was in a remarkable and unique position in that only one of those banks had its head office in the Dominion. It was really an extraordinary banking system that prevailed. The other five banks had a greater interest in Australia than in New Zealand.' However, so long as there was unanimity arnong the banks as to major questions and problems of finance .and currency things went smoothly, but when there came dissension, as there was over the question of exchange, it was made most apparent that there would be a complete breakdown. It was only to be expected that if the banker interi'ered with the poHtician, then the politician would interfere with tho banker. An impossible position arose. There was an artifieially depreciated exchange, no gold standard, no definite tie-up to sterling, which in turn was swinging loose, and no agreed banking policy, he said. It was an open question as to what should have been done and he felt that. the Government did the right thing. There would always be London dominance as long as London was New Zealand's most important customer, All Safeguards Removcd. The Reserve Bank of New Zealand, instituted in 1933, was a semi-State institution, with private capital and rigid safeguards against unlimited Government borrowing from the bank, ho said. But it barely settled down to function properly bef ore there was a change in the political field, and last year it was altered in tbree principal directions. The first was by increasing Government control, eliminating private capital and reducing discretion of tlie directions to shadowy proportions in that they held office during the pleasure of the Government. The second was by removing virtuali ly all lesfcrictions of State borrowing from the bank. This amounted to turning it into a currency factory and cash register for the Treasury. The Ifchird was by tightening the control over the trading banks through exchange qontrol and variable reserve,

ratios. This last-mentioned factor was a very vital one as regard s control oi' the trading banks. "The geueral effect of these chang-' es," he declared, "is to make the Reserve Bank no longer an independent institution. The sky is the limit, the bank is a currency l'actory; there is practically no restiuction on the power of the Government to create legal tender money and raise credit in New Zealand, for State domination cannot be prevented under any legislative safeguard. But there is no evidence as yet that the Government has borrowed anv more money from the bank that oue would natur'ally expect. There is no evidence, either, that the Government as yet has exercised its enormous powers. That is not to say that it will not do so in' the future, but as far as I can see the present Government has not deviated from past standards of Government finance. "It is not generally appreciated or known that tlie Reserve Bank, that is the Government, has the right to oommandeer funds accrued overseas from the sale of any or all of New Zealand's produets. This right has not yet been invoked, but it has the right. The Government can create as much money as ifc likes, and the Government ean compel the Reserve Bank to underwrite its loans if need be. In addition there is 110 safeguard against Government borrowing." Professor -Murphy, at the conelusion of liis address, was called upon to answer a nuinber of questions regarding matters not toucbed upon in particular in liis address. On the 1110tion of the deputy-lMayor. Cr A. T. Rainbow, he was accorded a liearty vote of thanks.