N.Z. RESERVE BANK

Hawke's Bay Tribune, Volume XXV, Issue 148, 8 June 1935, Page 7

N.Z. RESERVE BANK

GOVERNOR’S REVIEW Fulfilling Its Purpose NOTE-CONFUSION BOGEY By Telegraph—Press Association WELLINGTON, June 7. In submitting the board’s report at the meeting of shareholders of the Reserve Bank, the Governor, Mr L. Lefeaux, said he regarded it as highly desirable in the Dominion’s interests that, now the bank was in being, all traces of any atmosphere of controversy that might have Airrounded its establishment should be completely eradicated and that one and all should determine to do their utmost to make it a complete success. He reviewed events since the Reserve Bank Act was passed. Referring to the alleged risk of confusion in the two colours of ten-shilling and £5O notes, tie said the question had been carefully considered and that the board was satisfied that the supposed risk was being greatly exaggerated in certain quarters. It was not proposed to take any further steps in the matter until such time as a completely new series of notes was put into circulation. When that action was taken, it was hoped to have the higher-denomination note larger in size than those used for ordinary everyday purposes.

Mr Lefeaux also said it was the wish and intention of the bank that notes should be maintained in a satisfactorycondition, and that within reasonable limits the notes in circulation should be regulated by the general public. Notes that became unfit for further use should be paid by banking customers to their accounts in any branch. BIGGER-DENOMINATION NOTES. He said the reason for not providing notes of more denominations were twofolds it was practically impossible to arrange for more than three small denominations in the limited time available before the date fixed for the commencement of business; also, it is relatively expensive to provide numerous denominations of notes in small quantities. However, if there were clear evidence of a widespread need for other denominations, steps would be taken in due course to provide them. The rates announced by the bank had remained unchanged, without any noticeable pressure in either direction, and he thought that fact might be regarded as an indication that in the circumstances approximately the correct level was selected. During the same period there had not been any important alterations in the basic rates of exchange on London and on the other Dominions or any of New Zealand’s principal competitors in the export of primary produce. Thus one of the conditions regarded by many competent observers as a prequisite "of economic recovery—namely, currency stability—had in a measure been fulfilled, and he thought the improvement which had so far taken place in certain directions had been facilitated thereby. SMALLNESS OF SURPLUS. Mr Lefeaux said he did not think the profit and loss account called for much comment beyond, perhaps, an explanation of what some might possibly regard as the smallness of the surplus. In the first place, the Reserve Bank did not commence business until August 1, 1934, although certain expenditure was incurred as far back as the beginning of that year, and inevitably preliminary expenses of a non-recurring nature fell within the first year. On the Either hand, rates obtainable in London on short term investments fell to an abnormally low level, British Treasury bills at one time being issued at a discount rate of only 3/10 per cent, per annum, and as one of the primary duties of a central bank is to maintain its assets in a liquid position, the sharp fall in short-term rates naturally had a very important effect upon our income. Moreover, a central bank must always resist the temptation to engage in any transactions solely with the object of m’aking profits, if such transactions are not deemed to be in the public' interest; in fact, it might even be necessary in certain circumstances to incur a loss on some transactions in attempting to exercise control over the credit situation. “I do not wish to linfer that the profit aspect of all operations should be completely ignored,” said Mr Lefeaux, “but rather that such considerations must always be subordinated to the financial needs of the country as a whole.” Mr Lefeaux said he thought it advisable to utter a warning against either over-estimating or under-estima-ting what a central bank could do. MORE SETTLED FEELING. “That one can serve a useful purpose in a country such as New Zealand, I have no doubt,” said Mr Lefeaux, “and I think it can fairly be claimed that even in the first year of its existence the Reserve Bank has not been altogether unfruitful in assisting and straightening out the financial position of the Dominion and in creating a more settled feeling. “I mention the repayment of the Government’s Treasury bill with a consequent large saving to the State in interest as one benefit which has resulted, but it is well to realise there is a definite limit to what can be achieved hy monetary action alone. For example, . to take an extreme illustration: If all : the markets in the world were suddenly i dosed to our principal exports no ' amount of monetary manipulation ' would save the country from disaster. ' Apart from benefits derived from invisible exports, such as tourist traffic, real prosperity can be assured only by producing commodities of a kind which can be sold profitably in th® world’s markets at competitive prices in addi-

tion to those which can be consumed domestically. Therefore, our aim must be to do whatever is possible in the monetary sphere to facilitate and promote development along such economic lines. NON-POLITICAL ATTITUDE, ‘‘Then, I think, it must be clearly understood that a reserve bank should always maintain an entirely non-politi-cal attitude. The board accepts the view that the ultimate responsibility for the monetary policy of the Dominion must rest with the Government of the day, but holds that it is the duty of the bank to tender to the Government impartial advice on monetary and financial matters, and to exercise its own judgment in carrying out those functions entrusted to it. The objective of the Reserve Bank is the promotion and maintenance of the economic welfare of the Dominion as a whole and not merely the sectional interests of any, one particular class or group.” Mr Lefeaux continuing said, “I have heard it asserted that the Reserve Bank is under some form of domination by the Bank of England, acting on behalf of some mythical and malign international power. I can assure you that there is not even the shadow of truth in that assertion. The Bank of England acts as the London agents for the Reserve Bank, and we deem it a privilege to enjoy that relationship, but they would never dream of attempting in any way to interfere in the affairs of the Reserve Bank, and even if. they were so illadvised as to do so, I am sure you could confidently rely upon the board maintaining its independence.

“It may be, however, that on certain occasions the special interests of New Zealand and the welfare of the British Empire as a whole will best be served by co-operation between the various central banks of the Empire. In such event the Reserve Bank would wish to co-operate wholeheartedly with the Bank of England and other central banks which have been established in the Empire. ’ ’ SHAREHOLDERS ’ QUESTIONS. A shareholder asked how many shareholders at present held more than 21X1 shares. Replying, Mr Lefeaux said he did not think the board was called upon to disclose any particulars regarding the holdings of shares. It was not that the board had any sinister motive, but the register was not open to the public, and he did not think it would be in the interests of shareholders as a whole for information to be given. He thought he could go so far as to eay, however, that the number of persons holding more than 2(10 shares was quite small; in fact, he thought it could lie taken that the number was probably not more than two dozen. Beyond that he did not think the board was called upon to give particulars of actual holdings.

Another shareholder asked whether it would not bo possible to explain the item, “contingencies”, more fully, and also whether it would not be possible to give some indication of the bank’s future policy regarding discounts and advances. He also asked how the valuation of seeurties was arrived at. Mr Lefeaux said he was afraid he must once again tall back on the contention that the balance-sheet had been definitely drawn up in its present form because the board considered that in the public interests that was the best form in which to show it. The board had the benefit x>f precedent as far as that went. He thought it would be found upon examination of the balance-sheet of any other central bank that neither “contingencies” nor the manner of valuation of securities was in any way disclosed, and the reason for that was that it was felt it was not desirable in the public interests to do so.

Regarding discounts and advances, Mr Lefeaux said he thought it was hardly an occasion for announcing the board’s policy in such matters. As regards discounts, the position was fixed by statute. As regards advances, the board was enabled by statute to make limited advances to the Government or to any public bodies in the ordinary course. The Reserve Bank would not compete with other banks in maxing advances to other private customers, nor would it open accounts for them unless some very good reason was shown. The Reserve Bank had power to do that, but it wanted to leave the field quite clear to other banks in that respect so long as they were providing reasonable facilities. DIVIDEND OF 5 PER CENT. On the motion of Mr Lefeaux, seconded by Mr L. O. H. Tripp, the report and accounts were carried unanimously. A dividend of five per cent was declared on paid-up capital for the financial year ended March 31.