CURRENCY REFORM IN DOMINION

Hokitika Guardian, 30 September 1930, Page 2

CURRENCY REFORM IN DOMINION

STABILISING EXCHANGES

SI'R OTTO NIEMJSYER’S •. WORK. t By PROFESSOR A. H. TOCKER, t I \ 1 : ' ’ ; v s The visit of Sir Otto N.iemeyer to New Zealand, occasioned as it was mainly by the present abnormal exchange.rates on London, has attracted much attention to the need for stabilisation of the exchanges, and has also opened up’ wider issues. In particular, our visitor has to notice again New Zealand’s "close dependence, on Britain, a dependence due largely to the heavy volume of our export trade. But his main .-task is to report <m methods' of regulating currency and stabilising the exchanges. It would have been difficult to secure an expert better fitted for the task. In his address to the New Zealand * Cluh in Wellington, Sir Otto mentioned his experience with the League of Nations Financial• Committee in affecting much-needed currency reform in Europe during recent years. Under the supervision' of that committee and since the wat'j many countries, indud* ing Austria, Hungary, Bulgaria, Greece and Poland have had their currency and banking systems re-organ-ised, and their exchanges re-establish-ed on stable , bases. . Most of. these new systems have involved the establish ment of central banks, and Sir Otto, as the ” representative of the Bank of England, has been directly associated with most of these reforms, and is undoubtedly familiar with similar reforms effected elsewhere. Such ; experience brought to bear on New Zealand’s problem should prove extremely valuable. CONTROL OF CASH AND CREDIT. The principles of currency and exchange regulation are everywhere much the same. They consist .in maintaining such control over both cash and credit as will prevent undue inflation or deflation, and will maintain price. levels and ' therefore exchange rates—at y approximate . parity with those of the rest of the world. Before the /war, effective regulation was obtained by making all forms of money jn practice convertible with gold and using gold; both for internal circulation and for international payments. Since the war, it has become necessary to exercise strict economy over the supply of gold, lest a scarcity of gold for monetary purposes might increase its* value and depress prices. Such a Bearcity, duo largely to; the sterliaation of gold in unnecessarily large bank reserves, such as exist in France and America, is . held to be a primary, cause of the recent severe decline in prices. This decline has occasioned depression and increased unemploy, ment over most of the world, and monetary experts in Europe are using every effort to secure co-operation amongst central banks so that gold might be more evenly distributed and further price declines prevented. BIG RESERVES OF GOLD.

It is likely therefor©, that any system, of regulation suggested for New Zealand will keep in view of the need for economy of gold. For the past fifteen years an amount approximating £7,C00,000 worth of gold has been held idle in reserves in New Zealand. Such an amount/ is small in comparison to the world’s needs, but many such amounts may make a considerable difference. Currency ' regulation might well be devised for New Zealand, which would liberate this gold for profitable use. From the general trend of Sir Otto Niemeyer’s remarks in New Zealand, it appears likely that he has some such object in view.. Gold is in active circulation now to a very small extent, and in very few countries. It is unlikely that it will circulate in New Zealand in the near future. Its use is now confined mainly to the making of payments between nations. For this purpose New Zealand needs gold, not in New Zealand, but in London, where the hulk of her international payments are cleared. It seems probable, therefore, that whatever recommendations are made, our present gold reserves will be transferred to London, where they can be used profitably, and where they are likely to be needed, rather than held sterile in New Zealand. Sir Otto Niemeyer has stated that he is not prepared to make definite recommendations as yet. Further data is required, and probably he needs to 'b secure information bearing on New conditions both in Australia and in London. But lie has hinted plainly that he leans towards the establishment of a central bank for New Zealand. It is worth noting that central hanks have been established widely in Europe as part of the currency reforms effected there. Sou f h Afnra established a central bank some years ago, and Australia, whose attempt to combine central and commercial banking in the Commonwealth Bank has apparently proved unsatisfactory, is now discussing a new central hank.

RATIONALISING THE CURRENCY

The fact is that commercial banks are not organised to control currency and credit most effectively, nor to safeguard the exchanges against fluctuations. Moreover, there is an increasing pmount of co-operation between the

central banks of various countries, and the world has much to gain by the furtherance of such co-operation. But no country can co-operate in this way unless it has the necessary machinery. It is possible that Sir Otto has in view, as one of the results of his tour, the beginnings of rationalising the currency' and banking systems of the Empire, and So securing, through central banks operating in the various Dominions, the maximum of economy combined with convenience, elasticity and security.in currency and credit administration. Such a plan might do much to help the various parts ol the Empire and bind them closer together, and it would almost certainly be warmly supported' throughout the whole of New Zealand.

The duties of a central hank are different from those of an ordinary trading bank. As a rule a central bank retains exclusive control over a. uniform note issue. It acts as a hankers’ bank, holding their reserves, and should be in a position to lend to them when necessary. It undertakes no ordinary trading activities but usually does the Goverment’s banking business. Its reserves should be abimdn'n and are kept in the most liquid possible sta.te, since it must be in a position to extend credit to the commer banks, who in turn lend to their cns. tomers whenever it i» necessary to do so. . < . . 'FREE FROM POLITICAL INFLUENCES. In. nddiiton, it is generally .agreed thut a central bank should be'entirely free from any political influence. Its prime function is not to make profit*— in fact its rate of dividend is usually' limited—but ,to maintain credit and currency in' a sound and elastic condition and . at the same time to safeguard stability of exchange rates. These are . general principles—their application in any country depends on the needs and practices of that country. The detailed organisation of \ a working central bank in New Zealand would have .to be built up from a thorough practical knowledge of central banking, combined with a fund of information regarding hanking practices here. Sir Otto Niemeyer possesses the former; he is, Obtaining the latter throughout his tour. His report arid recommenda.tiions will be awaited with interest. , ,