The Guardian And Evening Star, with which is incorporated the West Coast Times. TUESDAY, MAY 12, 1931, A CENTRAL BANK.

Hokitika Guardian, 12 May 1931, Page 4

The Guardian And Evening Star, with which is incorporated the West Coast Times. TUESDAY, MAY 12, 1931, A CENTRAL BANK.

The establishment of a central bank to control New Zealand’s credit is the chief recommendation made by Sir Otto Niomeyer, of the Bank of England, who recently investigated the banking, currency and exchange pieblems of the Dominion. The proposal for a central bank is new to New Zealand (says the “Dominion”), and some explanation of its functions in a finan. eial system has been attempted below,, various authorities on the subject being freely drawn on. The banking system of New Zealand is at present classed as decentralised, that is, it consists of a number of banks of almost equal standing carrying on business independently without- any constant reliance upon one central institution. On the contrary, the ban.iing system of England is centralised the Bank of England constitutes a central credit reservoir with the credit of the State behind it. Decentralised banking has disappeared from all important countries, and central banking has shown a remarkable advance during the past ten vers, during which time increasing importance

has come to he attached to internation

al credits and the maintenance of the purchasing power of gold at a constant level. Among the most important functions of a central bank is the control of credit. Financial frontiers have tended to disappear since the war, with the result tlu the operations of independent hanks have come to he regarded as inadequate to cope with world wide complications. As a result of this the United State s lias in recent- years departed from the ■decentralised system and established the Federal reserve system under which is created a number of bankers’ banks designed to carry out functions analogous to those exercised by the Bank of England on behalf of the hanking system of Great Britain. The central institutions in turn are co-ordinated .11 general policy by a joint board with onsiderable over-riding powers over die member Federal reserve banks. H s generally recognised that although he central hank is the Government oanker, its operations should not bo hampered by political interference in uiy shape or form. Its responsibilities tre so widespread, extending as they lo beyond the hounds of internal .iminco, that it is essential it should have full discretionary powers, Since, however, it is the mainstay of national finance, and usually the sole currency reservoir, the Government is morally lomul, whoi'o necessary, to intervene for its support in times of stress, For chis reason the Stare must have some say in its constitution and functions. Past practice has shown that the Gov eminent should have the rigid to make representations to tlu* directorate .if a central hank as to what is thought to he in the public interest, but ordinarily political influence should stop there, the filial decision being left to the directors. The whole purpose of a central bank is to assure financial stability without political or other interference, and it i s therefore essential to its successful working that it should lot he sub-ordimited to sectional interests, but that it should lie able to adjust its operations to national ■ and international demands. While .a central hank should he as unhampered as possible, it should give true service to the State as the Government banker. It should not he permitted to relinquish its duties -and go into liquidation without the consent of the State, and it should not set its policy in the direction of earning dividends, because, strictly speaking, it is not a trading concern, but the protector of national'credit; On tile’other hand; the Government should he restricted in its power to borrow from the bank, for the possibility might arise tmn steps should be taken to inflate bank credit as a means of raising public funds, Stabilization is the keynote of tho functions of a central bank; and for this purpose no loophole should be given for tho bringing about of in* flation, Apart from the necessity of removing a central hank from poru-u-ui influence, ope of the cardinal points in its establishment is that it should not he controlled by interests representing the commercial hanks. On occasions the central bank might have to act against the wishes of the commercial institutions, and, as it would in any case regulate their credit, it could not he expected to operate with any freedom if they were able to dictate jn any way,