CENTRAL BANKING

Hokitika Guardian, 13 September 1933, Page 8

CENTRAL BANKING

ARTICLE I. (Contributed). Although much that is written and spoken on the subject lis unsound, the public interest in matters of currency and banking is evidence of the growing recognition of the fact that thanking and currency .play a. very important part in our economic life. In fact, ail our business and all our values are iin terms of money, and, as is now generally recognised, if the currency is not kept sound and relatively stable in value, trade and industry .are seriously and there is grave disorganisation and trouble.

Our banking system, like that of most other counties, has evolved with the development of the Dominion, and adequate facilities for commercial banking (deposits, advances, and exchange operations) are offered by the six commercial banks doing business in New Zealand. These ibanks are organised ‘primarily to make 'profits for shareholders, anl the control of our credit and currency, which at present remains with them, is only incidental to maintaining the soundness: of their own businesses.

The commercial banks have not altogether neglected the public interest, .and pursued the course which seems best i n the interest of their shareholders. In the long-run the banks’, interest must coincide with the interest of the Dominion as a whole, and it. may be said to their credit that thebank s operating in New Zealand have in the past acted together in pursuing ta common - policy that' perhaps rvas not lalw.ys in the immediate interest of their shareholders’ dividends. Some of the great banks of the Old World, no)ably the Bank of England, .started as purely profit-earning concerns, but hove now developed itito nation..! institutions * n which profit-earning is quite subsidiary to the public interests in the .regulation of credit and currency.

In modern times the control of credit and currency has become so fundamental ■to the we.fare and prosperity of the people tint it has been recognised in country .after country that such vital matters should ,nofc be left in the hands of the commercial banks. To meet the needs the art of central, banking has 'been evolved. A central or reserve bank is sometimes v described as a bankers’ bank. It is ceMainfy part of its job to hold the reserves of the' commercial banks and consolidate and co-ordina:e the banking- system \>f the country ; but more tb in that is required of a. central bank. It is really\ a national institution set up to maintain the stability of the currency, and cany inlo effect the mortet iry policy as determined by Parliament. This is its real function, and, to ensure that 'it acts solely in the best interests of the country, the Reserve Bank, in the ' absence of the binding traditions (which obviously could only be acquir-, edover a l°ng period), is hedged round with various stringent restrictions designed to keep it free, from other interests and any bias or influence other tha.n economic considerations. The control of a central ibank is made effective not by means of any judicial authority, but by its power to cut .across the business of the trad-1 irifir banks. In order that it s weight may be felt when necessary the Re- j serve Bank' cannot compete regularly with the trading banks. Its ••■funds a;re normally held tin reserve to be brought into active use if necessary to make its- policy effective or -as a stabilising factor The Reserve Bank, however, regularly offers, but normally only as a lead to the market, to do certain classes of business, s’tch as discounting of bids and exchange operations at rates fixed by its Board from time to time. For such purposes it will he Readily .understood that the Reserve Bank in its capacity as regulator does not require branches all over the country like a trading bank. 80 far as ■New Zealand i s concerned, one relatively small office in Wellington will probably be sufficient. Sir Ernest Harvey, a director of the Bank of England, when visiting Australia in 1927, summarised the accepted functions and conditions of '' a central bank as follows;—• (1) A central bank should possess the exclusive right of note-issue. (2) A central bank in it s management, and policy .should be free from Government control and the influence of politics.

(3) A central bank should -be entrusted with the entire banking business of its -own Government. (4) A central bank should ''■» the banker of ,the trading banks, and should act as a settling agent for clear-, ing differences between such banks. (5) A central bank should not ordinarily compete with the trading banks for general banking business. (6) A central bank should ensure to (he public the provision of adequate banking facilities on reasonable terms. (7) A central bank should not take moneys at interest on its own account. (8) A central bank should quote publicly the rate at' which it is prepared to discount approved bills, and should publish at regular end frequent intervals a clear statement of its position. (9) The assets of the central bank should be of the most liquid character possible. (10) A central bank should not draw or accept bills payable otherwise than on demand. (11) A. central bank should not engage in .a general exchange business on fits own account for the purpose of earning profits.

(12) A central hank should not engage in trade have any interest in, any commercial, industrial, or other undertaking.

(13) A central bank should have no branch outside its owp country, but may have agencies abroad. It fjhould' be undersijaod, however, that the powers and duties of any parti, eiilar central bank are governed by its statutes, and naturally vary according to the monetary system as laid down by the Parliament of the country concerned, On broad issues the over-riding control always remains in the hands of the Government. A central bank would enable us to have a uniform and absolutely secure note-issue. A- uniform note-issue would be a commercial convenience. B l| t what is of greater importance, a centralised (note-issue backed by the combined banking resources of 'the country would inspire the utmost confidence and have a prestige that would of great value

in emergencies. In addition, a single control of the note-issue is an -important factor /in the maintenance of sound economic' conditions. The centralisation of the cash resources of the commercial hanky not only provides a. method of control for '.be central institution, but greatly strengthens the whole banking system. In one pool the combined reserves w*n safely support a much greater credit structure than the same aggregate amount held by half a- dozen banks. The analogy of a water-supply is appropriate. If everybody in a town had a few'buckets of water end held on to them when a fire started, the whole tow,n would be destroyed. If, however, the whole supply is collected in a central' reservoir the outbreak iconld be don't with effectively as soon as it was discovered. At present each commercial bank ha s to carry sufficient re serves to meet any possible financial strain, but with the central institution to fall back on an appreciably smaller cash reserve is needed.

Holding the reserves of the other banks is not only economy, but puts into the hands of the central bank the powera to make its credit policy effective. Under modern conditions control of the credit structure i s the keynote of sound banking. Tire idea is to obtain deliberate control- quite apart from pro-fit-earning or other influences, whereby tlie credit structure is expanded or contracted in accordance with the needs of business and in the interests of national economic welfare.

Any monetary action in the direction of raising world prices is to a large extent dependent on international co-op-eration, and a great deal might be possible given, co-operation among the central banks of the world. Incidentally in appears likely that we will shortly see a great forward • movement in thi s direction. Individually, however, even the largest of such, institutions is powerless to prevent a major world-wide depression like the present one ; but, internally, expert control can do much to prevent; or flatten out violent fluctuations in,trade or anything approaching panics, ji It is generally. accepted that cyclical .fluctuations in business activity are, to some extent associated with credit, polioy and business psychology, and these can be influenced by central banking operations. The functions of a central ..bank are thus all designed to promote stability, without which business .is,.unsettled and haphazard and steady progress is impossible. In addition to these general but farreaching advantages, the setting up of a central bank in New Zealand will undoubtedly lead to cheaper credit. For instance, a considerable saving will assuredly accrue to the State from a lowering of Treasury hill rates which at present are high in comparison with those ruling in London and Australia. Further, the organising of a hill market by the Reserve Bank must result in cheaner discount rates for commercial and agricultural bills, and consequently savings for farmers and traders generally.