N.Z. RESERVE BANK

Hokitika Guardian, 14 September 1933, Page 2

N.Z. RESERVE BANK

CENTRAL BAJNK CONTROL.. The .functions of a. central bank are very important and purely national m character. At first sight dt would appear that such am institution should he directly controlled by the Si ate, hut in this respect wo can profit from the experience of other countries. On this point a standard work remarks as follows ;

“ The theory underlying the conception of a state bank centres on the proposition that since a wise centra] banking policy is the basig of a sound n.it ‘,ional economic life, the bank should he under the control of the notional 'Government But the dangers of this course are great. Just because- the decisions of the bank react on every aspect of the economic activities of the country, it is essential that its direction should be as unbiased as ‘i.s humanly practicable, and as continuous as possible. But clearly if the bank i s under State control continuity of policy cannot be guaranteed with changing Governments, nor cam freedom from poliiieal bia s in its administration he assured. In most economically developed countries the probabilities are that the national Government will be the largest individual customer of the local molley-market. Jn such circumstances it is * evident that, If it -also controls the administration of money-market policy, it may easily find itself ill an equivocal position where it may he called upon to decide between two ociuvsesy one lof which may be -immediately convenient to itself and the other conducive to the ultimate interest of the country as . a whole. 'H'e creation of such dilemmas should be avoided.” To obviate these difficulties many o' the central 1 banks of the world have shareholders and private capital. But.such shareholders are in quite a dif ferent position, to the shareholders of a trading hank, for the temptation to exploit the central bank for their own benefit i s avoided by definitely linrtir.g the -dividend ow; shares and; requiring all-excess profits (normally thp ■Greater part of the bank’s- earnings) to be- paid to the State. The whole idpa is to combine the advantages of private management and operation, with thofe ,of State ,control, while avoiding the; disadvantages of both as fa-r .as is humanly possible. ; A reserve bank cannot successfully discharge its all-important' function of safeguarding our currency ancl conti oiling our credit, which Is the life-blood jo-f ~ trade laJsd industry.-.unless . the motives of the hoard of management; .are free not only from - the fact, but also from the suspicion, of -being influenced..by other than the ..economic welfare of the Dominion as a whole. Tt is highly des-rable that all mem - hers of the community, whatever their political leanings, should have -the utmost- confidence in the reserve bank as , a national institution. If the manage, mient -was wholly appointed by . the Government of the cby, it is obvious that this would not he the ease, for at least there would always he the possibility that the appointment of .directors would be influenced by any

political questions or policies which happened to be the -subject of sharp differences of opinion at. the time. On the other hand, as the well-being of the whole community could be materially affected by decisions of the b°ard of management, it is advisable that the Government, which'carries an overriding responsibility for the conduct of the affairs of the'Dominion generally, should be in a -position-to ensure.that a wise selection of directors is made by the shareholders of the institution. To this end it is not unusual for the State to reserve the powor of veto over the appointment of ;, he Governor and ■deputy-Governor o-r even over the appointment of the whole of the -directorate. In other -cases some of the directors are .appointed by the shareholders and some by the State. As a further safeguard against precipitate action on the part of the shareholders or the . Government of the day, and to achieve .an essential measure of continuity and stability of management, provision is made for directors to ret-jic in rotation, s o that, apart from the initial -appointment on the establishment of the hank, at no time will -a majority of the Board come up for appointment. While independent management of the bank is necessary, for success in its actual operations close co-operation with the Minister of Finance -and the Treasury land with other financial authorities is practically essential Eac-h must have an intimate knowledge of what the other is doing, otherwise two powerful financial forces working in opposing directions would tend to vend-

er both ineffective, Although experience has shown that it is not advisable for the State to interfere in the active management of the bank, it is clearly the. function of the State to lay down by statute. the monetary system to be adopted. The .State .prescribes the: system—be it gold standard, sterling exchange, or any other standard—and the duty is cast upon the bank to control the operation of that system. Here it should be observed that the idea, often met with, that in giving the reserve bank the right of note-issue for a.period -of years Parliament is surrendering its right to determine matters of monetary policy, is quite .fa)- , iocious; The time-limit on; the! rights of (note-issue is merely for the’purpose of automatically bringing the . Apt .up for' review after a period sufficiently Jopg to' obtain adequate experience of it s operation.:, but it is open to Parliament tp fainend the Act- at any time. - All fundamental issues; such as. tffi .framework of'the monetary system,: or the basis of the monetary unit, are determined by statute, and it is always within the power of Parliament te aipend or repeal a statute. Thus Parliament can; never surrender 'its over adding -mntrol. A .good example o this was recently furnished by th< United- States,-when' Congress in •&< wisdom -deliberately suspended' the gO-* standard .as a matter of. monetary pol icy. In the same wav, if -at som: future date Parliament laid'.it dmvi that the New Zealand pound was t< bo worth only half iho pound sterling or iso-many pounds of wool or butter, the reserve bank would have no option but to work on any such basis, and endeavour to maintain it at the prescribed value. It is only the administration of the monetary system that should be free from political influence. Although the bank is constituted on the company model in order to secure the benefit of a form of management I that has been found the most success-, ful in all large-scale business, the central bank is hedged 'round with legislative restrictions and safeguards all designed to- ensure that the board of directors remains free and unbiased in carrying out its all-important duty of safeguarding the currency and controlling the credit of the country in the best interests of the people as a

whole. In this respect the reserve hank o' New Zealand Bill embodies the experience of other countries in providing for the following:— v (1) That only shareholders who are British snbiects ‘ordinarily resident i n y e w Zealand are entitled to vote at meetings of shareholders. This means that companies or other corporate bodies could not vote. (2) Every such shareholder would be entitled to one vote for . each share held, but with a limit of 500 votes. With 100,000 .shares as is proposed the' ideal would be to' have 100,000 shareholders adequately representing every' economic activity in.the Dominion. The shares in the first instance arc to he allotted by the Minister of Finance. Once a year a list of the shareholders must be sent to the Treasury. (3) No person shall hold office ns Governor, deputy Governor, or director who is not a British subject 'by birth i or who is a member of Parliament or is employed in the Public .Service or by any other bank. ) (4) The Governor and deputy Governor, whose appointment must be approved by the Governor-General in Council, cannot engage in. any other business or act as director of any other concern, of hold any interest in any other bank, whether in New Zealand or elsewhere. (5) To ensure that the directorate is representative, two of the directors must 'be men who a,re or have been actively engaged in primary industry, and two in industrial or commercial pursuits. Only one of the directors may at the panto time be a director of any other bank. These legislative restrictions would effectively prevent any large vested interests' from gaining control of the reserve bank and obviate the possibility of. tiio'policy of the Board being dominated by any one section of the community. The ideal aimed at its freedom fro,m the influence of politics o,i the one' bant] and of the trading

banks and vested intents general!} on the other hand. . ■