N.Z. RESERVE BANK

Hokitika Guardian, 16 September 1933, Page 3

N.Z. RESERVE BANK

details of measure. It has been suggested that New Zca* -land is too small to have a central bank, but people whq say this do diot realise the blue purpose and • functions ] of such an institution. One migh; just as well say that a throttle and brakes are necessary-in a large -motor-bus, but I are superfluous ill a small car. The banking habit- --is as highly developed in New as 'in nv «y much larger countries, and there is. the same need for -regulation and co-nbrol. A. collapse of New Zealand currency might no; shake the world to anything like the s:.me extent as a collapse of steri;ni, or of the dollar, but ;it would, nevertheless, be disastrous to our people. ]t might .b.e pointed out that we have managed reasonably well without a central bank up till now, but to say that ‘is to deny >. 1.1 progress. Our forefathers got along reasonably well with very primitive- forms of barter, but now the credit system of the commercial banks has become practically indispensable. The central bonk merely represents another stage -in' the evolution .of monetary science, and in due course it will probably become just as indispensable as the trading banks are to-day. Apar,; from the importantnegative aspects of safeguarding the Currency, there ai'.e 'distinct, possibilities of positive benefits to be derived, not only .from internal co-ordination, but also from Empire and international co-opera-iun in monetary matters. As explained in p 'evjpns articles; the. control of credit plays such ,an important pirt in'• the welfare of the Dominion .that unbiased control on, a national basis is essential, in addition to which substantial savings from cheaper credit wi 11 -accrue to the State, the -farmer, and the- commercial community ge-ner-r/ly. In short, there are many -advantages to -be obtained from setting up a central bank and no disadvantages. The Reserve Bank of New Zealand Bill provides for the setting-u-p of a central bank as a notional institution to co-ordinate and control our banking ’•sjysttenv on a- sterling-exchange basis, which is the basis on which the trad* Aug banks -are at- present opera.ing. Thus no fundamental change o-f -lystem js involved. Furthermore, in practice the dealings of the Reserve Bank-when established will be confined to th e trad, ing -banks and the Government. Thus the banking -and exchange business of firms -or individuals will not be affected in (any way. From the nature of its business i is evident that the Reserve Rank will require only one small office in Wellington with, a staff probably not exceeding twenty in number. Thus, although its functions -are very important and its powers and benefi s far■iteaching,;- the hank will not be ex*, pensive.

It is proposed' to incorporate the bank by statute and provide that it cannot? be- wound up except- pursuant to an -Act of? Parliament-. The bank will have a capital of £500,000 to- be subsc.-ibed. by the public, while- £1,009.000. to be-subscribed, bv the State, will lip paid into the -Reserve Fund. The state’s jquol-a 'goes into (the. Reserve Fund in -order to keep the-bank, entirely, free from the possibility- of -political influence in. the management. This is considered to be essential by all authorities.

' The. bank is intended to be a national institution, and. private -capital and shareholders- are brought into the-scheme to obtain stability .and provide a non-politi-cal franchise- foir the election o-f directors. -If-the'shareholding is spread far and wide through every section of the community the bank will have its roots in every branch of our economic activity ,and representatives of every section of society will have a personal interest i,n the bank, though the' interest will- be more of a. public nature than private. The shareholders, however, will be in quite a different position to the shareholders of ,a trading bank o, r other private, company. The operations of the bank are - restricted and safeguarded by statute in all directions, ,and to ensure, that, fhe private interests of the shareholders shall always be defi litely subordinated to (the public iwelf-are .the dividend on the shares will be limited by law to -5 per cen.. cumulative, .and all surplus profits over .and above this, normally the bulk-of-..the bank’s earnings, will [ro to the State. Only (shareholders who are British subjects ordinarily: resident in New IZealand; will be entitled t 0 vo;e at meetings of shareholders, sq< there will he no possibility of a controlling in* teresfc being acquired, by people of other countries, • .

To guard against- any person or-g'-’oup in New Zealand, securing, -a. controlling interest- it is provided 'in - the. proposed legislation that no shareholder can) have mo. r e than-500 votes, representing £2.500 of capital, and* -cannot: h-old. a proxy, for more than 500. votes. The- initial, allotment of shares will be in the hands of the Minister of Fina-nce, and l»tev the Board of the bank will have power to refuse transfers without giving?any reason for doing >so. A list of shareholders must be submitted to the Treasury annually.

directorate

As to the directorate, the. proposal is. that the- bank shall be managed .by a Board consisting of a 1 Governor, a deputy Governor, and five directors, of whom two a; least' shall be persons who are or have been actively engaged in primary industry end two who are or have been engaged in industrial or commercial pursuits.- Not mole - than one member of the- Board can be a director of may other bank. No person

slnll hold office as a member of the Board w ho—(1) Is Hot a British subject by birth ; (2) Is o r becomes a member ofjiameni/ or ,a Public servant j (3) Is employed in the service 1 of any other bank. The first Gvoernor and deputy Governor, who must be persons of actual banking experience, are to be appointed by the Governor-General in Council fo r a term,.of seven, yearsj and thereafter shall be, appointed* by. the shareholders, subject to the approval of the Governor-General .in Council. The Governor, of course, is the managing director. The other Board -members in the first instance are also to be appointed by the Governor-General in Council, to retire in, rotation at the end of one, two, three, .four, an-cl five years 'the order of retirement to be determined -by ballot. As to the ine-hcd,. of.iappoi-ntment,-there-of t©r uhree courses are open: (a) Straight-o-u election by the shareholders, (b) election by the shareholders subject to approval ...by the Governor-General in -Council, and (c) election of .some directors by the shareholders together with appointment of others by the Gov-ernor-General in Council.

NOTE ISSUE

On a day to be appointed by, Proclamation, but six months' notice, to be given, the Reserve B -nk will be given the righ; of note-i-ssue, and the trading banks will hand over their gold reserves in exchange for Reserve Bank jiofcs fi.d use these notes to retire their own -notes.: The change-over wiU take place gradually ,as,' the trading banks’ notes coine • in. The Reserve Bank notes- will bo leg 1 tender, in exactly, the same manner as 'the present note-issue. Eventually, > however, to, ensure the stability"of value and formally establish the sterling exchange M'aodaird, the bank will be required by, law to convert, its notes on demand into -sterling and, vice versa .accept sterling for- notes wi-hin definite exchange - f mits •h’responding to the cost. if. shifting, gold.. The effect-will be exactly the' same as a gold standard bank' being -required to give notes for gold and gold for notc-s at a fixed price. We will get all the benefits without- the heavy cost of keeping our own gold reserve. This provision has been put in the•BiM to indicate the basis on which' fhe bank is to operate, -but fit is not to oome into, force until a date to be' fixed by the Governor-General in G°" n ' ci], and there is’no intention of tying our currency down until such time as the present crisis is over and steps have been taken to definitely stabilise sterling on some' or other.

iAt present,, sterling is °ff gold and floating free under the' control of the Bank of England, J and in .view of what is happening a-t- present,,rip. .the .United States'- of ..America "and the uncer-tainty.-as. to the . -reactions in Great Br itain ii; ,is. Impossible to foresee the I’ltinrte position p : f the pound sterling. While this, continues it would be. unwise to consider stabilising our currency by. tying lit down to any definite ratio to . sterling., ; Such ~a pos'-ion, .of course, is purely temporary and is by n-o. mea,ns free of -risk, but it is the only, practicable course -we can adopt in the meantime. . v ,

The bunk will 'immediately, assume responsibility; for "‘'the nr-nagement of our exchanges, but- until such .time a$ the definite .link with' sterling is'established by the G»yevnmemt there will be no .limitation? of the : rates -of. exchange that may -be fixed. J.f the. clause ooacWbf? Lie con■ccrtibility of: the notes ‘is not to come into force, perhaps fo,r. yog's, R may he wondered- why it is in the Bill at all. but a currency system must have some basis, even if' it- is -a mispen-deu one, in -order to -determine the mode of doing business and the form in which reserves are to be - kept;

DEPOSITS BY TRADING BANKS

On the day. the bank acquires the sole right of note-issue it- will be entitled to .commence business. .As,,from a day to,-be. appointed l within twelvemonths thereafter tfie trading banks will be required to maintain balances with -the Reserve Bank at lea,st equal to 7 per cent, of theh- .demand liabilities and 3 per cent, of; their time liabilities.* Such balances wifi not be lost •to the trading banks, hut wall figure in the balance-sheets as balances at Reserve Bank. The balances will be paid over in the form -of gold or stealing, but, if necessary, to case tlm introduction of the Reserve Bank, provision has • also been made for .part of the p'yments being made in Government securities, fa turn,. a statutory ■duty will be cast upon the Reserve Bank ot maintain a minimum reserve of not less than 25 per cent, of its notes and other demand liabilities. This reserve will consist mostly ot liquid assets held in London, for, as the system is to be ba s ed on sterling, the Reserve Bank will be relatively powerless until it .acquires a substantial balance- in Londo-n.

TAKING-OYER OF GOVERNMENT

ACCOUNTS

The other important function of the Reserve Bank is the taking-over of the Government accounts. The Bill, pro-Ai-des. for,.this being acomplished within a period of-twelve months, with a possible extension 'to eighteen months, after the bank, is entitled t 0 commence business The Government accounts a-re usually kept at the. central -back wherever there is one,/partly fp.r the, reason that it is a national institution and partly because ; the Government’s financial operations are ..so, large that, wlithmt -a, complete .inside knowledge of them control of credit and currency would be ■ difficult.

GENERAL BUSINESS. ■As. already, indicated, the Reserve Bank will not open acquit ts or do j genet. 1 banking business with the : public. only be unfair to the trading banks, : but would seriously weaken the power, of ;h? Rq--1 serve Bank to carry out its proper ftinc(tions'. The whole idea is that, .the hank’s funds shall be held in’ reserve in a liquid form ready to he brought into action whenever required to meet an emergency, to act as a stabilising force, or to enforce i s banking policy, at the time. Obviously the Reserve I Bank could not give inuoh; assistance ! to the fading banks, when thei r assets are frozen if its own assets were j in much the same condition, j As a lead to the trading banks ana i the market generally the Reserve Bank will be required to make public the rates at which it will discount bills, etc. The bank- wi 1} also facilitate the business of the trading banks by orga> isiog a for the clear- ; ance of cheques between banks. I To ensure that the bank is always I in a. position to perform its .important ‘ functions, the classes ojf business, it may and may not undertake and the securities in which it m;y invest ' will be definitely prescribed by statute. It will, be prohibited from buying or making advances on the security of real property, making unsecured advances, or allowing interest on deposits. The last-mentioned provision to obviate the possibility of the bank being in any w:>y forced to ,seek profitable fnj vestment of 'its .funds,:.rand thereby i tying them up in undesirable ways; A J definite limit will be placed upon the j extent of the assistance that may be ' granted to the Treasury or other Departments of State. As to investments, | provision will be rude to permit the j investment of capital and general reI serves in long-term Government secun- ] ties, but otherwise the bank will be largely restricted to first-class commercial paper and Treasury Bills of limited currency. To meet the special need s of th primary industries, however, up to 40 per cent, of the commercial paper may be, agricultural hills with a currency up to six months. Liquid securities will doubtless he purchased by the bank as investments, but i*T. chief business op the commercial side will be rediscounting paper to facilitate the operations of the commercial banks. Above all things. however, liquidity must be the guiding, principle of the Reserve Bank.