N.Z. RESERVE BANK

Hokitika Guardian, 18 September 1933, Page 8

N.Z. RESERVE BANK

RESERVE BANK MISCONCEPTIONS Much of the criticism of the proposal to establish a Reserve Rank in New, Zealand is j undoubtedly due to a misunderstanding of the functions oi J such an institution, but it is hoped that the articles preceding this one will, claiify the position and thus disarm criticism of this nature.

S'ome oft the objections -that have been raised, however, are more general in character, and it is perhaps advis-, able to deal with them specifically. For instance, it is said that the set-ting-up of a central bank means placing the control of our currency under the. domination of the Bank of England. This idea is fallacious. The bulk of our trade is with Great Britain and we have large debts payable in sterling. In addition, we are also linked to Great Britain by strong ties ol ancestry and sentiment. As is only too evident at present, the prosperity of the Dominion hinges to a great extent on the course of events in Great Britain, and it. is useless to pretend that we can be indifferent to the monetary policy of the Mother-country or do otlmr than work in close consultation with the British authorities. We do it, however, because it is in our own interest to do so, and not because we are dragooned iuto it by pressure from- the Bank of England. That great institution i s always ready, to give us the benefit of its experience, and knowledge, but that doe s not alter the fact that we are. quite free to manage, our own affairs as we think best. We lay down by Act,of Parliament the lias'is -of. our monetary system and appoint .a New Zealand Board of Director's to manage that system in the host interests of the Dominion. If we take eare to aopoint men of upright and resolute character to the Board there is surely no reason to suppose that they would allow the interests of the Dominion to be sacrificed at the bidding of anybody in or out of New Zealand. In fact, our monetary independence is much more likely to be obtained under a sound and well-managed central 'bank than under the present haphazard ari'angement. Consider the present position. All matters pertaining to our currency and credit are at present,largely in tiie hands of the six trading, banks carrying on business in:the Dominion. These hanks are commercial institutions and' Vas such arfif naturally primarily concerned with earning profits for their shareholders. The banks act together in 'fixing rates for deposits { and exchange and in other matters conducive to their common welfare, hut otherwise there 'is strong competition between them for business. In such circumstance;., they cannot have any defined or conscious policy relating to t,he volume of money and'credit as a whole or take into consideration the effect of their united transactions on"the price-level of commodities in general.’ This is particularly the case when only one of tile six banks has a New Zealand Board of Directors and four of the remaining five are predominantly Australian institutions with ‘much larger interests in the Commonwealth than in the Dominion.

1 Another statement given wide circulation is to the effect that to establish a central bank means bringing our people within the ambit of a vast cbhspiiacy alleged to ‘be operating through central banks for the economic enslavement of the world in general. The whole idea is fantastic, but if there were anything in it we could not hope to avoid our full share of the consequences unless we could make ourselve s economically independent of the rest of the World, and that, of course, is impossible. In fact, we are more dependent than most countries on international trade, and our present position is eloquent testimony of the effect on this Dominion of a fall in the overseas prices for primary products whatever may be the cause of such fall. ■lf we' do need any defence on the 'monetary side, should ,we not organise and pi'operly equip our forces? Well, the way to do this .is to co-ordinate and consolidate our banking system under the control of a national institution in the form of a central bank. On broad issues the responsibility for monetary policy rests with and cannot be takon away from Parliament, but any policy decided upon cannot be' effectively carried °nt without the machinery of a central bank. ' The chairman of the Bank of New Zealand in his hist annual report to shareholders offered certain criticisms, his main points being as follows: (a) That the bank is being set up at

the dictation of London financiers; (b) That it is not reasonable to require trading banks to hand ovei to another proprietary bank 7 per cent'of their demand deposits and 3 per cent of their fixed deposits; (c) That a restriction of credit would, be imposed on the trading banks; (d) That the' South African Reserve Bank had failed to meet the situation, and had lost a large part of its capital; (e) That the Federal Reserve system of America was unable to avert the rot occasioned by the dosing 01 some 5,000 banks, neither wa s it able to prevent America having to go off the gold standard; (f) Quoted British Chancellor of the Exchequer as saying at Ottawa, “This is no time for rash, experiments in monetary matters.” As to these points, the first is definite. ]y incorrect. The proposal . is being undertaken because it is considered to be in the best interests of the Dominion. The idea originated in New Zealand,' and a British expert was invited to come here and advise the Government on the matter. It is true, however, that practically every monetary conference since 1920 has recommended the step to all countries that hs ve not

already'got l a central bank. The Monetary Sub-Commission of . the recent World Economic Conference unanimously adopted the following resolution “The Conference considers it to he essential, in order to provide an international gold standard with the necessary mechanism for satisfactory working, that independent central banks, with the requisite powers and freedom to carry out an appropriate currency tiiid credit policy, should he created iii such developed coun-tries'-ns have not at present an adequate central banking institution.”

On the second point, the description of the Reserve Bank as “another proprietary bank”' is hardly, appropriate; and as to the alleged hardship on trading banks” being required to keep m jiimuni deposits (with the Reserve Bank, the following extract from the report of the “Macmillan Committee” on Finance and Industry is fairly conclusive : “It 'vjs to 'tile interest of every commercial banker that, in the short-run, his reserves should be as small a s possible consistently with safety. It is equally to ' the' advantage of each banker that there should be one institution carrying a large reserve available for the use of all in moments of emergency, provided that this institution is willing to utilise its reserve for the common safety when the emergency does arise. Hence the onereserve system, the foundation of all central-hanking practice, arose in this country to meet a practical need and found its organ in the Bank of England. The immense importance of this system has had to he recognised, in newer areas in which commercial banks preceded the institution of central banking, of the system of compulsory reserve deposits at the central bank.” As to the suggestion that the settingup of the Reserve Bank involved a restriction of credit, there is no justification whatever for such a statement. With the gold and sterling assets available the trading hanks will have no difficulty whatever in meeting all their commitments to the Reserve Bank for notes and reserves against their present volume of! deposits. In fact, a.'ssets liamled over when pooled in the hands of the Reserve Bank will he sufficient to form the basis for an expansion of credit if sucli is necessary or desirable. The bank will "be required by law to keep a minimum reserve in gold or liquid sterling assets of ,at ’ least 2$ per cent of its demand liabilities, but when it commences operations the reserve will probably he (treble that percentage.

j ' Concerning tlfo references to the j : gputli African Reserve Bank, inquifie.s addressed''to the Government of that country brought the following reply : i f “Tim'ability of the central hank to function as intended wa s proved when South Africa remained on the gold standard and Grdat Britian ' abandoned it, and also when it wa s decided to link Union currency with sterling. I The central bank has performed successfully it s "primary function of | maintaining the country’s currency' as by law established. The central ImVik affords maohinerv for giving effect to the Government’s currency policy. The central bank was called upon to face losses on sterling balances when Great Britian left the gold standard and South Africa decided to remain on gold. The Government has stood aside from participating Tn profits of the bank pending the restoration of the bank’s position which jis now almost 'complete. The bank jis ' covered under Act of Parliament j against losses in maintaining parity j between South African pound and sterling in a similar manner to that in which the Exchange Equalization Account operates in Great Britain, As to the position in America, it is well known that the United States . Government departed from the gold standard as a deliberate, act of Government policy and not from necessity. Furthermore, all the information received shows that while many member (banks of the Federal system failed, bv I far the largest number were non-mem-berib In fact, it is recognised that the fundamental weakness of the' American' banking system is the existence of a Airge number of small independent banks outside the Federal Reserve system. Authorities agree that otherwise the Federal Reserve system is sound and beneficial, and it is difficult to say what would have happened during'the recent crisis if it had not been in existence. Similarly, when Great Britain was forced off the gold standard, the Bank of England was not able to prevent it, but a disaster of much greater' ifiagnitude would probably have happened if the bank had not been there to’ control the .situation

On the last point being referred to the British Chancellor of the Exchequer, he stated that his remarks in question had no reference to the proposal to establish a Reserve Bank in New Zealand, hut,’ as the context shows, were directed to policies of a totally different character. In fact, his remarks were directed at novel a.n.d untried monetary systems such as are being urged in this and most other countries to-day.