CENTRAL BANK BILL

Hokitika Guardian, 20 October 1933, Page 5

CENTRAL BANK BILL

GOLD RESERVES

EXPLANATION BY MR COATES.

(Per Press Association—Copyright)

WELLINGTON, October 19

In a statement to the House of Representatives on the profits on gold reserves, Mr Coates, in introducing the Central Bank Bill to-night, said: —

In order to clarify the situation, .in ■respect to the profit -on gold reserves, I would like to -draw .attention to the undisputed fact that the issue of currency, whether in the form of notes or coin, i, s ,a prerogative of the State. The rights of note .issue wove granted to our trading banks, but are subject to a tax, and to certain conditions

'regarding redemption in gold coin. Such right of note issue is a matter quite apart from (commercial - banking, which, in most countries, is carried on without it. Furthermore, it is a recognised principle that the value of the monetary unit, and, in fact, mone-

tary policy generally, are entirely irnttery io be determined by the State, which must stand all losses involved, and should take all. profits accruing therefrom.

Any profit's that. may be obtained from the -sale of our gold reserves ■arise, not out of banking, but, firstly, out 0 f Great Britain going off the gold standard, and secondly, out of the depreciation of the New Zealand currency in the terms of sterling, both as matters of monetary policy. The premium on gold, in comparison with the mint par value, is the (measure of the depreciation in the value of the notes. This depreciation has been at the expense of the people, and not at the expense of th banks. It follows that any profits on gold reserves arising out of Government action should accrue to the Slate, representing the people as a whole. The sterling value of gold in London is approximately 130 s per fine ounce. At the mint rat?, fine gold would be approximately 85s per ounce. It is with the latter figure that the market rate for gold should be - compared. Under the permanent banking legislation (see- the Banking Act, 1908) of New Zealand, each of ; the note-issuing banks is required to redeem its notes in gold on demand. T-he published returns for the September quarter .show the .notes issued at. £6,145,203, whereas the coin 'and bullion held' amounted to £5,076,254, of which about £600,000 is I silver coins-. (

Under the. special war legislation (the Banking Amendment Act, 1924) provision was made ..whereby .the G°* vei*n*or-Genciral.in-Council . Tnay, front time to time, declare, by Proclamation, that, the notes of any bank shall, during the ;period limited by s>*c,h Rvo* , tAamation, bo JugaL tender. Everywhere in' New Zealand, and during the validity of such a proclamation, the notes of the banks is question shall *be inconvertible. Before making such a proclamation, the Governor-General-may require, that adequate security be. give R by the banks that they shall pay their notes in gold on demand after the expiration o.f the period limited 'by the- Proclamation. In the event of default of payment by ' •any issuing bank, this war legislation provides that the Minister of Finance shall pay the notes, when presented, in igold.

Thus, when notes were made legal tender, the note-holders were still promised ultimate redemption in gold coin at face value, and as the profit on the gold only arises out of the abrogation of this right, it i s clear that such profit should go to the people as a whole, land not to the banks. Thus, the commercial banks have no established statutory right to the continuance of the inconvertibility of their notes. The present proclamation expires in 1935, but it contains a special provision for earlier termination if a, j Reserve Bank is established. During the period covered by the proclama- j tions the export of gold (othe r th a n uncoined gold) is prohibited, unless specially authorised 'by the Minister of Finance (see Banking Amendment Act, 1914, 'Section 6). The reason underlying this is that, a s the Govern- 1 ment had guaranteed redemption . in' gold, it was essential to ensure that | the equivalent amount of gold was' retained in the country. It follows, I therefore, that the gold holdings of • the banks must be regarded a s spec-' jal reserves against the n o te s issued, j .■nd not as part of tile general assets of the banks.

In view of the fact that the total gold coin and bullion now held by the commercial banks is actually" loss than the notes issued, it is quite clear that, if the Government removed the proclamation, the banks would very soon lie in a position of having to pay out the whoie of their nrosent gold holdings, giving a sovereign for. each one pound note presented. Even if the present position was maintained, and no Reserve Bank established, the banks could only work on the assump'ion that the temporary War Regulations would be allowed to lapse at any time, and, accordingly .apart from the necessity of protecting the Government guarantee, it would be necessary to hold their present gold reserves' in the country. Thus, they would not be able to realise any profit by disposal.

It is clear .therefore, that auv profit to accrue from the- disposal of the' present geld 'holdings is contingent ©ti Government action in .providing permanent legislation to make and main-

tain notes as legal tender. The keeping of-gold reserves was part of the obligation imposed on the banks in return for the right of note issue given them by the Government. The right to issue currency was an imporant concession, carrying corresponding obligations. was regarded'as the backing for the note issued and not as an ordinary asset, since the State has guaranteed payment 5 of the notes in ‘ g6ld. The banks, thereby, have surrendered liability for the ultimate redemption' of the notes. Therefore, they have;/also- surrendered the right to hold the assets covering that liability. 1

Tlie banks hold . tlie gold coin on charge at face value, and if they receive that value for it, the banks sufffer ho loss. Any gain that accrues will be due to Governmental action, and, therefore, rightly belongs to the State. No genuine case call be made out fop tile banks to any sharp in this gain. /

World exports eonsriUed recently lit 'London were definitely of tlie: opinion * that the gold should be taken over jby the Reserve Bank *at par value I only, and that, in principle, any proI fits or losses should accrue to the i State. In England, and France profits on the reserve gold resulting .from currency legislation were appropriated by the State without question. This is a well-established rule. The gold delegation of the Financial Committee of the League of Nations recommended the concentration of all monetary gold in the reserves of central hanks ,and that in those countries where gold lies locked up in the vaults of private hanks, measures of' reform should be a deputed. The same delegation pointed out that an appreciable economy might be effected if all gold coin, gold holdings against certificates, and gold immobilised in commercial banks were made available to perform the prober function of gold in the currency mechanism of to-day. Gold should be withdrawn into the reserves of the central banks and replaced by notes.

Finally, I may say that it has been stated, on behalf of the hanks, that their gold holdings are in excess cf what they we required to hold under I statutory authority. The permanent | legislation provides, inter alia, that notes in circulation must not exceed the total of the coin, bullion and public securities, nor more than three time the amount of gold held in New Zealand. This has been wrongly in- | terpreted in the direction of stating ' that the gold holding may be onej third of the notes issued. The statuI tory provision in question deals with ! the note issue, and, as such must take into consideration not only the actual issue at any moment, hut .the possible issue arising out of credit fluctuations hei-e. I' may say that it is not possible to carry on banking without 1 cash reserves, which in ’New Zealand consist of the hanks’, own unissued notes, and in order’to be in a position , to issue additional notes, the banks must hold additional gold cover. The amount or such additional gold cover was decided, by each bank for itself, and, as gold is a dead asset, the presumption is that the respective amounts held were not in excess of what was considered to be a safe margin in each case. On this point, also, it is of. interest to observe that, since IPI4 .the note issue has more than trebled, while the coin and bullion held is to-day about approximately the same as it was in 1914.