MONEY AND BUSINESS AFFAIRS.

Manawatu Standard, Volume LVII, Issue 215, 11 August 1937, Page 5

MONEY AND BUSINESS AFFAIRS.

CREDIT POLICY. *(By “H.J.Iv.”) Tlie voluminous and interesting report of the Royal Commission on Banking. appointed by the Commonwealth Government, is not being accepted without serious questioning; even Dr. Earl Page is doubtful regarding some of the recommendations. The commission points out that the chief function of the Commonwealth Bank, as a central bank, is the regulation of the volume of credit, and for this purpose it is essential that the bank should possess adequate powers. But the central bank’s success in expanding or contracting credit will depend mainly upon the effect which the action has on the cash reserves of the trading banks. The central bank could affect the cash reserves by Treasury bill operations, by the buying and selling of Government securities on the open market, and by its trading activities. But the trading banks, even if their cash reserves were affected, could go contrary to the central bank and alter their lending policy by lowering or raising their ratio of cash to deposits. They need not necessarily play up to the central hank, and this aspect of the matter is* recognised by the commission : it recommends co-operation between tlie central bank and the trading banks. The commission also advises that the central bank should be given power to apply compulsion, with the consent of the Treasurer of the day, and for a term riot exceeding eighteen months in any period of two years. This compulsion is quite a new thing in central banking. Tlio whole question rests on whether Australia lias a big enough population and adeouate trade to maintain a central bank on orthodox lines. If the central bank offered for sale Government securities on the open market it would depress the values of such securities; and, conversely, if it bought shell securities on the open market it would tend to raise values. The central banks in Europe have a wider field to operate in. and can do many tilings with success that could not be done in Australia. In the United States and in New Zealand it is obligatory on the trading banks to keep with the central bank cash reserves proportionate ,to their deposits.- The Reserve Bank of New Zealand was never really wanted. It is about half a century before its time. To maintain a central bank there must be the population, which we have hot got, a powerful Stock Exchange, and a host of investors. The sale of Government securities is a matter of negotiation between brokers or between broker and client, and while tlie negotiations are pending the central bank may be suffering. The Commonwealth Bank was not intended at a central bank, but was established by a Labour Government in Australia to compete with the trading banks, and such competition was expected to keep down the lendihg rates. BANK HOLIDAY. The first Monday in August is a statutory holiday for the Bank of Eng-

land, and is therefore known throughout the United Kingdom as “Bank Holiday,” and as the weather is generally good then the lines of travel radiate from London to all parts of the country. Parliament also has its long vacation then, and August may be said to be a holiday month in England. It is quite obvious from the weekly return of the Bank of England that the most has been made of the bank holiday this year. This is shown by the note circulation, which on “Wednesday, August 4, stood at £503,000,000, as compared with £498,300,000 at the close of the preceding week, an increase of £5,600,000, and the total is the highest on record. The bank has not added to its gold reserve, which still stands at £326,400,000, but lias allowed its reserve of notes to diminish; this reserve oil August 4 amounted to £23,600,000, as compared with £29,200,000 in the preceding week, a shrinkage of £5,600,000, or the exact amount of the increase in the note circulation. Except for the fiduciary issue of £200,000,000, the bank lias gold coverage pound for pound for the circulation, and the gold is taken in at the old parity of 85s per fine ounce. The big increase in circulation has naturally caused a big shrinkage in bankers’ deposits with the Bank of England. The deposits on August 4 amounted to £95,500,000, as compared with £104,300,000 in the preceding week, a decrease of £8.800.000. The discount rate of the Bank of England was reduced from 2$ per cent, to 2 per cent, on June 30, 1932, and it has remained at that low rate ever since, a period of five years, and the longest in the history of the bank. This rate of 2 per cent, is the traditional minimum, and it is purely a nominal rate. Tlie open market discounts bills at much lower rates. Thus trade bills arc discounted at 2 to 2$ per cent, according to the standing of the signatories of a hill. Bank hills, that is, bills endorsed by trading banks, and therefore safe, are being discounted at 11s 3d per cent., and Treasury bills at three months at 10s per cent. The Bank of England is the most powerful and most influential of all central banks. It is hoarv with traditions which have developed over the 200 years it has been in existence and some of its terms are archaic. Thus what modern hanks call their “reserve” funds tlie Bank of England -refers to as the same fund as the “Rest.” And there is a tradition with regard to the Rest. for it is never I allowed to fall below £3.000,000. Tt increases each week because the profit earned during the week is added to it. Another feature is that the chairman and directorate of the Bank of England arc known as the Governor and Court of the Bank of England. There pre 24 directors besides a Governor and a deputy-Governor, and they are all ineii of outstanding ability. The capital of the bank is £14,500,000, but this is not in shares but in stock, the unit of calculation being £IOO. In addition to capital there is the Rest of £3,600,000. and tlie Government debt to the hank of £11,000,000, against which the bank can issue notes. This Government debt has appeared hi the weekly returns ever since 1844. There is an interesting story attached even to this. The last dividend paid by the Bank of England was at the -rate of 12 per cent, per annum. British banks throughout the Empire amply prove that banks can be run by private enterprise.