N.Z.’s Banking System

Sun (Auckland), Volume IV, Issue 1074, 11 September 1930, Page 8

N.Z.’s Banking System

Plea for Amended Laws

IMPORTANT changes in New Zealand’s banking laws, primarily by legislating to fix the sterling exchange standard in the Dominion, advocated recently by a prominent accountant, Mr. B. C. Ashwin, is of absorbing interest at present because Sir Otto Niemeyer, Bank of England finance expert, is now here investigating the Dominion’s banking problems.

In a comprehensive analytical survey of the Dominion’s banking system, delivered before the Wellington branch of the Economic Society of Australia and New Zealand, Mr. Ashwiu urges that four main alterations be made by legislation. He recommends, first, the definite fixation of the sterling exchange standard, by making it mandatory for the banks to provide exchange on London, at a premium or discount, within certain prescribed limits, roughly corresponding to the cost of shipping gold to and from London; secondly, making bank notes, as legal tender, a permanent feature of the system; thirdly, fully covering the note issue by Government securities; fourthly, that subject to necessary safeguards. Government securities to cover the note issue may be held in New Zealand and London. The establishment of a non-political Note Issue Board to institute single and uniform uote # issue is also proposed. it being suggested that, although the board is not absolutely essential, it will be a valuable adjunct.

“The framers of our banking legislation evidently intended that the complete gold standard should operate in this country,” says Mr. Ashwin, “but trading conditions led, in fact, to the adoption of a sterling exchange system.” New Zealand is not now, and never was, on the gold standard, according to the reviewer, who points to the dominating influence of London on the Dominion’s monetary system. The rise and fall of balances held by the New Zealand banks’ offices in London, increased by funds front the sale of exports and depleted by funds to pay for imports, control the volume of credit, and through this, the issue of currency in New Zealand. The conclusions drawn from an examination of the monetary system are: (a) That the de facto system is, and always has been, a sterling exchange standard; (b) that it centres round an approximate fixed par of exchange between the British and the New Zealand pound; (c) that our external trade is cleared through Loudon, and the London balances of the

bank are the chief factor in regulating the volume of credit in New Zealand; (d) that the banking habit is strongly developed in New Zealand and notes are very subsidiary, being used for little beyond payment of wages, petty disbursemer ts and till money; (e) that the legislative restrictions on the note issue have been quite inoperative, as the demand has always been considerably less than the maximum amount the banks were in a position to issue; (f) that the volume of credit has regulated the note issue and not vice versa. None of the changes in banking arising out of the war-time conditions had any real economic significance, in Mr. Ashwin’s opinion. He points out that no alterations in the law have been made since 1920, but the medley of Acts and regulations operative at that time are still in force today. The essential point is that throughout the war period and since the pre-war, de facto sterling exchange standard was maintained without any fundamental change. Discussing rates of exchange, Mr. Ashwin claims there is nothing in New Zealand economic conditions to justify a rate of 5 per cent., and he attributes this to the habit of six banks trading in the Dominion fixing practically uniform rates for Australia and New Zealand, presumably on the basis of the average economic conditions and the outlook of both countries combined. The remedy lies in treating the countries as separate economic units and fixing separate exchange rates according to each country’s trade position and outlook. The legal recognition of the sterling exchange standard will enable large savings to be made by the utilisation of £6,600,000 in gold which has lain unused in the banks’ vaults for the past 15 years, according to Mr. Ashwin, who points out that this “dead” asset is costing the people £330,000 annually. He suggests that this gold stock should be transferred to London, to become portion of the exchange fund, and believes this objective could be accomplished voluntarily simply by amending the law requiring gold to be held in New Zealand.