RESERVE BANK OF NEW ZEALAND. ANNUAL REPORT OF THE BOARD OF DIRECTORS AND STATEMENT OF ACCOUNTS FOR THE YEAR ENDED THE 31st MARCH, 1942.

Appendix to the Journals of the House of Representatives, 1942 Session I, B-16

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1942. NEW ZEALAND.

RESERVE BANK OF NEW ZEALAND. ANNUAL REPORT OF THE BOARD OF DIRECTORS AND STATEMENT OF ACCOUNTS FOR THE YEAR ENDED THE 31st MARCH, 1942.

Presented to both Houses of the General Assembly, pursuant to Section 20 of the Reserve Bank of New Zealand Amendment Act, 1936.

ANNUAL REPORT.

To the Hon. the Minister op Finance. The Board of Directors presents hereunder the report on the operations of the Reserve Bank during the financial year ended the 31st March, 1942. On the 30th April, 1941, Mr. W. F. L. Ward, who, as Deputy Governor, had been carrying out the functions of Governor of the Bank since Mr. Lefeaux's appointment had expired in December, 1940, was appointed Acting-Governor (pursuant to the provisions of the Reserve Bank Emergency Regulations 1940). The appointment was for a period of three months commencing on the Ist May, 1941, and this has been renewed each three-monthly period since then. By Order in Council dated the 21st May, 1941, issued pursuant to the provisions of section 25 of the Reserve Bank of New Zealand Act, 1933, Mr. E. C. Fussell was appointed Deputy Governor. Both Mr. Ward and Mr. Fussell have been with the Bank since its inception —Mr. Ward as Deputy Governor and Mr. Fussell as Secretary and subsequently as Assistant to the Governors. Two of the Bank's Directors, Mr. G. Lawn and Mr. M. Silverstone-, completed five years' service on the Board on the 23rd August, 1941, and were both reappointed Directors pursuant to the provisions of section 7 of the Reserve Bank of New Zealand Amendment Act, 1936. After making provision for depreciation and contingencies, the net profit for the year amounted to £350,241 19s. 9d. This amount has since been paid into the Public Account to the credit of the Consolidated Fund. Major changes in the balance-sheet figures as at 31st March, 1942, as compared with those of the previous year were as follows : — Liabilities. Bank Notes. An increase of £2,704,231 10s. The upward movement mentioned in last year's report continued throughout the year under review, as also did the figure for effective note circulation. The following table shows how this upward movement has continued since the Bank commenced operations : —

Demand Liabilities. (a) State. —An increase of £6,185,732 to £12,455,283. Receipts from income-tax held in the Public Account accounted largely for this increase. (b) Banks. —An increase of £3,502,478. Balances held by the Bank rose in February, 1942, to a total of £21,482,000. They declined quickly in March when income-tax payments became due, and at 31st March, 1942, totalled £16,346,248.

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(£(N.Z.)000.) As at last Monday Total Notes Effective Note in March. outstanding. Circulation.* 1935 .. .. 9,341 6,236 1936 .. .. 10,153 7,105 1937 .. .. 13,179 9,844 1938 .. .. 13,554 9,536 1939 .. .. 15,334 11,176 1940 .. .. 18,379 14,835 1941 .. .. 21,441 17,162 1942 .. .. 24,132 20,177 * Notes in the hands of the public.

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Assets. Sterling Exchange. An increase of £999,937. Throughout the year sterling exchange has been on a slightly higher level than for the corresponding periods in the previous year. Advances. To the State or State Undertakings : — (i) Marketing Department: An increase of £4,794,170. Large quantities of butter and cheese for which suppliers had been paid but for which no payment was yet due from the United Kingdom Government accounted for the major portion of this increase. Advances to the Marketing Department throughout the year averaged approximately £2,500,000 higher than in the previous year. (ii) Other Purposes: An increase of £6,500,000 to a total of £22,000,000. Of this total, £20,000,000 were Housing Bills (an increase of £4,500,000 since the 31st March, 1941) and £2,000,000 were for general purposes. The rates for accommodation to the Government were reduced as from the 26th July, 1941. The new rates are as follows :— Per Cent. Marketing Department —• per Annum. First £5,000,000 .. .. .. .. .. .. .. 1 Thereafter .. . . .. .. . . . . 1£ General Purposes Treasury Bills— First £5,000,000 .. .. .. .. .. .. .. 1 Thereafter .. .. .. .. .. .. 1^ Discount Rate. The minimum rate for the discounting of approved bills of exchange was reduced from 2 per cent, to per cent, as from the 26th July, 1941. The rates quoted since the Bank commenced business are as follows :— Per Cent. per Annum. As from Ist August, 1934 .. .. .. .. .. 4 As from 29th July, 1935 .. .. .. .. .. 3J As from 2nd March, 1936 .. .. .. .. .. 2£ As from 29th June, 1936 .. .. .. .. 2 As from 19th November, 1938 .. .. .. .. .. 4 As from 6th September, 1939 .. .. .. .. .. 3 As from 27th May, 1940 .. .. .. .. .. 2 As from 26th July, 1941 .. .. .. .. .. 1| Exchange Rate. No alteration was made in the Bank's official buying rate for sterling, and no official selling rate was quoted. Management of Public Debt. During the year under review the major loan transactions were as under : —- (1) National Development Loans. (a) 3-per-cent. Stock maturing 15th July, 1945, at an issue price of £100 per cent. (b) 3J-per-cent. Stock maturing 15th January, 1956-59, at an issue price of £97 ss. per cent. As mentioned in the last report, the prospectus for the above loans was issued by the Bank on the 3rd January, 1941. The issue was for an unspecified amount and was still open for subscription when the last report was written. In exercise of the right reserved in the prospectus, the invitation for subscriptions to the short-dated 3-per-cent. 1945 Stock was withdrawn on the 14th May, 1941, whilst the lists for the 3|-per-cent. 1956-59 loan remained open till 16th July, 1941. Subscriptions to these loans involved the issue of Stock to the total nominal value of £8,423,100, of which £2,147,420 is 3-per-cent. 1945 Stock and £6,275,680 3J-per-cent. 1956-59 Stock. (2) £10,000,000 War Loans at an Issue Price of £100. (a) 2|-per-cent. Stock repayable Ist August, 1946. (b) 3-per-cent. Stock repayable Ist August, 1951—54. The prospectus for these loans was issued by the Bank on the Ist August, 1941, two classes of Stock as above being offered for subscription. Provision was made for subscription in full or in instalments spread over a period of four months. The response to these loans was very satisfactory, resulting in over-subscription to the extent of £220,620. Of the total subscriptions, " fully-paid " applications exceeded £8,000,000, indicating that considerable sums were available for immediate investment. (3) Conversion Loans. Two New Zealand Government loans became due for repayment during the year, these being 3-per-cent. Stock and Debentures which matured on the 15th July, 1941, and 3f-per-cent. Stock and Debentures which matured on the 15th November, 1941 ; the latter was subject to the option of the Government to repay the loan on or after the 15th November, 1938, on giving three months' notice in the New Zealand Gazette. In addition to the loans mentioned, the Government decided to exercise its option to repay, before final maturity date, the 3|-per-cent. and 4-per-cent. Stock maturing 15th March, 1943. Accordingly notice was given in the New Zealand Gazette that the 3|-per-cent. Stock and Debentures maturing 15th November, 1941, would be repaid on the 15th August, 1941, and the 3|-per-cent. and 4-per-cent. Stock maturing 15th March, 1943, on the 15th September, 1941. The loans subject to the conversion offer were as under : — £ (a) 3-per-cent. Stock and Debentures maturing 15th July, 1941 . . 4,613,505 (b) 3f-per-cent. Stock and Debentures maturing 15th November, 1938-41 .3 ,001,015 (c) 3|-per-cent. and 4-per-cent. Stock maturing 15th March, 1940-43 13,658,960 Total .. .. .. .. .. .. £21,273,480

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The Bank issued a prospectus on the 15th May, 1941, inviting holders of the securities affected to convert to the new issues mentioned below as from the respective repayment dates—namely, 15th July, 15th August, and 15th September, 1941. In any case where the conversion offer was not accepted the securities became repayable on the dates specified. Provision was made for the payment of interest in respect of the securities up to the conversion dates or repayment dates specified. Alternative offers in new Stock issues were made to holders of the securities dealt with in terms of the prospectus —conversion into 3-per-cent. short-dated Stock repayable 15th September, 1946-48, being offered at par, whilst conversion to the 3J-per-cent. long-dated issue repayable 15th September, 1957-60, carried a premium of £3 for each £100 converted, such premium being met by the issue of additional Stock for amounts of £5 or multiples thereof. Fractional amounts of £5 became payable in cash on the respective conversion dates. Up to the 31st March, 194-2, additional new Stock totalling £419,660 had been issued to cover the above-mentioned premium, while fractional amounts of £5 refunded in cash totalled £6,948 lis. £ The total amount subject to offer in terms of the prospectus was .. .. 21,273,480 This amount was dealt with as under :—- Conversions — £ (a) To new issue of 3-per-cent. Stock, 1946-48 .. .. 5,985,070 (b) To new issue of 3|-per-cent. Stock, 1957-60 .. . . 14,220,285 Redemptions .. .. .. .. .. .. 1,033,560 21,238,915 Outstanding as at 31st March, 1942 .. .. .. .. £34,565 The lists for the new loans closed on the evening of the 14th June, 1941, but the Bank was authorized to accept applications after such date in any case where, in the opinion of the Bank, application prior to such date, was impracticable. It will be realized that in a conversion transaction such as the one under review, factors such a,s the absence of security-holders from the Dominion, decease of security-holders, and other factors occasion considerable delay in the completion of the final accounts relative to the transaction. Every effort is being made to clear up the few individual cases outstanding. (4) Interest-free Loans for War Purposes. The total contributions outstanding by way of interest-free loans at 31st March, 1942, was £1,216,475. The volume of work entailed in handling these loan and conversion operations was considerable, and the Board desires to express its appreciation of the helpful co-operation of the trading banks, the Stock Exchange Association of New Zealand, Government .Departments (in particular the Post and Telegraph Department), the press, and all other organizations and individuals whose assistance was such a material factor in the success of the transactions. Exchange Control. No fundamental changes in the procedure of licensing overseas trade took place during the year, and the administration of Exchange Control provisions of the Finance Emergency Regulations 1940 (No. 2) operated smoothly. The power conferred on the Minister of Finance to require New Zealand residents to offer gold coin or gold bullion for sale to the Bank has not so far been exercised. The table set out below gives a classification of foreign exchange transactions for the years ended 31st March, 1940, 1941, and 1942 : —

Summary of Transactions.

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(£(N.Z.)000.) Year ended 31st March. Year ended 31st March. Receipts. Payments. 1940. 1941. 1942. 1940. 1941. 1942. In respect of — In respect of— Exports .. .. .. 70,975 73,302 72,774 Imports, excluding payments 37,868 42,015 39,623 Interest, dividends, legacies, 1,588 4,220 4,231 in respect of Government immigrants' funds, repatri- imports and in respect of ated capital, and private goods imported prior to debts due in New Zealand introduction of licensing Trade debts due in New Zea- 1,734 3,443 2,897 system land, including overseas earn- Interest, dividends, legacies, 3,187 3,935 3,782 ings of New Zealand firms .. emigrants' funds, repatriated Commissions, royalties, and in- 68 120 166 capital, and private debts surance due overseas Donations and allowances .. 342 382 431 Trade debts due overseas, in- 4,671 2,759 2,294 Travellers' expenses .. 270 280 268 eluding earnings in New Local-body loan raised overseas 322 .. .. Zealand of overseas firms Government loan raised over- 2,500* .. .. and payments in respect of seas goods imported prior to inUnclassified .. .. 683 965 504 traduction of licensing system Government debt and other 14,064 19,628 34,501 services, including payments in respect of imports Local-body-debt services .. 1,634 3,635 1,800 Commissions, royalties, and 323 538 549 insurance Donations and allowances .. 547 622 606 Film hire and entertainments 293 343 226 Travellers' expenses .. 727 274 198 Unclassified .. .. 43 15 78,482 82,712 81,271 63,357 73,764 83,579 * Sterling loan from trading banks since repaid.

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Overseas Funds and Balance of Trade. The following table shows the movements during the past eight years to the end of March, 1942 : —

It will be remembered, as was stated in last year's report, that the net overseas assets figure quoted does not represent a freely disposable surplus, as a large proportion of this amount has already been allocated to provide for imports. During the year a sum of £(5tg.)9,980,000 was made available in London to meet charges in respect of the Dominion's war expenses. These amounts are first paid by the British Government and subsequently charged by them to the New Zealand Government. It must be remembered, however, that there is a time lag between payment by the British Government and charging to the New Zealand Government. . Trading Banks. The position of the trading banks as shown by the main items in their monthly returns has been as follows :—

Assets.

Liabilities in New Zealand.

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(£(N.Z.) Millions.) _ . . at i. » j Balance of Trade End of March. Net Overseas Assets. (Twelve Months). r 1935 .. .. .. 45-2 12-4 1936 .. .. .. 44-1 12-2 1937 .. .. .. •• 34-4 12-6 1938 .. .. .. .. 26-6 6-9 1939 .. .. .. 9-3 3-5 1940 .. .. .. 23'0 14-1 1941 .. .. .. .. 29-8 23-3 1942 .. .. .. .. 30-9 18-6

(£(N.Z.)000.) Deposits at Reserve Total Cash Net 0yer . Qovernme nt Adva » ces Last Monday in Month. Reserve Bank in New seas Aaseta . Securities. J™ d . Bank. Notes. Zealand. Discounts. 1941. March . .. 12,832 4,279 17,860 12,239 15,434 53,680 April .. .. 13,302 4,707 18,758 11,688 18,656 52,253 May .. 13,889 4,455 19,113 11,871 18,655 51,376 June . .. 14,100 4,029 18,904 11,111 18,640 50,219 July .. .. 14,14-0 4,301 19,218 11,396 20,533 48,423 August .. .. .. 12,632 4,204 17,587 10,007 22,333 48,573 September .. .. .. 9,240 4,527 14,525 10,947 23,255 47,810 October . .. 9,163 3,882 13,759 .10,822 23,222 49,460 November .. .. 8,716 4,226 13,749 11,054 23,190 50,151 December 10,719 4,397 15,854 12,009 23,039 50,478 1942. January 14,402 4,622 19,855 12,709 22,903 49,327 February .. . • 21,480 3,945 26,222 12,139 22,694- 47,056 March .. .. .. 16,218 3,955 20,938 12,533 23,733 49,629

(£(N.Z.)000.) Demand Time Total Demand and Last Monday m Month. Liabilities. Liabilities. Time Liabilities. 1941. March . ■ ■ • • 53,682 28,630 82,312 April .. 53,678 28,783 82,460 May .. 53,619 28,762 82,381 June .. 52,552 29,040 81,593 July .. .. •• 52,038 29,317 81,355 August .. .. 51,875 29,145 81,019 September .. .. .. 49,723 29,213 78,936 October .. .. .. 49,593 29,234 78,827 November .. .. 51,326 29,124 80,449 December .. .. 53,976 28,980 82,956 1942. January .. .. •• 57,787 28,954 86,741 February .. ■- 62,151 28,920 91,070 March .. .. •• 61,525 28,420 89,945

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The figures showing the greatest relative movement during the year were those for deposits at the Reserve Bank, the highest figure (£21,480,000 for February, 1942) exceeding that of £8,716,000 for November, 1941, by £12,764,000. Total cash in New Zealand tended upwards, and the net rise since March, 1941, was £3,078,000. While advances and discounts have shown a fairly steady decline during the year —the net fall being £4,051,000 since March, 1941 —the proportion of advances and discounts to total demand and time liabilities fell from 65-2 per cent, to 55-2 per cent, during the year. On the other hand, the trading banks' holdings of Government securities rose steadily throughout the year, the net increase being £8,299,000. On the liabilities side a net rise of £7,843,000 is shown in the figures for demand liabilities, the increase occurring mainly in the latter part of the year under review. Little movement was shown in the figures for time liabilities, the net change being a fall of £210,000. War-time Changes in Money Supply. Since the outbreak of war the supply of money in New Zealand, as indicated in the following table, has increased by £(N.Z,)42-8 millions :—

This increase was due almost entirely to the causes mentioned below:— (a) Net Income from Overseas— Million. The Dominion's receipts overseas exceeded external expenditure by 22-3 as is shown by the rise in the combined net overseas assets of the Reserve Bank and the trading banks, from £(N.Z.) 8-6 m. in September, 1939, to £(N.Z.) 309 m. in March, 1942. (b) Credit Expansion in New Zealand— (i) Advances by the Reserve Bank increased by .. .. .. 9-8 £(N.Z.) (ii) Holdings of securities in New Zealand by the trading banks Million. increased by .. .. .. .. .. .. 13 • 9 but the effect of this increase was offset to the extent of .. 4-0 by a fall in trading bank advances, leaving a net increase of .. .. 9-9 Thus, the above causes accounted for .. .. .. ~ .. .. 42 • 0 of the total increase of £42-Bm. in the supply of money in New Zealand. Staff. As at 31st March, 1942, thirty-six members of the staff were on active service in His Majesty's forces. This represents approximately 70 per cent, of the Bank's permanent staff eligible for such, service. The remainder are either serving in the Home Guard or under the E.P.S. It is with deep regret that the Board places on record the death whilst on active service of two members of the staff, Second Lieutenant P. E. Sefton and Bombardier W. R. Jourdain. The Board desires to congratulate Sergeant D. P. Phillips, R.N.Z.A.F., who was recently awarded the Air Force Medal for devotion to duty. The extra work at the Bank arising from the war has imposed a severe strain on the permanent staff who remain at the Bank and on the temporary staff who have been engaged to assist over the war period. The Board desires to record its deep appreciation of their loyal and cheerful services throughout the year. For and on behalf of the Board of Directors : W. F. L. Ward, Acting-Governor. E. C. Fussell, Deputy Governor. 29th June, 1942.

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(£(N.Z.) Millions.) Sw s w -1 *!«• Ssssr Coin held by public (estimated) .. .. .. 1-5 1*8 +0-3 Notes held by public .. .. .. .. .. 13-4 20-2 -f- 6-8 Government deposits at Reserve Bank .. .. .. 1-8 13-5 +11'7 Other demand liabilities of Reserve Bank .. .. 0-3 0-2 — 0-1 Demand deposits at trading banks .. .. .. 37-4 61-5 +24-1 Total .. .. .. .. .. 54-4 97-2 +42-8

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RESERVE BANK OF NEW ZEALAND. Profit and Loss Account for the Year ended 31st March, 1942. Dr. £ s. d. Or. £ s. d. General charges, including salaries, rent, Balance of profit after making provision cost of note issue, and other expenses .. 137,972 011 for rebate on Treasury Bills not yet due, Balance, being profit for year .. .. 350,241 19 9 and for sundry liabilities and contingencies .. .. .. 488,214 0 8 £488,214 0 8 £488,214 0 8 Profit and Loss Appropriation Account. Dr. £ s. d. Gr. £ s. d. Payments to New Zealand Government in Balance as at Ist April, 1941 .. .. 351,906 10 0 terms of section 36 of Reserve Bank of Balance from Profit and Loss Account .. 350,241 19 9 New Zealand Act, 1933 .. .. 344,942 4 6 War loan fees refunded to Government 6,964 5 6 Balance 350,241 19 9 £702,148 9 9 £702,148 9 9 Balance-sheet as at 31st March, 1942. Liabilities £ s. d. Assets. £ s. d. General Reserve Fund .. .. 1,500,000 0 0 Gold (at face value) .. .. 2,801,877 10 0 Banknotes .. .. .. 24,145,054 0 0 Sterling exchange .. .. 18,536,506 3 7 Demand liabilities— Subsidiary coin .. .. .. 66,708 15 8 (a) State .. .. .. 12,455,283 8 8 Advances to the State or State under(b) Banks .. .. .. 16,346,247 16 11 takings— (c) Other .. .. .. 303,381 12 8 (1) Marketing Department .. 7,720,632 11 9 Liabilities in currencies other than New (2) For other purposes . . .. 22,000,000 0 0 Zealand-currency .. .. 17,725 11 1 Investments .. .. 4,146,228 5 4 Other accounts .. .. .. 1,041,166 1 7 Other assets .. .. .. 887,147 4 4 Profit and Loss Appropriation Account 350,241 19 9 N.B. —Holdings of sterling have been converted into New Zealand currency at the rate of £100 sterling equals £124(N.Z.). £56,159,100 10 8 £56,159,100 10 8 W. F. L. Ward, Acting-Governor. E. C. Fussell, Deputy Governor. W. R. Sogers, Chief Accountant. Auditors' Certificate and Report.—We have audited the balance-sheet as at 31st March, 1942, above set forth, and have obtained all the information and explanations we require. We have accepted the certificate of the Bank of England as to assets held on account of the Reserve Bank of New Zealand. In our opinion the balance-sheet is properly drawn up so as to exhibit a true and correct view of the state of the affairs of the Bank as at 31st March, 1942, according to the best of our information and the explanations given to us and as shown ,by the books of the Bank. J. L. Griffin \p u j-,]j c Accountants, Auditors. D. G. Johnston J Wellington, New Zealand, -25th June, 1942.

Approximate Cost of Paper.—Preparation, not given ; printing (491 copies), £12.

By Authority: E. V. Paul, Government Printer, Wellington.—l 942.

Price Od.]

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