8.—3.

A stock of gold coin and bullion has certainly been lield by the banks in New Zealand for monetary purposes, but in fact —even in pre-war days —this gold was used only to support a gold circulation and provide for the legal requirements, previously referred to in connection with the note-issue. The export of gold for exchange purposes has been absolutely negligible, and imports of gold have been confined to sovereigns for internal circulation, there being no mint in New Zealand. Prior to 1914, however, as already pointed out, the amount of gold held was relatively so large that a very large expansion of the currency was legally possible, but never occurred. Scope to expand the currency under the operation of the normal gold standard meant scope to expand credit proportionately. But then, as has been demonstrated, the normal gold standard did not, and does not, operate in this country. In fact, credit is not controlled through the currency, but, on the contrary, the currency is controlled through the credit, which in turn is controlled through the operation of the exchanges with London. Further, the banking habit is well developed in this country, and with the extensive use of cheques, notes and coin are definitely subsidiary, being required for little beyond payment of wages and till-money in the retail trade. This being the position, it must be realized that under the normal operation of the de facto system, as distinct from the legal system, our gold coins played no greater part than our bronze coins. It is true that the gold coins carried within themselves the guarantee of ultimate redemption in value, but as part of our money mechanism they played the part of a token coinage ; work that could have been carried out with equal efficiency with much cheaper material. To sum up this examination of the monetary system, the only conclusions to be drawn from an examination of the facts are as follows :— 1. That the de facto system is and always has been a sterling-exchange standard. 2. That it has centred round an approximate fixed par of exchange between the British and the New Zealand pound. 3. That our external trade is cleared through London, and the London balances of the banks are the chief factor in regulating the volume of credit in New Zealand. 4. That the banking habit is strongly developed in New Zealand and notes and coin are very subsidiary, being used for little beyond payment of wages, petty disbursements, and till-money. 5. 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. 6. That the volume of credit has regulated the note-issue, and not vice versa. How our Banking System Operates. As an adjunct to the review of the factors governing the volume of credit in New Zealand, it may be useful to explain how deposits are created and extinguished, and generally how the banking machinery operates. An understanding of this can best be obtained from simple illustrations of the effect of various transactions on the balance-sheet of a bank in skeleton form. When the first bank extended its operations to the Dominion the first transactions were probably the purchase of suitable premises to be followed by purchase of gold, it being assumed in both cases that, bank-notes were given in payment. A balance-sheet of the New Zealand business prepared at this stage would read as follows : — Liabilities. Assets. £ £ Notes and coin .. .. .. 101,000 Premises .. .. .. .. 1,000 Gold .. .. .. .. 100,000 £101,000 £101,000 Then assume that transactions, as set out below took place, the changes in the balance-sheet being given for each one. (a) Bank accounts opened and £50,000 notes deposited : — £ £ Notes, &c. .. .. .. .. 51,000 Premises .. .. .. .. 1,000 Deposits .. .. .. .. 50,000 Gold .. .. .. .. 100,000 £101,000 £101,000 (b) £100,000 advances granted and drawn, £90,000 by cheque and £10,000 in notes, both for payments in New Zealand, it being assumed that all cheques are lodged for collection immediately :— £ £ Notes, &c. .. .. .. .. 61,000 Premises .. .. .. .. 1,000 Deposits .. .. .. .. 140,000 Gold .. .. .. .. 100,000 Advances .. .. .. .. 100,000 £201,000 £201,000

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