8.—3.

Witness : Mr. B. C. Ashwin, representing the Treasury. Wellington, 17th April, 1934. The Chairman: I would just like to say to the Committee that the matter that is under discussion is the statement bearing on banking and currency in New Zealand. Captain Rushworth.] You do not agree that the banks lend their deposits ?—Actually, no. I would like to ask your opinion as to why it is the banks seek deposits ? —How do you mean " seek deposits " ? They seek deposits by offering a rate of interest. I will suggest a possible reason, it is the only reason I can think of. It is to attract to themselves the money that otherwise might be available for competitors ? —No. I think it is the other way round, in so far as they offer rates of interest for fixed deposits and from that aspect of the matter alone they do it not go much with the idea of attracting them as keeping them. Then the putting of money on fixed deposit is really a detriment to industry ?—ln general, yes. It withdraws it from active circulation, and that may be a reason in certain cases for offering a rate of interest; for the purpose of pulling down the volume of active deposits. Returning to the statement —there are several places in the statement where an interesting train of thought is set up. First of all, on page 1, the paragraph last but one, the wording is : " The explanation, of course, is that our banking system, &c." Could I understand from that —monetary system. Would that be synonymous ? —Yes. In the general sense of the term, unless you have any specialized meaning for monetary system. Strictly speaking, our banking system here, controlled by the local directors of the banks, is a self-contained system, but that really the monetary system is not self-contained?—' Yes. The explanation of the paragraph is that the whole business is not centred in the Dominion. They operate in London as well as here. The active part of the business is done at this end. That paragraph, read in conjunction with other paragraphs, leads me to think that what you intended was not so much the banking systems, as such not being self-contained, but that the monetary system which they administer should be self-contained ?—Yes. On page 2, about the middle, the paragraph starting,— In fact, the pressure on the London balances of the banks is what limits the amount of credit that can be created in New Zealand. As already pointed out, there is ample scope for expansion in so far as cash resources in New Zealand are concerned. If, however, the credit structure is enlarged, apart from any corresponding increase in local production, the additional resources will be used to buy additional imports, and thereby impose a drain on London funds. Failing internal action to lower the volume of credit, such a situation can be met only by raising the exchange-rate, which, in effect, means that more must be paid in New Zealand currency to obtain a given quantity of imports. Thus the additional credit created is neutralized by depreciation in the purchasing-power of the monetary unit. Then on page 4, the bottom paragraph,— In fact, all the evidence clearly demonstrates that the volume of credit in New Zealand, has not been governed through the currency on a gold basis, as was apparently originally intended, but is automatically governed by an exchange fund held by the banks in London, which fund, so long as Great Britain was on the gold standard, was in effect equivalent t'o a stock of gold held in London. When Great Britain departed from the gold standard, however, we followed automatically, and our exchanges were not directly affected—that is to say, this country possesses a sterling exchange standard. And on page 5, — 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. . . Now, all those paragraphs, taken together, indicate quite clearly that New Zealand has never been a self-governing country so far as its monetary system is concerned. Is that correct ?—No. I mean that the sterling-exchange system was adopted voluntarily, and it may be involuntarily, in that it grew up and was not part of a financial policy determined in advance. But it does not mean that this country is not self-governing. That is to say, so far as the monetary policy is concerned, it had the power to become self-governing, but it was not so in fact ?—Yes, even in fact, in that the system evolved was just as self-governing in working on the volume of London balances as the Bank of England was in the English system in working on a stock of gold. Your wording here that the de facto system is and has always been a sterling exchange standard ? —Yes, and by that I mean that the basis of our credit in New Zealand is and has always been the balance of sterling kept in London. So that it is sterling that has been the sheet anchor ? —Yes. Even so, that balance is only the reflection of our own trading position. That balance is built up by the sale of our exports and is depleted by payments for imports and by debt payments. The controlling factor has been our external trade and debt operations abroad. Excepting those, this sterling balance depends entirely upon sterling policy ? —Yes, in so far only as it affects the prices we receive for our exports. The sterling policy may lead to a given average pricelevel in Britain. If that price-level goes down, that automatically decreases the proceeds from the sale of our exports, and therefore the inflow into the basis of our monetary system.

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