New Zealand's Financial Resets: Part 4 Supplement

Full press stories to accompany New Zealand's Financial Resets - Part 4

Some of the press reports used in Part 4. Start here…

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BAY OF PLENTY TIMES, 5 JANUARY 1924, PAGE 2
EXCHANGES AND THE PRICE OF GOLD.

When a contributor to this paper, writing just after the Armistice was signed, five years ago, predicted a rise in the price of gold as a likely result of the financial upset of the world’s exchanges consequent on the vast expenditure caused by the war, but few people could believe that the price of gold could ever exceed it’s mint value. The Chairman of Directors of the Bank of New Zealand, speaking at the half-yearly meeting held last week, made pointed reference to the price of gold as being one of the causes of the difficulty in the exchanges between New Zealand and London.

The trouble with regard to our exchange is that we are, and have been for the last two seasons, selling more stuff to England than we are buying from her, even it we include the amount that we owe the English investor for interest, and call it invisible imports, and the result is, that the banks hold large sums of money in London which should be brought to New Zealand, either in the shape of goods or in gold. But gold is not in free circulation anywhere in the world as a currency, because it is worth more than mint or coin value and would quickly disappear from circulation.

The value of gold has not really risen, the mint price stands fixed at £3 17s 10½d per ounce standard, but the premium that the banks or anyone else pays for gold is the measure of the depreciation of a country’s currency. About three years ago the price of gold was quoted at about £5 10s per ounce and the difference between that price and the mint price was the measure of depreciation of England’s currency when measured against the currency of the chief creditor nation, which is the United States. That means that English bank notes or British Government currency notes of a face value of £5 10s were required to buy the same amount of dollars or American government currency notes as could be bought in ordinary times for £3 17s 10½d worth of British paper, whether in the shape of notes or trade bills.

The market price of gold today is £4 6s 5d and the exchange on New York is quoted at four dollars thirty-six cents, as against the usual price of eighty-six cents which means that British paper of an approximate value of £4 6s 5d is required to buy American money of the value of £3 17s 10½d, the difference between the mint and market prices of gold being about equal to the fall in the value of English money as compared with American. This does not refer to the sovereign which is still worth face value, in America or anywhere else.

Put in another way a pound note is worth in America to-day only seventeen shillings and eleven pence, whereas a sovereign is worth, as coin, twenty shillings, as gold may be a bit more. The ordinary man about town does not realize that his own money has depreciated, and not many can see why the Indian Government should have found it necessary to buy sovereigns in the native bazaars at the price of twenty-seven shillings each, yet that is what actually happened, and the price paid was, only in proportion to the depreciation of currency and the market price of gold at the time.

Taking the exchange on marks at twenty billion to the pound, as was quoted last week, whereas the ordinary exchange is a fraction more than twenty marks to the pound, it will be seen that gold in Germany is worth a billion times as much as was formerly the case. Although we do not see gold in New Zealand now, the banks have plenty of it, and although there is possibly between seven and eight million pounds worth of notes in circulation, there is gold of equal, or rather slightly greater value, in the banks.

The British Government has brought the value of its currency nearly back to normal by funding its debts, otherwise Treasury bills, and paying interest thereon. The amount of these bills now outstanding is, roughly, three hundred million pounds against which there is a gold reserve of say ten per cent, and when those bills have been brought in, either by means of taxation, such as stamp and death duties or customs or excise, or else funded, then the pound note will probably approximate four dollars eighty-six cents on the American market. When this happens we shall be on virtually a gold basis.

There remains the question of German and other Continental exchanges, but as it is not possible that Germany can ever redeem her paper, any more than France did her assignats, the mark will simply be ignored and she will obtain the necessary gold and credits by sales of goods to other countries. Granted that Europe is not involved in a fresh war, it does not appear as if we should have to wait long for a return to the use of gold in ordinary business.

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POVERTY BAY HERALD, 3 MARCH 1924, PAGE 2 - EDITORIAL
BRITISH CREDIT.

“It, is my decided opinion that British credit stands firmer to-day than at any time since the war, and that as to the intrinsic value of the pound there can he no doubt.” The statement was made in London on January 24th by a well-known financial authority, Mr F. C. Goodenough, in a presidential speech at the annual meeting of Barclay’s Bank, and it served to dispel anxiety which was then arising over the renewed slump in American exchange.

Various factors have contributed to bring about the fall in the pound when reckoned in United States dollars, the principal one being the necessity for payment of large sums in interest on the British debt to America : another a mischievous rumor suggesting that the Government should resort to a policy of inflation; and a third that the country had perhaps made investments abroad to a larger extent than it could afford, thereby using up certain foreign liquid assets which would normally have been available for an adjustment of exchange.

Mr Goodenough discounted these fear-raising contingencies and said positively that while the payment of the American debt still remains a great problem two factors are helping to alleviate the incurrence of these payment—the high standing of British credit and the probable upward movement of gold prices which will have a decided reaction on price levels in the United States. Since 1920 the British budget has been balanced each year and the nation has repaid over £200,000,000 of foreign debt, besides effecting considerable reductions in its internal debt.

During the past two years prices have been kept at a very stable level. British reputation for solidity all the world over remains firm, and there is a general appreciation of the fact that in the funding of the debt to America Britain undertook an obligation of honor, involving considerable burden, which was all to its credit. Moreover trade statistics for some months past have been showing a gradual improvement in commercial and industrial activity. And trade statistics tell but half the story. In world trade, goods and services are paid for by goods and services. Values are reckoned in terms of pounds, dollars, francs, lire, or whatever the money of the country concerned may be.

The money, itself, however does not pass from country to country, except on comparatively rare occasions, and then it goes as a commodity. Its duty is to facilitate trade. Usually it is not a part of the trade, explains an American correspondent. When a country imports more than its exports, the balance of trade is said to be against it. In other words, it is living beyond its income. But when the value of the exports exceeds the value of the imports, the balance is in the country’s favor. It is living within its income, and is saving something. It. is accumulating credits abroad or perhaps paying off old debts.

Most of the British Dominions in the period of expansion before the war borrowed heavily from London. Their borrowings came to them in the form of goods rather than money. Their imports were greater than their exports, and the balance was against them. Of late the balance has been the other way. New Zealand and the other Dominions have been borrowing little and their exports have been greater than their imports.

But trade balances do not always mean what they seem to mean. Statistics for 1923 show that Great Britain’s imports exceeded her exports by £203,000,000. This in the case of most countries would indicate either a year of wild extravagance or heavy borrowing for some purpose. But, the Old Land is unique. She has great “invisible exports.” As already stated, good's and services. must be paid for, but only goods show in the Customs returns. Britain does a very large share of the world’s shipping. She “exports” a service, and brings home goods she has received in payment. She has large investments abroad. Each year she ‘‘exports’’ the use of her money, and brings home the value of her interest in goods. She does a great insurance business, a great commission business, a great exchange business, “exporting” the skilled services of her brokers and agents; and their commissions come home in the form of goods.

The Board of Trade estimates that, for 1923 the value of these’ “invisible exports” was £300,000,000. So the Old Land, after all, instead of living beyond her income, has been attending closely to business, and has a favorable balance of £97,000,000. Britain's position is sound, her credit is good, and recovery of her position of predominance in the world’s money markets will be steady and sure. Sir Herbert Hambling, the deputy director of Barclay’s Bank, declared with good reason that timorous people in Britain who have been investing in dollar securities for safety during the past twelve months, would have to crawl back from this position in a few years and take substantially less for their timidity.

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SOUTHLAND TIMES, 11 SEPTEMBER 1924, PAGE 7
EXCHANGE TOO HIGH
AMELIORATION DESIRED
ACTION BY THE GOVERNMENT
IMPORTANT CONFERENCE ARRANGED
In the House of Representatives this afternoon, Mr W. D. Lysnar (Gisborne) put the following question to the Prime Minister on the subject of exchange: “Seeing that the official report of the Imperial Economic Conference, held in 1923, discloses the fact that it was admitted on all sides, including the Committee set up by the Conference, that a return to the gold standard would be a solution to the exchange difficulty, and the Committee also recommended that exchange difficulties could be ameliorated if the note issuing authorities were to accumulate sterling assets and to undertake to exchange their local currencies for sterling assets, and vice versa, and, as the exchange difficulties have obviously become more aggravated since the date of the Conference, can the Prime Minister inform the House whether anything is being done or any proposal is being put forward which' is likely to lighten the unfortunate difficulty with regard to the question of exchanges?”

MR MASSEY IN REPLY
The Prime Minister replied: "The exchange position, instead of improving, is becoming increasingly difficult. The disparity is too great. Producers and exporters are at a disadvantage. It has been suggested that the difficulty might be overcome by means of Imperial shortdated currency bills conjointly guaranteed by Great Britain and the Dominions. Such a scheme was very fully investigated by experts in attendance at the Imperial Economic Conference, and also by the financial advisers to the British Government. These experts, however, considered that the financial and constitutional difficulties to be overcome were too great, especially in regard to what is known as the 'purchasing power parity,' in the respective countries, and the control of credit and currencies administered by each country independently.

CENTRAL BANK OF CREDIT
”The committee considered that it was possible to achieve the same or at least similar results by utilising and extending the existing machinery of banking and credit without having resort to the creation of a new instrument of Imperial credit with the various constitutional and financial difficulties to which that might give rise. The investigation led to the consideration of another method of overcoming the obstacles to a balanced exchange with restricted gold movement. Their recommendation, which was endorsed by the Imperial Economic Conference, was that the best means of affording relief is through the operations of a central bank with ample powers to effect and control exchange operations as between its own country and the country or countries with which it principally trades. Under this scheme provision for the closest co-operation of the central bank and the note-issuing authorities would require to be made.

IMPORTANT NEW ZEALAND CONFERENCE.
“I have been in constant communication with bankers and other financial experts regarding the best solution of a world-wide problem, and this week a conference with the principal bankers has been arranged with the object of considering the application of the recommendations of the Imperial Economic Conference to the exchange system of New Zealand. The resolution agreed to by the Committee at their meeting on November 6, 1923, was as follows:—

“The Committee having considered their terms of refence, and having unanimously resolved that where difficulties have arisen in regard to exchange between certain parts of the Empire, and between such parts and the United Kingdom:

(a) The position could be ameliorated if the note-issuing authorities were to accumulate sterling assets and to undertake to exchange their local currencies for sterling and vice versa.
(b) This measure might be further developed and assisted by the creation of central banks, and by mutual cooperation as recommended by the Genoa Conference.
(c) In some cases, the bank charges for buying and selling sterling appear to be unduly high, and should be callable of reduction,”

THE NOTE ISSUE.
Hon. J. A. Hanan (Invercargill): Are they suggesting that the note issue should be increased?
Mr Massey: There is no such suggestion here, but it follows naturally, as a matter of course.
Mr Hanan: It means expansion of credit.
The Prime Minister: Yes.
Mr Massey added that he had arranged for representatives of the different banks of Wellington to meet him on Saturday morning, when he hoped some good would result, because it was necessary to get rid of the difficulties of the present position, or have them ameliorated.

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EVENING POST, 6 JUNE 1930, PAGE 11 - RATE OF EXCHANGE; POSITION ANALYSED; AUSTRALIAN INFLUENCE; DOMINION PENALISED

The present high rate of exchange was touched upon by Mr. B. C. Ashwin, M.Com., during the course of a paper last night on "Banking and Currency in New Zealand," which was read before the Wellington branch of the Australasian Economic Society. For a short period in 1921 the published rate for telegraphic transfers on London reached a premium of 3 per cent., and the present rate was a premium of 5 per cent., which had greatly perturbed the importing section of the commercial community.

"As the whole system is governed by the rise and fall in the London balance of the banks with a traditional bias towards keeping the rates of exchange stable and using the volume of internal credit as the fluctuating factor to preserve the equilibrium of the system, the only logical explanation of the present exchange position is that the London balances have come down to dangerously near the point of exhaustion. In fact, there would be no justification for a rate of 5 per cent. otherwise. Incidentally, if this Dominion had actually returned to the gold standard of 1925, as was stated at the time, the exchange rate could not have gone to 5 per cent. when the cost of shipping gold to London was not more than 1.5 per cent.

"Now, the only factors of any consequence that could have resulted in such a heavy drain on the London balances are an adverse trade balance, and (or) a sudden cessation of borrowing abroad. As far as New Zealand is concerned, borrowing abroad has continued without any marked changes in practice, while for the last financial year ended on 31st March, exports practically balanced imports. Under these circumstances there may have been a net drain on the London balances of the banks of from £2,500,000 to £5,000,000, being the probable extent to which interest and dividends, repayment's of debt and investments abroad exceeded fresh borrowing abroad, and other investments of outside capital in New Zealand, but against that must be set off the considerable increase in the London balances which have resulted from the favourable trade balance of £22,000,000 for the two previous years. One of the New Zealand banks, which handles somewhere about 40 per cent. of the banking business of the country, showed in its balance-sheet as at 31st March, 1929, the last one available, money at call and at short notice, bills receivable, in London, at approximately £12,500,000, and the actual London balance was probably larger than this. It would thus appear that the London funds were ample to tide over the less prosperous period since experienced. Similar lean periods in the past have been financed without a marked departure, from the traditional exchange policy.

"In fact, there is nothing in New Zealand economic conditions to justify a rate of exchange of 5 per cent., and we must look across the Tasman Sea for the real cause of the trouble. Four of the six banks carrying on business in New Zealand, from the point of view of the operations, are primarily Australian institutions. Although there have been indications in recent years of an attempt to change over to a self-contained gold standard, Australia has to the present been operating on a sterling exchange system very similar to that of New Zealand. The London balances to finance the trade of both countries, so far as the four banks are concerned, really form one fund, and the six banks in association have been in the habit of fixing practically uniform rates of exchange for both Australia and New Zealand, presumably based on the average economic conditions and outlook of the two countries combined. ln other words, the two countries have been practically regarded as one for the purpose of exchange in London. Now, Australia is a much larger economic unit than New Zealand, and accordingly this country is much more affected by Australian conditions than Australia is by New Zealand conditions. The practical result is that the rates of exchange in New Zealand on London and vice versa are governed to a predominating extent by Australian conditions. This is the real explanation of the present 5 per cent, rate.

SUPPORTING AUSTRALIA.

"Australia is suffering from a heavy adverse trade balance, accentuated by a cessation, or at any rate a severe restriction, of London borrowing, and from the fact that exchange on London is definitely and openly rationed in Australia, it is clear that the London balances of the Australian banks, including the four operating in New Zealand are practically exhausted. Thus the London credit balances built up from the good trading years of New Zealand have apparently been used to support the Australian exchange. This arrangement, for reasons already stated, works out quite unfairly to the people of this Dominion, and at a time like the present is clearly seen to be prejudical to the interests of the country.

"SIMPLE BEMEDY."

"The remedy is simply to give due recognition to the fact that New Zealand and Australia are separate economic units, and to fix separate exchange rates for each country, according to its trade position and outlook. This would happen in the ordinary course of events, if the banking in New Zealand was done entirely by New Zealand institutions, but there appears to be no valid reason why it should not be done under the conditions that actually obtain. When London balances are falling, instead of penalising both countries alike, the banks should ascertain which country is at fault economically, and adjust the respective exchange rates accordingly, thus in effect giving a preferential claim on the remaining funds to the country whose balance of international payments has not caused the drain on the funds. All the necessary data for doing this must be in the books of the several banks concerned. ln this connection it must be noted that during the recent rise in the rates, though the New Zealand rate practically kept pace with the Australian rate up to 5 per cent., the Australian rate has gone higher still. It almost appears that the associate banks have come to the conclusion that there were limits to which New Zealand could be dragged along at the heels of Australia in this matter of exchange on London. If so, that is the thin edge of the policy I am advocating, and it is hoped that it will be generally adopted.

"It must be recognised, however, that if there are to be separate rates of exchange on London for Australia and New Zealand, the present practically nominal rates of exchange between these two countries cannot be maintained. In fact, the Australian and New Zealand exchange rate would have to be the difference between the respective rates on London. This might at times be detrimental to our Australian trade, but that trade is relatively small with the rest of the world, all of which is settled through London. In effect, we are at present allowing our larger interests to be penalised for the sake of the smaller."

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EVENING POST, 6 JUNE 1930, PAGE 10
GOLD IN BANKS
RADICAL PROPOSAL
OUTLINED BY ECONOMIST
Several important alterations in the banking system in New Zealand were suggested last night by Mr. B. C. Ashwin, M.Com., of the Treasury Department, during the course of a paper on "Banking and Currency in New Zealand," read to the Wellington branch of the Australasian Economic Society. Mr. Ashwin made it clear that the views he put forward were purely his own personal views, as a student of economics, and that those views were not necessarily concurred in by the Treasury.

He said that the regulative provisions of the Nw Zealand banking legislation were obviously designed to govern the operation of a self-contained system operating upon orthodox lines on a full gold standard. This provision, however, had remained practically inoperative because the actual system evolved out of our economic conditions was a sterling exchange standard which, generally speaking, had worked smoothly and efficiently. Economic facts and the traditional exchange policy of the associated banks were at present the only real operative factors of the banking system. The present position, however, was quite illogical. The system should either he made to fit the existing legislation, which meant changing over to the gold standard, or the legislation should be made to fit the existing system.

COST OF UNUSED GOLD.

The legal recognition of the sterling exchange standard, however, was more than a matter of academic interest, for it would enable large savings to be made for the benefit of the people generally, and, incidentally, the Dominion was in need of savings at the present time. These savings would come from the utilisation of the £6,600,000 of gold which had remained quite unused for any purpose in the vaults of the banks for the past fifteen years. That "dead asset" was costing the people of the Dominion about £330,000 per annum, which was equivalent to more than one-half per cent, of the advances outstanding. That was to say, if the gold could be turned into an interest earning asset, the overdraft rate could be reduced by one-half per cent, without altering the deposit rates or affecting the bank dividend. All this gold had been hold in New Zealand presumably in order that the banks might be in a position to comply with the pre-war legislation, should that legislation be brought into force again. It was thus in the interests of the country that action should be taken without further delay to definitely determine the system to be operative in future, and then concurrently with the appeal of the war regulations to make the. necessary amendments to the present banking legislation.

REDEMPTION OF NOTES.

"Prior to the war we had a gold circulation," said Mr. Ashwin, "but the sovereign played no greater part in the actual system than the silver and bronze coins. To return to a gold circulation would be a pure luxury which this country cannot really afford. Moreover, the circulation of gold has practically ceased even in the gold standard countries, so that it can safely be assumed that it will not be resumed in New Zealand. The other legal function of gold was to act as a regulative factor and as guarantee of ultimate redemption in value of the note issues. But the note issue is not in fact regulated by the amount of gold held, but by the volume of credit in conjunction with the commercial habits of the community. In other words, notes are quite subsidiary to credit, and through the latter their value is kept at parity with sterling, which means gold, through the operation of the exchanges. The regulative factor being thus eliminated, the only reason for keeping a stock of gold in the country is as a guarantee of ultimate redemption in value of the notes. This aspect of the matter would only be of practical moment in the event of the failure of a note issuing bank, and could be provided for quite as effectively in other ways. In fact, as notes in circulation normally form only a small proportion (less than one-tenth) of the liabilities of a bank, the provision in the Banking Act, 1908, making notes a first charge on the assets of the issuing bank provides all the safeguard needed. In fact, it was the only real safeguard, even under the pre-war system, as gold, being legal tender, could then be demanded in withdrawing deposits, and in the case of a run on the bank the stock of gold might conceivably have been absorbed in this way.

Finally, the argument might be put forward that, even although the gold held in New Zealand was not a live factor in the exchange operations, it was nevertheless an exchange reserve to be brought into action in a time of stress when the London balances had become exhausted. But in such circumstances, where are the extra funds required? Undoubtedly in London, through which practically all our external payments are cleared in the final analysis. This being so, then the total exchange resources are no less if the whole fund is kept in London, instead of partly in New Zealand as is the case as present. By transferring the gold to London, however, this portion of the exchange fund could be made interest bearing until such time as it is required. So long as our banks had credit in London, gold could be obtained from the Bank of England at any time.

"I am aware, of course, that there is a certain amount of prestige to be gained from keeping a stock of gold in the country, and many people will doubtless regard the suggestion to ship it all overseas as distinctly revolutionary, but an analysis of the position shows that we have really no use for it in New Zealand. Further, the stock of gold is an expensive luxury, costing the country about £330,000 yearly.

ADVANTAGE AND A GESTURE.

"Incidentally another £6,600,000 of gold would be an appreciable gain to the banking reserve of the Bank of England, and the resulting reaction on credit in Great Britain could not fail to benefit New Zealand through an improvement in the price of our exports. Thus our own material advantage could be combined with a graceful gesture to the Mother Country.

"In saying that the gold stock should be sent to London I do not suggest that legislation should be passed compelling the banks to take such action. All that need be done is to amend the legislative provisions which require gold to be held in New Zealand, and it may safely be presumed that it would not be long before most, if not all, of it was sent abroad. There is the risk, of course, that in the case of the four Australian banks, in a time like the present, the resulting addition to the London balances would be used to bolster up the Australian exchange, and thus be lost to New Zealand. However, if steps are taken to definitely fix the sterling exchange standard by legislation, this would force a separation of the Australian and New Zealand exchanges and the banks to protect their position would practically find it necessary to reserve the New Zealand funds for New Zealand business.

PROPOSED LEGISLATION.

"The question next arises what legislative provisions should be made assuming the formal acceptance of the present sterling exchange standard. I suggest the following as the essential points:—

"(a) Definitely fix the sterling exchange standard by making it mandatory for the banks to provide exchange on London at a premium or a discount, with certain prescribed limits roughly corresponding to the cost of shipping gold to or from London. At present the system is operated on a voluntary basis.

"(b) Bank notes as legal tender to be made a permanent feature of the system. A return to gold circulation being out of the question there is no alternative to doing this.

"(c) The note issue to be fully covered by Government securities. This is practically the present requirement under the war regulations. It is really more a security provision than a regulative one, as the note issue is governed by commercial custom in relation to volume of credit.

"(d) That, subject to necessary safeguards, Government securities to cover the note issue may be held in New Zealand or London. This would give more elasticity to the system and would prevent a large favourable trade balance from paradoxically being an embarrassment to the banks.

"In the last point I have used the words 'subject to necessary safeguards.’ In this connection I have to say that if banknotes are to be legal tender it is essential that the ultimate redemption of the notes shall be assured in the event of a bank failure. Under the present pre-war enactments the notes had to be covered by gold and public securities held in New Zealand, and these provisions, coupled with the section in the Banking Act, 1908, making notes a first charge on the assets, provided adequate protection for the note holders. Under the war regulations notes might also be issued against securities held in London, provided such securities were hypothecated to the Crown, which guaranteed the notes. Incidentally, under the Bank of New Zealand Act, 1920, that bank was given the right to issue notes against securities held in London without any such safeguard as that afforded by hypothecation.

ISSUE OF NOTES.

"It seems to me that, if the banks are to have permanently the right to issue notes against securities held abroad, the securities in question must be definitely set aside for that purpose alone. Otherwise a bank with large trading interests in other countries, as in the case of four banks doing business in New Zealand, might use those securities to cover other liabilities, and when the trouble came the redemption would be lost to the New Zealand note holder. Hypothecation of the London securities would be one way of overcoming the difficulty, but I consider a better protection could be obtained for the note holder. Hypothecation of the London securities would be one way of overcoming the difficulty, but I consider better protection could be obtained for the note holder by a method that would also enable another desirable reform to be carried out.

"The other reform I refer to is the institution of a single and uniform note issue. At present we have six note issuing banks in New Zealand, and another one that has not been established has been given the right of note issue. If still further banks commence business in the Dominion and measure up to the proper standard in other directions, the State could hardly refuse to give them the right of note issue. Thus we might before so very long have ten or a dozen note issues circulating in Now Zealand. It would be much more satisfactory in every respect to have a single note issue as is the case in Great Britain. Accordingly, I suggest that while making the other necessary changes in the banking laws the opportunity be taken to set up a non-political note issue board whose functions would be similar to those of the bank issue department of the Bank of England; that is to say, the board would be bound to sell and redeem notes at face value at the demand of the banks. Such notes, although issued in New Zealand, could be paid for by cheque in New Zealand or in London at the option of the banks. The board would be bound to keep its funds invested as closely as possible in Government securities, the interest on which, after deducting administrative expenses and provision for an investment depreciation fund, should go to the State in lieu of the present note tax. The redemption fund, set up in connection with the British currency notes issued during the war, and recently transferred to the Bank of England, was administered successfully on these lines. The net result of the proposed system is that the notes would be issued against Government securities, as they may be at present, the only difference being that the securities would be held by a central note issue board instead of by the several banks.

A CENTRAL BANK.

"If such a note issue board were established, the banks would of necessity have to relinquish their present rights of note issue and purchase notes as they required them from the board. These notes would be a liability of the board and not of the banks. The proposed system would be very simple to operate; we would have a single uniform note issue, and the note holders would be assured of ultimate redemption of the notes, irrespective of the fortunes of any particular bank. I may add that the establishment of a note issue board, which, by the way, might in due course form the nucleus of a central bank, is not absolutely essential to the other proposals I have outlined, but would nevertheless be a valuable adjunct.

"I consider that, if adopted, these proposals would firmly establish on a permanent basis a banking and currency system for this Dominion that would be absolutely sound, very economical, elastic in operation, and particularly well suited to our economic circumstances."

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DOMINION, 6 JUNE 1930, PAGE 13 [mine]
EXCHANGE RATES; “AT HEELS OF AUSTRALIA”; BANKING OPERATIONS; NEW ZEALAND SUFFERS

Holding that it was unfair that New Zealand should be dragged at the heels of Australia in the fixing of exchange rates, Mr. B. C. Ashwin, B. Com., presented some interesting phases of the exchange question in the course of an address to the Economic Society.

The present rates of exchange with London, he said, represented a temporary partial breakdown of the system of which the essence was the maintenance of even rates of exchange, with a swing either way not exceeding the cost or shipping gold to London. This cost he understood to be not more than 30/- per cent [does this refer to weight; i.e. 30 shillings per hundredweight; see centum weight (cwt)?]. For a short while in 1921 the published rate for telegraphic transfers on London went to a premium of 3 per cent, and the present rate was a premium of 5 per cent, a fact that naturally perturbed the importing section of the commercial community.

London Balances Exhausted?

As the whole system was governed by the rise and fall in the London balances of the banks, with a traditional bias toward keeping rates of exchange stable, and using the volume of internal credit as the fluctuating factor to preserve the equilibrium of the system, the only logical explanation of the present exchange position was that the aforesaid London balances have come down to dangerously near the point of exhaustion.

Incidentally, if this Dominion had actually returned to the gold standard In 1925, as was stated at the time, the exchange rate would not have gone to 5 per cent, when the cost of shipping gold to London was not more than 1.5 per cent.

Factors of Consequence.

“The only factors of any consequence that could have resulted in such a heavy drain on the London balances are an adverse trade balance, and/or a sudden cessation of borrowing abroad,” he said. '‘As far as New Zealand is concerned, borrowing abroad has continued without any marked changes in practice, while for the last financial year exports practically balanced imports. Under these circumstances there may have been a net drain on the London balances of the banks of from £2,500,000 to £5,000,000, being the probable extent to which interest and dividends, repayments of debt and investments abroad exceeded fresh borrowing abroad, and other investments of outside capital in New Zealand, but against that must be set off the considerable increase in the London balances, which must have resulted from the favourable trade balance of £22,000,000 for the two previous years.

It would thus appear that the London funds were ample to tide over the less prosperous period since experienced. There Is nothing in New Zealand economic conditions to justify an exchange rate of 5 per cent, and we must look across the Tasman Sea for the real cause of the trouble.”

Two Countries as One.

Four of the six banks carrying on business in New Zealand, from the point of view of their operations, were primarily Australian institutions, Mr. Ashwin continued. The London balances to finance the trade of both countries, so far as these four banks were concerned, really formed one fund, and the six banks in association had been in the habit of fixing practically uniform rates of exchange for both Australia and New Zealand. This country was much more affected by Australian conditions than Australia was by New Zealand conditions, and the practical result was that the rates of exchange New Zealand on London and vice versa were governed to a preponderating extent by Australian conditions. This was the real explanation of the present 5 per cent rate.

Australia was suffering from a heavy adverse trade balance, accentuated by a cessation, or at any rate severe restriction, of London borrowing, and from the fact that exchange on London was definitely and openly being rationed in Australia, it was clear that the London balances of the Australian banks, including the four operating in New Zealand, were practically exhausted. Thus the London credit balances built up by these banks from the good trading years of New Zealand "had apparently been used to support the Australian exchange. This arrangement worked out quite unfairly to the people of New Zealand, and at a time like the present it was clearly seen to be prejudicial to the interests of the country.

Remedy Suggested.

The remedy was simply to give due recognition to the fact that New Zealand and Australia were separate economic units, and to fix separate exchange rates for each country according to its trade position and outlook. When London balances were falling, instead of penalising both countries alike, the banks should ascertain which country was at fault economically, and adjust the respective exchange rates accordingly, thus, in effect,, giving a preferential claim on the remaining funds to the country whose balance of international payments had not caused the drain on the funds.

In this connection it might be noted that during the recent rise in the rates, though the New Zealand rate practically kept pace with the Australian rate up to 5 per cent., the Australian rate had gone higher still. It almost appeared as thought the associated banks had come to the conclusion that there were limits to which New Zealand could be dragged along at the heels of Australia in this matter of exchange on London.

It should be recognised, however, that if there were to be separate rates of exchange on London for Australia and New Zealand, the present practically nominal rates of exchange between these two countries could not be maintained. In fact, the Australian and New Zealand exchange rate would have to be the difference between the respective rates on London. This might at times be detrimental to our Australian trade, but that trade was relatively small compared with our trade with the rest of the world, all of which was settled through London.

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DOMINION, 6 JUNE 1930, PAGE 15
GOLD TO NOTES; CHANGES IN CURRENCY; POUND FOR POUND; “DEAD ASSET” BULLION

Some of the changes brought about by the Great War on the law relating to bunking and currency were dealt with by Mr. B. C. Ashwin, M. Com., in an address delivered last evening to a meeting of the Economic Society of Australia and New Zealand.

“Regulations under section 44 of the Finance Act, 1916, were issued from time to time from August. 1916, to December, 1920,” he said, “The first lot of regulations authorised the issue of 10/- notes and provided for an alteration in the form of the statutory bank returns consequent upon the notes being declared legal tender. The second lot issued during the same month practically suspended the legislative restrictions on the note issue and credit expansion. Briefly these regulations provide in effect:—

“(a) That the note issue is to be limited only to the total amount of coin bullion and public securities held in New Zealand with a proviso that the Minister of Finance may by warrant authorise the inclusion of public securities held in the United Kingdom provided the securities are hypothecated to the Crown. This regulation means that no gold at all need be held. “(b) That the sections in the several private banking acts limiting the debts and engagements to three times the coin bullion and public securities held in New Zealand are extended to include public securities held in the United Kingdom. These are the sections intended to control credit expansion, which are practically unintelligible under the existing banking practice. “(c) That the definition of public securities in the several Banking Acts previously restricted to New Zealand Government securities is extended to include public securities of the United Kingdom or of the Commonwealth of Australia or any State of the Commonwealth.

“(d) That section 2 (2) of the Banking Amendment Act, 1914, is suspended. This subsection contains the condition precedent to the issue of a proclamation declaring notes legal tender already referred to. This suspension meant that the banks in question need not be solvent on the basis of their assets and liabilities in New Zealand before their notes could be declared legal tender. The purpose of this suspension was evidently to allow the banks to accumulate assets abroad against liabilities in New Zealand.

“By additional regulations made in 1917 and 1920 the limit of the note issue was extended by adding to the total of coin bullion and public securities the amount of the advances to customers to enable them to invest in war loans or discharged soldiers’ settlement loans, and also the amount of the advances against wool held in store at the time. Special returns of these advances had to be made to the Treasury. “In 1919 a section in the Finance Act removed the ban on the exportation of uncoined gold. In the following year it was deemed necessary to pass a further section in the Finance Act making it an offence to melt down or use gold or silver coin except as currency. At that time gold was at a considerable premium, a result of the tremendous rise in the price level. Gold had regularly figured in the Dominion’s exports since the very early times, but purely as a commodity being sold for its intrinsic value. The export of gold for exchange purposes had been absolutely negligible, and imports of gold had been confined to sovereigns for internal circulation, there being no mint in New Zealand. “A stock of gold coin and bullion has certainly been held by the banks In New Zealand for monetary purposes.” the speaker said, “but in fact—even in pre-war days—this gold was only used to support a gold circulation and provide for the legal requirements. Since 1916 the £7.000,009 or £8,000,000 of gold lying in the vaults of the banks has not been required at all and has simply been a ‘dead’ asset.”

Gold Less Convenient

Declaring notes legal tender led to an ostensible change in the withdrawal of gold from circulation, but this in itself was of no real economic significance, as a pound note does the work just as efficiently as a sovereign. In fact, in many respects the note is much more convenient than gold.

A much more fundamental change was made when by regulation the legal restriction limiting the note issue to three times the amount of gold held was removed. The volume of credit, however, is definitely dependent on credit conditions in Great Britain, and the relaxation of the restrictions on the note issue in no way contributed to such credit expansion as did occur in New Zealand during and immediately after the war. In fact, throughout the whole period of inflation, right down to the present, the note issue was practically covered pound for pound by the gold held by the banks. Removing the restrictions on the note issue thus meant little or nothing in the economic affairs of the country.

A “Dead Letter” Law.

“In fact,” Mr. Ashwin concluded, “none of the changes in the law that I have referred to had any real economic significance, for the very good reason that the original permanent provisions which were subject to amendment or were suspended by the war regulations had always been quite ineffective. To amend a law that is practically a ‘dead letter’ is obviously not going to make much difference to anybody.”

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PRESS, 9 JUNE 1930, PAGE 10 - General News.
"In many respects the banking laws were suspended at the beginning of the war by war regulations." said Mr B. C. Ashwin, M. Comm., when addressing a meeting of the Economic Society of Australia and New Zealand at Wellington (states the "Post"). "These regulations are still in force. Obviously the present situation cannot remain indefinitely, but economic conditions have so altered since 1914 that a return to pre-war conditions is not advisable and in fact hardly feasible. For instance, a return to a gold circulation would be a luxury for which there is no need and no demand, apart perhaps from those who imagine that the sight of gold sovereigns circulating from hand to hand is the panacea for all our economic ills. It may be noted that Great Britain found that she could dispense with a gold circulation."

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EVENING POST, 12 JUNE 1930, PAGE 12 - BANK EXCHANGE (To the Editor.)
Sir, —I read with very much interest your report of the address given recently by Mr. B. C. Ashwin, and must express surprise that it has not given rise to a great deal of discussion. Not that Mr. Ashwin's statements can be disputed, but the matter is one of so much importance to New Zealand that one would naturally expect considerable attention from business people so much affected, and particularly from the Associated Chambers of Commerce. The position as outlined in the above address has been obvious to most of us for many months, and it is really remarkable that we have been content to accept the very unfair attitude adopted by the Associated Banks, mainly in the interests of Australia. In matters of this kind we should be able to look to chambers of commerce for a lead, but not even a mild protest seems to have been made. While I dislike Government interference in any form, this appears to be a legitimate and urgent cause for such interference, but apparently the responsible Minister is too busy with politics.

Had Australia been treated similarly because of conditions in New Zealand, can you not imagine what an outcry there would have been, from the press to the smallest business man, and rightly so? Why, then, do we submit? It is a reasonable demand that the banks in London should treat New Zealand as a separate unit, and it is to be hoped that representations accordingly will be made from influential quarters, particularly the Associated Chambers of Commerce and the Government.

In the above connection, I think that a great deal of good will result from the high rate of exchange, but nevertheless the economic conditions of the country did not warrant it, and it should not have been imposed, except perhaps as regards such imports as certain classes of motor vehicles and other luxuries from foreign countries.

In conclusion, may I say that I think that the permitted use of the word "Australasia" has had a lot to do with the linking of New Zealand to Australia in banking operations and otherwise. When will something more than a feeble attempt be made by New Zealand business houses to abolish that objectionable and injurious word? There is no denying that a real national spirit is not much alive in the business community, otherwise the constant use, especially by companies with established headquarters in Australia, would not be tolerated. Will the president of the Wellington Chamber of Commerce start a real campaign here and elsewhere, especially in the United Kingdom, to abolish the use of the term "Australasia" as embracing New Zealand, and to establish more widely New Zealand's separate entity?—l am, etc., N.Z. 10th Jun

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ASHBURTON GUARDIAN, 13 JUNE 1930, PAGE 4 - LOCAL AND GENERAL

"In New Zealand there is no bullion market; no bill market, or short loan market, and generally no money market in the full sense of the term," said Air P. C. Ashwin. M. Comm., addressing the Economic Society of Australia and New Zealand at Wellington. ''The all-important works of our banks is financing our external trade, which per head is one of the highest, if not the highest, in the world. Furthermore, a very large part of our trade is with Great Britain, wherein is situated the premier international money market of the world. Under these circumstances, supported by the ties of empire and the fact that this country has been borrowing steadily in Great Britain practically ever since these islands were brought under the British Flag, the dominating portion of our banking business has centred in London.

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PRESS, 15 JULY 1930, PAGE 12 - N.Z. GOLD RESERVES; AUSTRALIAN COMMENT.

The "Wild Cat Monthly," [an Australian financial periodical] of July 5th, states that in some respects, and most notably in regard to its ideas about finance, New Zealand is more conservative than Britain. In its early days the Colony had some salutary lessons on the dangers of departing from strict business principles in banking and in the administration of the public purse. It took those lessons to heart. Like Australia it had a gold boom, got drunk on it, and had an unfavourable trade balance for a decade. That jag [sic] ended in 1886, and in only four years since, and those pretty widely spread, has the balance been to debit. Probably the surpluses haven't been quite sufficient, most of the time, to pay the interest on external loans, but the record is very much more impressive than Australia's.

One of the New Zealand financial habits engendered by hard experience is a sort of super-scrupulousness about bank-note issues. There has been no occasion in the last 50 years when the banks of issue have not held more coin and bullion than was required to redeem their notes—in 1894 they could have planked four sovereigns on every note presented, and their promises to pay gold were revoked by war-time legislation, which made the banks' holdings of public securities in Maoriland a legal backing; nevertheless they continue to hoard metal reserves at least equivalent to their note issues. A recent arrival in the Dominion, Mr B. C. Ashwin, the latest British Trade Commissioner, has been puzzled by this. He estimates that it costs the country £330,000 a year to hold its gold, and that the gold would be more useful to the Dominion's traders if it were shipped to London and placed in the vaults of the - Old Lady of Threadneedle street.

In support of that argument he suggests that exchanges on London would be cheaper, but he admits that if the gold went away without legislative safeguards the advantage might go to Australia, since four Australian banks operate in the Dominion. That, it would seem, is precisely why the influence of the Bank of New Zealand (which has the State as senior partner) and of the National of New Zealand has been for so many years in favour of a policy of concentrating reserves in New Zealand rather than in London. Mr Ashwin proposes to frustrate knavish tricks by a legislative ukase compelling the banks to base exchange rates on the cost of gold shipment, and as a further aid to the solution of exchange problems he would like the banks to be allowed to hold either in New Zealand or Britain the Government securities which back their non-convertible notes. The banks had not, at time of writing, offered any comment on the matter. Possibly they think they know their own business best.

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DOMINION, 4 SEPTEMBER 1930, PAGE 8 - Editorial: CURRENCY AND EXCHANGE PROBLEMS

The special business in New Zealand of Sir Otto of the Bank of England, and Dr. Gregory, Professor of Banking in the University of London, who have just competed their financial mission to Australia, will be to confer with the Government “in connection with the banking, currency and exchange problems of the Dominion.” A resettlement of the currency system of the Dominion in the light of post-war conditions has long been overdue.

It is time that New Zealand came into line with other civilised countries and put her monetary system on a permanent and scientific basis. Though, thanks to the wisdom of the banks, the existing system (or lack of system) has worked tolerably well, from the technical point of view it is in a condition of chaos, and presents openings for possible inflation that in less wise hands would have been a serious menace to our industry and commerce.

Prior to the war New Zealand was effectively on the gold standard. Gold was in active circulation, and the note issue, then as now a function of the trading banks, was convertible into gold. On the outbreak of war banknotes were made inconvertible and, under a series of Orders-in-Council based on emergency legislation, they have remained inconvertible ever since. The present authority is due to expire on January 10, 1932. As a matter of fact our banks have all along held gold reserves in excess of their total note issue, but they are not bound to release gold in exchange for notes, and gold is not available for export by the mercantile community.

By further war legislation the necessity for a proportionate gold backing for the note issue was abolished, so that it is quite open to the banks to secure their note issues by a backing of public securities and in certain circumstances to hold these securities in the United Kingdom. The opening for inflation of the note issue, under existing legislation, is therefore practically unlimited. It is not necessary for New Zealand to return to a circulation of gold, but it is desirable to devise such provisions as paper money from the risk of inflation, and stabilise the foreign exchanges, which at present are in a seriously disorganised condition. This is probably the principal matter on which the visiting experts will be asked to offer an opinion.

Ruling out a return to the pre-war system, the obvious alternatives are either a gold bullion standard such as obtains in England and France, or a gold exchange or sterling exchange standard. Under the gold bullion system the note issue would be convertible in multiples into bar gold of a defined weight, with freedom of export. As long as this system is kept effective, the paper money cannot deviate from its gold value, and exchange rates could not pass the so-called gold points; that is, rise or fall more than somewhere about 30/- per £100.

An alternative and simpler arrangement would be to provide that the banks shall be required on demand to provide sterling drafts in exchange for local notes at prices within the range between the gold points. This would mean that the banks would have to make their own arrangements to maintain adequate London exchange balances. It would also have the effect of maintaining our paper money on a parity with sterling, not necessarily with gold, and stabilising exchange rates within the gold points.

Wider questions may conceivably crop up, such as the transfer of the note issue function from the banks to a specially create note issue board, and the development of a central bank for the Dominion, a step which we consider premature. There is also the question as to whether our local gold reserves are not wastefully large and could not be employed, in part at least, to better advantage in London. On this point, however, the last word must be left to the banks themselves. They are the owners of the gold, and can quite properly regard its disposal as their own business.

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PRESS, 5 SEPTEMBER 1930, PAGE 12 - WOBBLING MONEY.
WHY PRICES FALL. GOLD'S EVER-CHANGING VALUE. IS STABILITY POSSIBLE? (SPECIALLY WRITTEN FOR THE PRESS.) [By A.N.F.]

That the present world-wide fall in commodity prices which has brought Australia to the verge of bankruptcy, and is leaving a trail of disaster and depression around the whole globe, upsetting the calculations of business men and producers in all countries, and making past promises to pay given sums of money, at future dates impossible of fulfilment—that this phenomenon, of such vital interest to all of us, is due to a fluctuation in the value of gold, is now generally recognised by the world's leading bankers and economists.

It is easy to see variations in the value of commodities, but changes in the value of money are difficult to see. We all live under the spell of the "money illusion"—the illusion that money remains stable in value, whereas goods are eternally changing in value. Even in Germany in 1923, when a million marks, equal in pre-war days to £50,000, would not suffice to buy a postage stamp, not more than one or two Germans in a hundred had any conception that the mark had depreciated in value. They could see the prices of goods soaring colossally, and for this they were ready with all sorts of reasons, but to them the mark was still the same good old mark it had always been.

To-day we are faced with a move of the, price level in the other direction. Nearly every commodity has fallen, and fallen heavily, in value. All sorts of reasons have been advanced to explain the fall in price of each particular commodity, but when everything declines in value when translated into terms of gold, it is pretty obvious that gold has appreciated in value.

This unhappy state of affairs is very different from what was predicted by those who, after the war, were so strenuously advocating that Britain should return to the gold standard. From August, 1914, to April, 1925, Britain was off the gold standard; there was an immense issue of paper money, and prices soared. It was urged that the only way to secure stability was by a return to gold. This was achieved by a great forcing down of prices until pre-war parity was obtained between the pound and the dollar—an achievement, by the way, only made possible by a thirty per cent. decline in the purchasing power of the. dollar itself.

Falsified Predictions.

All sorts of things were predicted as a result of this return to the gold standard. We would, we were told, get back to a currency that had a definite intrinsic value, and a new era of stability would be ushered in. As an example of the predictions of this period it is interesting to recall the case of the New Zealand exchange on London. At the Imperial Economic Conference in 1923, Sir James Allen made strong complaint of the banks charging 30s per cent. exchange on London in face of the fact that the rate in pre-war days had remained stable for years at 17s 6d per cent. The matter was referred to an expert committee under the chairmanship of Sir Charles Addis, one of Britain's foremost bankers, and a director of the Bank of England. This committee reported that the high exchange of 30s per cent. was due to Britain and New Zealand being off the gold standard, and that the exchange would automatically right itself with a return to gold. The return to gold was made five years ago. To-day the exchange is not 30s per cent., but 100s per cent.

The above is but one of innumerable predictions of the advantages of returning to the gold standard that have been falsified by the event. The fact of the matter was that when Britain returned to gold in 1925 it was under totally different conditions from those obtaining before the war. Half the world's monetary gold had passed to the United States, and what this has meant was lucidly analysed by Mr Reginald McKenna, chairman of Britain's Midland Bank, the biggest bank in the world, in his annual address to the shareholders of that institution two years ago. After referring to the enormous powers of the United States Federal Reserve Banks in expending or contracting credit, and how they could at will put the dollar on or off the gold standard by calling in from the member banks the Government gold certificates backed by 100 per cent. of gold and issuing in lieu Federal Reserve notes that need not be backed by more than 40 per cent. of gold, Mr McKenna reached the conclusion that to-day the value of the dollar controls the value of gold, not the value of gold that of the dollar.

A Dollar Standard.

Thus we get the position that the value of the pound is controlled by the value of gold; the value of gold is controlled by the value of the dollar; the value of the dollar is controlled by the United States Federal Reserve Banks; and on top of this we find Mr H. Parker Willis pointing out in the Australian "Banking Record" that the Federal Reserve Banks are now controlled by a very small group of American financiers indeed.

If this diagnosis is correct it means that this small group of American financiers by sending the dollar up or down can affect the whole world price level. Professor Gustav Cassel, of Sweden, a much-quoted European economist, in an article in the London "Financial Times," recently went so far as to assert that the present price slump was due to the policy pursued by the United States Federal Reserve Banks in checking the New York Stock Exchange speculation last year. If the gentlemen in control of these institutions had kept their eyes more on commodity prices and less on Stock Exchange securities the world, in Professor Cassel's opinion, would have been in a much healthier condition today.

There is not the least doubt that our present troubles are mainly due to the fact that the world's monetary system is in a mess. No automatic value attached to Britain's gold currency today. It is a "managed" currency, and there is very little evidence that those who manage it are concerned primarily with the interests of the British Empire. Sir Josiah Stamp, head of Britain's Midland Railway, and a director of the Bank of England has expressed the opinion that money, which in its modern development has made our present civilisation possible, may well destroy it. Everything he considers, depends on our ability to stabilise it in purchasing power. This problem of the price level Sir Josiah Stamp holds to be the most important single problem of our age—more important than Capitalism, Socialism, unemployment, taxation, or any other problem, because fundamental to them all.

How Britain is Injured.

Every farmer in New Zealand knows how the price slump has completely altered the ratio between his income and his liabilities. What this change in money values means internationally was the subject of interesting comment by the London "Statist," last month. Britain's debt to the United States, it pointed out, was funded at £945,205,000 in 1923. Since then £35,755,000 has been paid off, making the amount outstanding £909,452,000. The price level in 1923 was 133, to-day it is 98. The debt remaining to-day is thus equal to £1,234,256,000, at the 1923 level. That is to say, Britain owes £289,051,000 more to-day than she did when the debt was funded, and she is deeper down the drain than ever she was.

Such is the comparison between the dead-weight of the American debt today and at the date of funding. If we go further back to the time when the debt was incurred, we shall find that to discharge it at to-day's price level would require about three times as much in commodities as the debt represented when contracted, and it is in commodities that it must be discharged. Does this represent justice? According to the head of Britain's biggest bank it is "repugnant to every principle of equity and economic propriety."

A monetary system which yields such results is not only an imperfect system, but it is fast reaching the stage of becoming an unworkable system. The wartime inflation ruined millions of persons all over Europe with fixed incomes. Now, in its turn, the post-war deflation threatens ruin to all debtors and debtor countries. Is there a remedy or must we drift passively with the stream?tt

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[PART 1]

DOMINION, 9 SEPTEMBER 1930, PAGE 7 - WOBBLING MONEY
Why Prices Fall. GOLD’S CHANGING VALUE. Is Stability Possible? (By A.N.F.)

That the present world-wide fall in commodity prices which has brought Australia to the verge of bankruptcy, and is leaving a trail of disaster and depression around the whole globe, upsetting the calculations of business men and producers in all countries, and making past promises to pay given sums of money at future dates impossible of fulfilment —that this phenomenon, of such vital interest to all of us, is due to a fluctuation in the value of gold, is now widely recognised by the world’s leading bankers and economists.

It is easy to see variations in the value of commodities, but changes in the value of money are difficult to see. We all live under the spell of the ‘‘money illusion’’ — the illusion that money remains stable in value, whereas goods are eternally changing in value. Even in Germany in 1923, when a million marks, equal in pre-war days to £50,000, would not suffice to buy a postage stamp, not more than one or two Germans in a hundred had any conception that the mark had depreciated in value. They could see the prices of goods soaring colossally, and for this they were ready with all sorts of reasons, but to them the mark was still the same good old mark it had always been.

To-day we are faced with a move of the price level in the other direction. Nearly every commodity has fallen, and fallen heavily, in value. All sorts of reasons have been advanced to explain the fall in price of each particular commodity, but when everything declines in value when translated into terms of gold, it is pretty obvious that gold has appreciated in value.

This unhappy state of affairs is very different from what was predicted by those who, after the war, were so strenuously advocating that Britain should return to the gold standard. From August, 1914, to April, 1925, Britain was off the gold standard ; there was an immense issue of paper money, and prices soared. It was urged that the only way to secure stability was by a return to gold. This was achieved by a great forcing down of prices until pre-war parity was obtained between the pound and the dollar—an achievement, by the way, only made possible by a thirty per cent, decline in the purchasing power of the dollar itself.

Falsified Predictions.

All sorts of things were predicted as a result of this return to the gold standard. We would, we were told, get back to a currency that had a definite intrinsic value, and a new era of stability would be ushered in. As an example of the predictions of this period it is interesting to recall the case of the New Zealand exchange on London. At the Imperial Economic Conference in 1923 Sir James Allen made strong complaint of the banks charging 30/- per cent. exchange on London in face of the fact that the rate in pre-war days had remained stable for years at 17/6 per cent.

The matter was referred to an expert committee under the chairmanship of Sir Charles Addis, one of Britain’s foremost bankers, and a director of the Bank of England. This committee, of which Sir Otto Niemeyer was also a member, reported that the high exchange of 30/- per cent. was due to Britain and New Zealand being off the gold standard, and that the exchange would automatically right itself with a return to gold. The return to gold was made five years ago. To-day the exchange is not 30/- per cent., but 100/- per cent. in the other direction.

The above is but one of innumerable predictions of the advantages of returning to the gold standard that have been falsified by the event. The fact of the matter was that when Britain returned to gold in 1925 it was under totally different conditions from those obtaining before the war. Half the world's monetary gold had passed to the United States, and what this has meant was lucidly analysed by Mr. Reginald McKenna. chairman of Britain’s Midland Bank, the biggest bank in the world, in his annual address to the shareholders of that institution two years ago.

After referring to the enormous powers of the United States Federal Reserve Banks in expanding or contracting credit, and how they could at will put the dollar on or off the gold standard by calling in from the member banks the Government gold certificates backed by 100 per cent. of gold and issuing in lieu Federal Reserve notes that need not be backed by more than 40 per cent. of gold, Mr. McKenna reached the conclusion that to-day the value of the dollar controls the value of gold, not the value of gold that of the dollar.

A Dollar Standard.

Thus we get the position that the value of the pound is controlled by the value of gold; the value of gold is controlled by the value of the dollar; the value of the dollar is controlled by the United States Federal Reserve Banks; and on top of this we find Mr. H. Parker Willis pointing out in the Australian “Banking Record” that the Federal Reserve Banks are now controlled by a very small group of American financiers indeed. If this diagnosis is correct it means that this small group of American financiers by sending the dollar up or down can affect the whole world price level.

Professor Gustav Cassel, of Sweden, a much-quoted European economist, in an article in the London “Financial Times,” recently went so far as to assert that the present price slump was due to the policy pursued by the United States Federal Reserve Banks in checking the New York Stock Exchange speculation last year. If the gentlemen in control of these institutions had kept their eye more on commodity prices and less on stock exchange securities the world, in Professor Cassel’s opinion, would have been in a much healthier condition today.

There is not the least doubt that our present troubles are mainly due to the fact that the world’s monetary system is in a mess. No automatic value attaches to Britain’s gold currency to-day. It is a “managed” currency, and there is very little evidence that those who manage it are concerned primarily with the interests of the British Empire.

Sir Josiah Stamp, head of Britain’s Midland Railway, and a director of the Bank of England, has expressed the opinion that money, which in its modern development has made our present civilisation possible, may well destroy it. Everything, he considers, depends on our ability to stabilise it in purchasing power. This problem of the price level Sir Josiah Stamp holds to be the most important single problem of our age—more important than Capitalism, Socialism, unemployment, taxation, or any other problem, because fundamental to them all.

How Britain is Injured.

Every farmer in New Zealand knows how the price slump has completely altered the ratio between his income and his liabilities. What this change in money values means internationally was the subject of interesting comment by the London “Statist” last month. Britain s debt to the United Stales, it pointed out, was funded at £945,205,000 in 1923. Since then £35,753,000 has been paid off making the amount outstanding £909,452,000. The price level in 1923 was 133, to-day it is 98. The debt remaining today is thus equal to £1,234,256,000 at the 1923 level. That is to say, Britain owes £289,051,000 more to-day than she did when the debt was funded, and she is deeper down the drain than ever she was.

Such is the comparison with the deadweight of the American debt to-day and at the date of funding. If we go further back to the time when the debt was incurred we shall find that to discharge it at to-day’s price level would require about three times as much in commodities as the debt, represented when contracted. and it is in commodities that it must be discharged. Does this represent justice? According to the head of Britain’s biggest bank it is “repugnant to every principle of equity and economic propriety.”

A monetary system which yields such results is not only an imperfect system but it is fast reaching the stage of be coming an unworkable system. The war time inflation ruined millions of persons all over Europe with fixed incomes. Now in its turn, the post-war deflation threatens ruin to all debtors and debtor conn (ribs. Is there n remedy or must w< drift passively with the stream? In n future article it is proposed to direct attention to the work of the Stable Money Association recently formed in America and numbering among its office-bearers many of Europe’s foremost financiers: to various plans put forward for stabilisation : and to one in particular that was commended to the favourable attention of the Government by our own Board of Trade some years ago.

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[PART 2] - Note: [ ] added.

DOMINION, 10 SEPTEMBER 1930, PAGE 9 - WOBBLING MONEY. Stabilisation Schemes. CAN WE HELP OURSELVES? A Plan Worth Looking Into. (By A.N.F.)

With an unstable currency dislocating its trade and threatening its producers with serious repercussions it is of the utmost importance to New Zealand to discover whether there are any practicable steps it can take in self-protection. Many schemes for money stabilisation have been put forward and it is worth recalling that in 1919 our late Board of Trade "earnestly recommended’’ one to the serious attention of the Government.

At that date the trouble was inflation with its soaring prices. We are now learning by bitter experience that deflation has even less to offer than inflation. The rising prices of an inflationary period have at least the merit of creating a temporary business boom until the crash comes. Deflation offers nothing at all. It enriches all creditors at the expense of all debtors, and as the debtors are mainly the producers, manufacturers and business men generally this means that the wealth of the community passes from the active people who are doing things to the inactive who are merely drawing interest.

In the case of a debtor country, such as New Zealand, needing capital for its development, it means that a far greater portion of its produce than was contemplated has to be given for the use of that capital.

Deflation’s Ills.

That is the position when deflation has been effected. The worst thing about deflation, though, is that while it is taking place the falling prices which accompany it kill industry. It is ruin to buy on a falling market with stocks and raw materials depreciating under one’s eyes, and the result is that trade languishes and unemployment stalks abroad in the land, becoming ever more intense as the process continues.

After the war a policy of deflation was deliberately entered upon in Britain with the object of restoring the pound sterling to its pre-war purchasing power. This proved impracticable and those in authority satisfied themselves with getting back on to pre-war parity between the pound and the dollar. This was achieved in 1925 when the gold standard was restored on the recommendation of a Currency Committee, whose members were Lord Bradbury, Sir Otto Niemeyer, Professor Pigou, and Mr. Gaspard Farrer. This committee anticipated that the return to gold would involve “a fall in the final price level” of a "significant though not very large amount,” but, it predicted, "any disadvantages will be many times outweighed,” and, furthermore, past experience had shown that “a courageous policy in currency matters surmounts apparently formidable obstacles with surprising ease.”

Some Prophecies.

Mr. Churchill, in announcing as Chancellor of the Exchequer the restoration of the gold standard, declared that we were far more likely to have a stable price level on gold than off it. Professor Gregory, now visiting New Zealand with Sir Otto Niemeyer, wrote at this date: “Within a single decade the value of paper money has fluctuated sufficiently to ruin whole social classes. Nothing of this sort is to be feared from gold.” Sir Felix Schuster, president of the British Bankers’ Association, predicted that the “benefit of stability and security” would outweigh any "temporary drawbacks.”

The stability foreshadowed by these authorities has not so far been forthcoming. Mr. McKenna, in his annual address as chairman of the Midland Bank in January, 1925, pointed out that in 1922, 1920, and 1924 the British pound, though then a managed paper currency had been more stable in purchasing power than the American gold dollar, and it was much more stable than it has since been on a gold basis. In Mr. McKenna’s view the policy of deflation pursued in Britain has been mainly responsible for the prolonged trade depression and unemployment which has afflicted that country.

A Modem Invention.

In his annual address in January of this year Mr. McKenna did not go into currency policy, stating that as a member of a Government committee appointed to inquire into the matter he considered it would be improper for him to do so. However, significance may possibly attach to the fact that he pointed out that the gold standard, contrary to general supposition, is really quite a modern invention. Britain only adopted it a little over a century ago, and until so late a date as 1844 she was the only country on it. One of the merits of the gold standard, as Mr. McKenna pointed out some years ago, is that a nation with a currency convertible into gold “feels more honest,” and that “so long as nine people out of ten in every country think the gold standard the best, it is the best.”

Although the results of getting back on to gold may not have come up to expectations. Britain had very little option in the matter. The public demand was for a return to gold. and. internationally, to have remained on paper, would have meant a lowering of British prestige abroad. Having got back on to gold the problem is to discover how we can save ourselves from being ruined by the fluctuations in its value.

America Moves.

This matter has been the cause of considerable concern in the United States, where a Stable Money Association was recently formed, not for the purpose of advocating any particular scheme of stabilisation, but solely with a view to [not decipherable - possibly focus?] public attention in all countries on the problem. Among its officebearers are Mr. Owen D. Young, chairman of the last Reparations Commission; M. Moreau, Governor of the Bank of France; Mr. McKenna, Sir Henry Strakoseh, Sir Charles Addis, Mr. Otto H. Kahn, Professor Kemmerer, Professor Irving Fisher, Sir Herbert Holt, president of the Royal Bank of Canada, and innumerable other men of similar standing in almost all countries of the world. The object of the association is to promote research and education on the problem of securing greater stability in the purchasing power of money, and it is also distributing much literature. Its headquarters are at 104 Fifth Avenue, New York City.

In a former price slump period in the United States the late Mr. Bryan became a national celebrity after a famous speech, in which he declared that the farmers and common people of America were being “crucified on a cross of gold. As Uncle Sam is now sitting on top of the biggest pile of gold ever collected in the world, he naturally cannot afford to see gold currencies behaving so badly that other nations cannot remain on them. For if these nations adopted some other medium of exchange, America’s colossal gold heap would have hardly any value except in so far as the dentists wanted an ounce or two for stopping the teeth of people who could not afford porcelain, and so on for other purposes. America may well consider its interest is to have gold high in value, but not so high as to ruin its debtors.

Stabilisation Plans.

Many plans have been put forward for money stabilisation. Mr. Maynard Keynes, for instance, has been a leading advocate of getting off the gold standard altogether. Professor Lehfeldt wants international control of the world's goldmines, that the supply of gold can be regulated solely with a view to keeping it stable in value. Professor Irving Fisher for twenty years or more has been advocating that the sensible thing to do is to keep a currency stable in purchasing power but variable in gold. More conservative people are of [missing “the”] opinion that the best way to stabilisation is for the heads of the world’s central banks to work together in their credit policies with a view to maintaining money at a stable level. The only one of these plans that has anything to offer New Zealand is Professor Irving Fisher’s. So far as the others are concerned it is simply a case of sifting back and hoping that the financiers at the other end of the world may some day be pleased to do something to get us out of the mess they have got us into.

An Advocate of Self-Help.

Professor Fisher, on the other hand, is an advocate of self-help in monetary matters. In a recent book. “The Money Illusion”—which, by the way, is dedicated by permission to Owen D. Young, and to which Sir Josiah Stamp gives his blessing in a foreword —Professor Fisher deals in a very practical way with the money problem. After dwelling on the importance of the money factor in fluctuating price levels and the evils caused thereby, he devotes a chapter to discussing what individuals can do in self-protection, another to what banks can do, and a third to what Governments can do.

Individually, Professor Fisher points out, we can keep much better track of where we are getting to financially if we pay more attention to the price index, particularly in carrying forward fixed assets from one balance-sheet to another and many other such operations. We can also contract out of money fluctuations, though in this we need to be depending with some one of a like mind

Some Experiments.

Instances are given of recent commercial bond issues in the United States in which it was provided that the return should vary as the price index went up or down. In Europe during the currency crisis some banks took deposits on the basis of returning to the depositor not the same amount of money that he put in, but an amount of money that would buy the same amount of rye as the amount deposited. A statute of Queen Elizabeth required that college land rents should be in part expressed in terms of wheat and malt, and two centuries later the third so expressed was worth double the two-thirds expressed in money. From 1780 to 1780 the State of Massachusetts issued bonds on which interest and principal varied according to “five bushels of corn, sixty-eight pounds and four-seventh parts of a pound of beef, ten pounds of sheep’s wool, and sixteen pounds of sole leather" cost more or less than £130. (To be concluded.)

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[PART 3]

DOMINION, 11 SEPTEMBER 1930, PAGE 7 - WOBBLING MONEY. Professor Fisher’s Cure. POUND THAT BEHAVES. How Would it Work? (By A.N.F.)

Having tracked down our present economic troubles to the wobbling value of the pound sterling, and having found in Professor Irving Fisher’s money stabilisation plan a scheme still treated with respect, after twenty years of criticism, we next come to a consideration of just what it is that Professor Fisher proposes.

In a previous article some of his suggestions for individual self-help, in face of monetary fluctuations were noted. As to what Governments can do, Professor Fisher points out that already we patch up the pound and the dollar from the outside by taking account of variations in the price level (the cost of living) in regulating wages. Both these money units are stable only in that they represent a definite number of grains of gold. As units of weight they would be admirable. As units of purchasing power they are like a yardstick, which varied from 36 to 10 inches in length in the period of one generation, or which stretched 3½ inches during a single year.

Would it not be much more to the point, he asks, if we decreed that henceforth our pound or dollar was to be not a fixed amount of gold, buying a variable amount of goods, but a variable amount of gold buying always the same amount of goods?

To do this under the Fisher plan we would make up a composite goods basket of about a hundred staple commodities in the proportions in which they are of importance to the community, the whole basketful being exactly what a pound would purchase at the point of stabilisation. Thereafter a pound would be our name for the amount of gold necessary from time to time to buy this basketful.

The Professor does not propose that fresh lots of sovereigns should be coined of different sizes every time the price level went up or down. We never see sovereigns nowadays in any case. What he proposes is that the note issue should be taken over by the Government, and that the number of notes issued against the gold held by the Government would vary as the price index moved up or down, the adjustments to be made every two months or so.

Like Daylight-Saving.

Professor Fisher claims that this scheme would operate as simply as shifting on the clock for daylight saving, and would produce its effects as unobtrusively. Its technical details are fully explained in the 300 pages of his book, “Stabilising the Dollar,” published by Messrs. Macmillan in 1920, and a very good summary will be found in the annual report of New Zealand’s Board of Trade for 1919.

In that year the Board of Trade was busy considering the question of price control, and in order to assist it in getting down to the root of its worries Professor Fisher sent it a manuscript copy of his book in advance of publication. From this it may be inferred that the professor, who is one of the world’s foremost authorities on the subject of money, was of opinion, so far as he was acquainted with our conditions, that it would be a practicable and beneficial proceeding for us to put his plan into operation. The Board of Trade was of similar opinion. “So hopeful,” it said, “does Professor Fisher s suggested remedy appear to the board that we earnestly recommend it to the serious attention of the Government.”

Professor Fisher’s stabilisation scheme was first given publicity in 1911, and has been under criticism ever since. None of the criticism appears to have demolished it, and numbers of its critics have been shown by the course of events to have been mistaken in their ideas as to what was sound and beneficial in currency matters. To us in New Zealand the Fisher scheme is of particular interest, as it seems to be about the one way by which we could secure internal monetary stability. It does at least appear to be well worth that close investigation recommended eleven years ago, and which it has never received.

Exchange or Prices?

If adopted and successful in its operation it would mean that we would have a stable internal price level, but our New Zealand pound would fluctuate in value in exchange against the British pound, etc. On this heading it is worth noting that Mr. J. M. Keynes in his “Tract on Monetary Reform,” points out that: It the external price-level is unstable we cannot keep both our own price-level and our exchange stable. And we are compelled to choose. . . . The right choice is not necessarily the same for all countries. It must partly depend on the relative importance of foreign trade in the economic life of the country. Nevertheless there does seem to be in almost every case a presumption in favour of stability of prices if only it can be achieved.”

With the highest external trade per head of any country in the world New Zealand would naturally feel to the full the disadvantages of fluctuating exchange. Nevertheless the advantages of internal stability would be very great. For example, more stabilised land values would be an immense boon to this country. To-day it is almost impossible to say what a farm is worth. A competent valuer can readily enough arrive at what a farm will produce in wool, meat, butterfat, etc., under existing methods of farming, and can make a very fair estimate of the increased yield under improved methods. But to translate these yields into terms of money representing a safe and fair purchase price is well-nigh hopeless in face of the fluctuations in the price level during recent years.

Land Values.

Yet we are faced with the fact that it is essential to the security of our farming population that land values should be correctly assessed and should be stable. The Fisher plan would not, of course, wipe out fluctuations in the price of an individual commodity due to the supply and demand and cost of production of that commodity, except insofar as these fluctuations were reflected in the value of the composite goods basket making up our pound. But the plan would wipe out fluctuations due to a change in the general price level as a whole, and it is these changes that are the most injurious.

For instance, suppose we stabilise our pound at a certain level and that thereafter the price index falls fifty per cent. What would happen? A New Zealand farmer selling produce in London for £100 would receive for it in New Zealand pounds £200k, a sum round about the same figure as he had received at the time of stabilisation. He would thus have enough money to meet his interest payments and to cover his general expenditure at the old price level. A merchant buying goods for £100 in London would have to find £200 in New Zealand pounds to pay for them. To do this he would have to keep his prices at the old level, but this would not be a matter of difficulty as the farmers and the population generally would have the same amount of money as at the old price level and would be able to do business as usual on it.

A Contrast.

Contrast this with a fifty per cent. fall in the price level under existing conditions. Figures published in the current “Official Year Book’’ indicate that fifty per cent. of our farmers carry mortgages equal to two-thirds or more of the capital value of their farms. With the decline in prices they would be unable to meet their obligations in most cases. Where they did they would be giving their mortgagees fifty per cent, more in purchasing power than was contemplated when the mortgage was entered into, or at any rate very substantially more. Not all the defaulting farmers would lose their farms as there would be no buyers. Some would, the rest would remain on on condition that they worked the farms for less than wages. If they wanted wages, or more than wages, it would naturally be more, profitable to the mortgagees to turn them off and take over the properties themselves. In any case the farmer’s equity in his holding would disappear.

The process would be ruinous to the commerce of the country. Even when better times returned it would mean that the purchasing power formerly widely distributed among many thousands of farmers would be concentrated in the hands of a relatively small section of the community. And anybody who knows anything of the subject will tell us that what keeps the wheels of business moving smoothly and prosperously is not a community consisting of a small number of wealthy people and a great many impoverished people, but a community with a widely distributed spending power.

A Community Burden.

Under the Fisher plan we should, of course, have no magical escape from the injuries wrought by changes in the world price level. The plan, as the writer understands it, would, however, make these changes a community burden instead of permitting them to injure first one section and then another section of the people.

In the case of a fifty per cent. fall in the price level below the point of stabilisation, which we have taken illustration, the Government and the local bodies would naturally have to find proportionately more in New Zealand pounds to meet the interest bill on their overseas debt This would have to be done by imposing additional taxation, and such taxation would presumably be imposed so as to distribute the burden equitably. Private borrowers having interest payments to make to overseas lenders would not have this simple means of relief, and their case would be one of the nuts to crack under the Fisher scheme, though whether they would be much worse off than with a similar price decline under existing conditions is a debatable point.

One Conundrum.

One great difficulty under the Fisher plan would be to select the point of stabilisation. Professor Fisher thinks it would have to be pretty close to the price level existing at the time of stabilisation. We cannot, he says, undo the evils of past fluctuations in money, but we can prevent those evils recurring. As Sir Josiah Stamp says: “Quite as good business can be done on one price level as on a level twice the height, provided it is a stable level and all the factors have been fairly adjusted to that level.”

The trouble is that nobody wants the bother of a currency change until conditions are in such a state of maladjustment that some means of relief must be found. If on closer examination the Fisher plan were found to offer sufficient general advantages to be worth adopting the difficulties of working out an equitable basis for transition on to it should not prove insuperable.

The essential thing to remember about the Fisher plan is that it involves no departure from gold. It simply means that the money counters we use, instead of representing a fixed amount of gold and a highly variable amount of goods, would represent a fixed quantity of goods (taking a general average over commodities as a whole) and a variable amount of gold. As our commercial transactions are large exchanges of goods against goods, and as we have practically no interest in gold except as a medium of exchange, it certainly seems sensible, to say the least, to tie our pound rigidly to what concerns us most and flexibly to what concerns us least. At present it is upside down, and has turned too many of calculations upside down.

The Proof of the Pudding.

The writer makes no pretentions to any profound knowledge of this intricate subject, on which so many experts have gone astray. He is merely a layman, who, in common with many thousands of others, has been hit by the price slump, and he has endeavoured with such ability as he possesses to discover what it is that has hit him, and whether there is any cure for it. So far as he can find, the Fisher plan is the only plan that has anything to offer New Zealand. It has never been tried by any country, and nobody can say positively how it will work until it has been tried. It has, however, survived twenty years of criticism, and still commands respect from foremost economists.

The whole world is talking money stabilisation. Nothing can be achieved without an experiment, and the country that makes a successful experiment will benefit not only itself, but the whole Empire, and all civilisation. Eleven years ago one of the world’s front-rank men went out of his way to offer us his help in this matter. It would be interesting to know whether Professor Fisher is still of opinion that his plag or any adaptation of it would benefit us in the circumstances in which we find ourselves to-day.

What is wrong with the world to-day is that its medium of exchange has dislocated its commerce. Its people have not been spirited away to the moon or Mars. They are still here on earth with the same human needs and desires craving satisfaction. The commodities and services needed to satisfy those desires are here the same as ever. But the monetary medium of exchange has fallen into so gigantic a muddle ns to threaten the collapse and ruin of our civilisation unless it can be righted.

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TIMARU HERALD, 11 SEPTEMBER 1930, PAGE 12 - VISIT OF LONDON BANKER.
RECORD OF DISTINGUISHED SERVICE.

Since his arrival in Australia to assist the Commonwealth in solving its financial troubles the name of Sir Otto Niemeyer has appeared on numerous occasions in the New Zealand Press. Almost every reference, however, has described him in somewhat vague terms, generally as "a high official of the Bank of England.” This, no doubt, is due to the scanty details given of his career in the British “Who’s Who,” and similar biographical works of reference.

After mentioning when he was born, who he married, the size of his family, and a few other domestic details, the “Who’s Who” gives his occupation as "at Bank of England since 1927.” "Whitaker’s Peerage” of titled persons is equally as brief, and refers to him as “holding a post in the Bank of England since 1927.” Exactly what position Sir Otto occupies in the bank is therefore, not clear from those sources of information. First there is the Governor of the bank, Mr Montagu Norman, then the Deputy Governor, Sir Ernest Harvey, and next a group of four who are termed “officials.” Sir Otto Niemeyer is one of these four. Sir Ernest Harvey was one of the “officials” before he was made Deputy Governor.

Business Men’s Suggestions.

Chambers of commerce and other organisations suggested that Sir Otto Niemeyer should spend a short time in the Dominion on his way back to England. Bankers are known to be strongly in favour of the proposal, but custom decrees that their opinions be screened from the spot light of publicity. In his address at the annual meeting of the National Bank of England in London the Hon. W. Pember Reeves, when referring to Sir Otto Niemeyer’s visits to Australia, said: “I should imagine that this gentleman may be asked by the New Zealand Government to extend his journey as far as Wellington, and it is much to be hoped that he may find it possible to do so.”

“This is all the more desirable.” continued Mr Reeves, “because the masters of British finance are wont to veil their policy in the darkness of reticence. They decree, but seldom explain. If silence were gold, as the proverb assures us, the metallic holding of London might be greater than that of Paris and New York combined. But silence is not a metal—it is a mask.”

Comparatively Young Man.

A comparatively young man—his age is 47 —Sir Otto Niemeyer has been a conspicuous figure in finance in Great Britain for several years. Educated at St. Paul's School and Balliol College, Mr Otto Ernest Niemeyer, as he then was, entered the British Treasury from open competition in 1906, at the age of 23 years. Five years later he was given his first important appointment when he was selected to act as Private Secretaiy - to the Financial Secretary- He rose steadily in the service, and in 1919 he was placed in charge of the Finance and Budget Division, at the same time filling the position of senior Treasury officer of accounts. He retained these posts until 1921, when he was appointed Deputy-Controller of Finance in succession to Sir Basil Blackett, on the latter’s appointment as finance member of the Viceroy’s Council.”

In 1927 Sir Otto Neimeyer resigned his position as Controller of Finance at the British Treasury to take up an appointment with the Bank of England. In the process of reorganising the internal administration of the Bank of England after the Great War several new high administrative posts were created, and it was to one of these that Sir Otto was appointed: With his intimate knowledge of the bank’s biggest customer, no one was better qualified than he to take up such an important position with the bank.

Honour From the Sovereign.

Sir Otto Niemeyer has had a wide experience of international, political, and financial affairs. He was a member of the East and West African Currency Boards, and subsequently served on several committees formed as the result of war readjustments. One of the most important of these was the Financial Committee of the League of Nations in 1922. His knighthood of a K.C.B. came from his Majesty the King in 1924 for valuable public services.

When his appointment to the Bank of England was announced in May, 1927, “The Times” described Sir Otto Niemeyer as “a man of unusual ability with a unique experience.” He has rendered, it said, “most conspicuous services” in the onerous post of Comptroller of Finance and concurrently he had served on the Financial Committee of the League of Nations. “The Times” further remarked that it was difficult to appraise the value of his work on the Financial Committee of the League, and that “to few men is the cause of reconstruction in Europe more indebted than Sir Otto Niemeyer. H»s work on the Financial Committee and also as Comptroller of Finance at the Treasury during the last five eventful years has met with wide approval from bankers and business men who have understood the magnitude and complexity of the problems involved.”

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SUN (AUCKLAND), 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. Ashwin 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 note 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 London, 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 disbursements 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.

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PRESS, 25 SEPTEMBER 1930, PAGE 11
NATIONS OF THE WORLD. POLITICS AND FINANCE. GROWING CO-OPERATION. ADDRESS BY SIR OTTO NIEMEYER. (Press Association Telegram) WELLINGTON, September 24.

International finance and its problems were referred to by Sir Otto Niemeyer in an address given at the New Zealand Club luncheon to-day. The Hon. E. A. Ransom, Acting-Prime Minister, was present.

"It may seem odd that any representative of the Bank of England should visit New Zealand," said Sir Otto Niemeyer, "but it is not perhaps symptomatic? Is it not a symbol of the need which we feel for closer relations and more accurate understanding? It is every day becoming more apparent that every considerable financial and economic problem is less and less a national problem and more and more an international problem.

Every war tends to become a world war, and even those who remain neutral do not escape from its economic effects. Such a problem as unemployment, which used to be a local matter, is rapidly becoming an international matter afflicting practically all countries at the same time, and possibly only curable in the end by international agreement and international action. Over-production is not a local problem; it is a phenomenon which appears in all parts of the world and in all branches of production.

World politics are becoming more and more international, world finance is becoming more and more international, and world trade and industry are becoming more and more international. New Zealand cannot in her own interests stand aside from international affairs or close her eyes to international happenings. They affect her intimately and domestically. You have only to look at the present prices of wool and of agricultural produce to see how closely the fortunes of New Zealand are bound up with events at the other end of the world.

Central Banks.

"I think I need make no further excuse for dwelling on two great international movements among many. The first is growing co-operation between the central banks of the world and the second is the growing political co-operation which centres in the League of Nations.

You must distinguish a central or reserve bank from an ordinary trading bank. A reserve bank such as exists at Home in the Bank of England, or in America in the Federal reserve system, or in South Africa in the South African Reserve Bank, or in various countries of Europe, is not mainly or normally a bank which deals with the ordinary commercial banking business of a country. It is rather a bank which holds the ultimate reserves of the country, including the cash reserves of other banks, and whose general mission may be described as that of endeavouring to maintain the parity of the national exchange.

With the great currency disturbances which have arisen out of the war, disturbances which deprived of any value at all the currencies of Germany and Central Europe, and reduced the value of French and Italian currencies to about one-fifth, that problems facing the central banks obviously became much more difficult. There has arisen a perception of the fact that the central banks too must have an international outlook. It is not possible for them to carry out their functions completely without understanding and co-operation with the corresponding central banks of other political units.

The Exchange Problem.

"If you reflect on how greatly the exchange problem depends on the level of prices in the importing country which buys your exports, you will see at once how closely the functioning of one central bank depends on the policy being pursued by another.

If you take again the question of the stability of the value of gold in relation to commodity prices, a most important world problem, it is obvious that unless there is a measure of agreement between the central banks as to the amount of gold they respectively think it necessary to hold, there will be a scramble for what gold is available, and consequently a growing danger as the price of gold goes up of commodity prices falling, to the ultimate disadvantage of all parties.

Cooperation between the central banks, a slow and difficult process, has been making steady progress in the last five or six years, and now perhaps taking a new step forward in the foundation of the Bank of International Settlements in Basle, which, though primarily a piece of machinery connected with the reparation payments, has also in it, we hope, the seeds of closer and more formal co-operation between the central banks.

One of the things one would like to see would be an accelerated growth of similar cooperation between, say, the Bank of England and the Dominions. I believe myself that is one of the most urgent problems within the British Empire.

International Co-operation.

"The second point on which I would like to dwell is international co-operation, which takes place through the League of Nations. My active interest in the League began in 1922, when I first became a member of the League Financial Committee. I have been a member of the Committee continuously since then, and was chairman of the committee in 1927. My approach to the League and its work has not been from the side of high ideals or international politics, but from the severely practical standpoint of a financial administrator.

The Finance Committee has about twelve members, each a national of a different country. These members do not represent their countries in the normal official sense, but are chosen for their expert financial knowledge and as persons of financial standing in their own countries. They are largely well-known bankers. The Committee is truly international, and absolutely independent.

When we started we were all strangers to one another, but by constant association and discussion we have become a united body, knowing each other well, and trusting each other. We have evolved a definite doctrine and a united spirit in dealing with public financial problems. It has been our duty to advise the Council on those financial reconstructions in Europe which have been undertaken under the auspices of the League, and you will remember that the League has no power to enforce its advice on anyone, and no money of its own which it can lend to anyone.

We have had therefore, in forming our reconstruction schemes, not not only to decide among ourselves what is a practical solution of a difficult financial problem, but also on the one hand to persuade the country concerned to adopt and carry out our advice, and on the other hand so to frame our schemes as to secure the support of investing markets where that was necessary.

Rehabilitation of Austria.

"The first country with which we had to deal in 1932 was Austria. Austria at that moment was the despair of Europe and of herself. We were able by exceedingly drastic measures to establish a plan which restored Budget equilibrium in about six months. To carry out this scheme for a year a distinguished Dutchman acted as the League’s Commissioner-General in Vienna, and for some time an expert advisor was a member of the Austrian Central Bank staff.

That scheme, which was an experiment for the Financial Committee, which had to elaborate new and untried methods for an unparalleled situation, and also an experiment for Austria and the Powers of Europe was, from the first, completely successful. Budget equilibrium never has been seriously threatened since, and currency has been absolutely stable. In two years foreign advice could be safely withdrawn, and Austria is, now a well-ordered and reasonably prosperous financial community.

It was the international prestige of the League of Nations which enabled us to get from the neighbours of Austria the essential guarantees of her territorial integrity and the necessary adjustments of her reparations. It was the prestige of the League of Nations which enabled us to claim in half a dozen international markets the necessary financial support from outside, and it was the prestige of the League of Nations, which put at the service of Austria the expert advice she received and persuaded the people of Austria that it was wise to accept that advice. ln later years we have dealt with the very similar case of Hungary, with the case of Greece, and the case of Bulgaria. We have also been engaged in currency advice in Estonia and Danzig.

A Moral Drawn.

"I have heard it said that this is all very well, but why should the League bother itself about the domestic troubles of second-class powers? I think the answer is that in the first place order and tranquility are essential to the maintenance of internal trade and commerce, and in the second place economic misery is a fertile breeder of war. No man can say where starvation in Vienna or in Budapest or destitute in Bulgaria or Greece might end, and it may well be that those small causes might in the end might even touch distant New Zealand. Events in a much less important town in south-eastern Europe crucially affected New Zealand in 1914.

"The moral which I should like to impress upon you, particularly those of you who are interested is commerce and among them particularly those who are interested in primary produce, is that distant as New Zealand may seem and remote as may be happenings on the other side of the globe, there never was a time when were more problems calling for international settlement, when there were more problems which can only be settled internationally, and when it was more important to New .Zealand that she should take her full share in such activities."

At the conclusion of his address, Sir Otto Niemeyer was accorded a vote, of thanks and was presented with a memento in the form of a silver kiwi mounted on greenstone.

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EVENING STAR, 25 SEPTEMBER 1930, PAGE 10—THE LEAGUE AND GOLD.

“Every considerable financial and economic problem is less and less a national problem and more and more an international problem.” So said Sir Otto Niemeyer to a Wellington audience yesterday. New Zealanders had already dimly begun to realise, this. We have our share of unemployment, and we have financial stringency in both Governmental and private enterprise spheres. At first we were inclined to attribute part of their severity to critical developments in the affairs of our nearest neighbour, who has long pursued a more venturesome and short-sighted policy than ourselves. The surmise was not incorrect, but it was incomplete. We are learning to look even further afield and to realise how international world trade and industry now are. Out of the war arose great currency disturbances, involving in several countries, notably Germany and France, a boom, its bursting, and reconstruction on a new basis [sic].

Since then the problem of a sounder money has agitated the minds of interested people in various countries. Two years ago a Stable Money Association was founded in the U.S.A., its object being the prevention of wide fluctuations in the general price level and the serious evils resulting therefrom. Many of those engaged in the production and distribution of commodities have laid the blame on over-production. Mr Henry Ford recently stated that there was no such thing as over-production. It is a sweeping statement. It must not be accepted as comprising all the truth; nor must it be rejected as consisting wholly of error. Sir Josiah Stamp has put the position more lengthily, but more accurately, in saying: “It is not uncommon to hear statistical explanations of ‘ over-production ’ applied to the fall of commodities in particular, but this method will not cover a general fall, and if staple commodities will exchange for similar quantities of each ether, except gold, tho real monetary character of the problem is manifest. Tho present uncontrolled international monetary system has tacitly assumed its power to provide sufficient stability to obviate injustice and economic disaster, and has signally failed to provide it. For people who find it difficult to remember that it is gold that is changing in value, and not commodities in general —akin to tho notion that it is • tho earth going round on its axis, and not tho sun going round the sky, that makes and measures the day and night —it is as well to point out that tho chief function of tho price level is to settle*how the total production, resulting from human effort shall bo divided amongst the different agencies that produce it—internationally and nationally.” Thus in a way the popular belief that the bankers arc in a sense fundamentally responsible for the worldwide depression has had some confirmation from one of the world’s best-known bankers. Tho consolatory feature is that the bankers are themselves profoundly dissatisfied with tho present system or lack of system, and arc socking to evolve internationally something better. A persevering attempt has been made to recondition a machine not only badly damaged by tho war, hut deprived of much of its motive power by the war’s unexampled destruction of world capital. Tho machine has broken down, and needs replacement. Not Jong ago a tentative step was taken in the creation of tho Bank for International Settlements, with headquarters at Basel, in Switzerland. Its ostensible object was to provide machinery for the collection

and distribution of inter-Government debts. That, however, is merely a routine matter compared with tho meeting of bankers to devise a common policy and concerted measures to avert or mitigate the dangers that may bo threatening tho stability of European currencies, or any one of them. Now tho League of Nations is taking up the running. Its Financial Committee, agitated perhaps by the tendency to monopolise the available gold on tho part of two nations, has begun by investigating the present supplies and the probable future augmentations, and suggesting a redistribution that will be more equitable than the present concentration. ft is not suggested that gold should bo put into circulation, Init that the central banks in different countries should have adequate covers for their note currencies to enable them to participate in a world revival of trade. This latter must surely be inevitable some time or another, and it is, if anything, a cheering sign that some preparations are mooted in view cf it—preparations, too, that should accelerate it and give it a better basis of permanence than any other factor except, perhaps, a mutual casting down of prohibitive Customs tariffs everywhere. Sir Otto Niemeyer has sat on tho Financial Committee of the League of Nations since 1922, becoming its chairman three years ago. Presumably, though now in New Zealand, he is keeping in dose touch with its proceedings, for there is a perceptible connection between liis speech yesterday and tho cabled report of what the committee is now discussing in Geneva. His advice to New Zealanders to follow closely what is now going on, because it intimately concerns ourselves, must be our excuse for rather frequent reference to a somewhat dry subject.

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EVENING POST, 1 OCTOBER 1930, PAGE 11 - HOUSE OF REPRESENTATIVES, BANKING INQUIRY WANTED

Mr. C. H. Chapman (Labour, Wellington North) asked the Prime Minister whether he will take steps to have an inquiry made into the general incidence of banking for the purpose of relieving industry of the exactions of banking and financial institutions, which place enormous burdens on all forms of industry. Mr. Chapman said that the balance-sheets of the banks operating in New Zealand show profits amounting to millions of pounds, even in times of depression. The Acting-Prime Minister (the Hon. E. A. Ransom) replied that the Government has already publicly announced that Sir Otto Niemeyer has accepted an invitation issued by the Prime Minister to advise the Government, on the questions of banking, currency, and exchange.

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EVENING STAR, 9 JANUARY 1933, PAGE 5 - Commerce, Mining, & Finance
CENTRAL RESERVE BANK; AUSTRALIAN JOURNAL'S COMMENT
“Trading banks question 'the necessity for the establishment of a central bank in New Zealand,” says the Australasian Banking Record. “Before a reform is instituted, there are usually some grounds for reform, but looking at the position of New Zealand, and its banking history in particular, it is difficult to discern any sufficient reason for such a fundamental change as will be brought about by the creation of a central bank.

“There has been no failure of any bank in New Zealand this century, and each of the institutions operating there is in a remarkably sound position. Cogent representations by the trading banks that a central bank for New Zealand is a needless extravagance have failed to have any effect, and the Government has introduced the Bill.”

After outlining the provisions of the proposed legislation, the ‘Record’ adds: “The question will doubtless be fully explored whether a country of the dimensions of New Zealand can afford, in present circumstances, what has been referred to in banking circles as ‘the luxury of a central reserve bank.’ ”

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KING COUNTRY CHRONICLE, 10 JANUARY 1933, PAGE 4
Reserve Bank Bill.
The Reserve Bank Bill, which was introduced just before the adjournment, has not yet been discussed by members, although Sir Otto Niemeyer's report, on which the Bill is framed, has received some consideration. Discussions which have taken place so far on the principles of central banking have revealed strong opposition, and it may be taken for granted that the passage of the Bill through the House will not be an easy or quick one. Since the terms of the Bill have been made known there has been some discussion in the country, and it has become evident that there is a feeling of hostility among some sections of the community. The most definite objection so far has come from the Waikato farmers, who have expressed the view that a central bank would be disastrous to the Dominion as a whole. A meeting of protest is to take place at Hamilton on Wednesday night, and it is suggested that this may be the forerunner of other similar meetings.

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WANGANUI CHRONICLE, 27 MAY 1933, PAGE 8—THE CENTRAL BANK CRITICISM

A GOOD DEAL of what passes for criticism of the Central Bank proposal, advanced, but not defended, by the New Zealand Government, is very wide of the mark, and it would be more in place in a novel by the late Mr. William Le Quex. Surveys of the facts concerning the Central Bank proposal would be very helpful, but drawing upon the imagination is not likely to assist the discussion at all. It is quite easy to assert, as does Mr. Rushbrook, M.P. [there is no ‘Rushbrook’ on the Parliamentary roll; it is likely the WANGANUI CHRONICLE means ‘Rushworth’ M.P.], and some others with him, that the whole scheme is a plot to bring New Zealand finance and banking under the dominance of the Bank of England, but it would be more to the point if this airy charge was made in more specific terms. It would probably surprise most, of those romantic critics, were they to learn the truth of the present arrangements, that, the decisions of the Bank of England, in so far as they are effective in ruling the money market, do dominate New Zealand finance already, simply because the liquid assets of the New Zealand and Australian banks are situated in London. If the advice given by Sir Otto Niemeyer was sound, and a fully developed money market could be constituted in New Zealand, then the dominance of the Bank of England would be lessened, not increased, in its influence on New Zealand finance and banking. The opposition to Sir Otto Niemeyer’s proposals are really to be based upon the fact that the development of a money market, in its complete sense, is beyond the range of possibility in New Zealand, or even in Australia, at the present time, and therefore it is useless to go to all the trouble of establishing a Reserve Bank in New Zealand when the means of it operating effectively are negligible.

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A short advertisement of the following in-depth article was included on p10 of the same issue of the Dominion.

DOMINION, 8 SEPTEMBER 1933, PAGE 10—RESERVE BANK BILL, Explanation of Functions, ADVANTAGES ANALYSED

A comprehensive survey of the functions of the proposed Reserve Bank of New Zealand is published on pages 6 and 7 of this issue. The article has been issued for publication by the Minister of Finance, Rt. Hon. J. G. Coates, Jn order that the people of the Dominion might fully understand and appreciate the clauses embodied in the Reserve Bank Bill, which was read a first time and circulated at the last session of Parliament.

The article is divided into five sections, the first of which is devoted to a general analysis of the advantages of central banking. Central bank control is discussed in the second section, and the third deals with central banking and the monetary standard. A detailed explanation is given of the Reserve Bank of New Zealand Bill and the significance and meaning of the various clauses. The article, concludes with a reference to several of the misconceptions surrounding the proposal to establish a Reserve Bank in New Zealand.

[ ] and emphasis added.

DOMINION, 8 SEPTEMBER 1933, PAGE 6—RESERVE BANK OF NEW ZEALAND, Uniform and Absolutely Secure Note Issue, DESIGNED TO PROMOTE STABILITY, Comprehensive Survey of Advantages and Functions

To enable the New Zealand public to fully understand and appreciate the clauses of the Reserve Bank of New Zealand Bill, which was read a first time and circulated at the last session [7 Dec. 1932] of Parliament, an article dealing with various phases of the proposal has been issued for publication by the Minister of Finance, Rt. Hon. J. G. Coates. The article, which is divided into five sections, discusses central banking, central bank control, central banking and the monetary standard, the Reserve Bank of New Zealand Bill, and Reserve Bank misconceptions.

Advantages that will accrue to New Zealand as a result of the establishment of a central bank are set out in the article. It is stated that the functions of a central bank are designed to promote stability. The setting up of a central bank, it is contended, would undoubtedly lead to cheaper money. The legislative provisions contained in the Bill would effectively prevent any large vested interests from gaining control of the Reserve Bank, and obviate the possibility of the policy of the board of directors being dominated by any one section of the community.

It is emphassied [sic] that the setting up of the Reserve Bank does not involve forcing the exchange rate back to parity with sterling if that is not in the interests of the Dominion. The commercial banks would continue to transact business for their customers exactly as they do at present. From the nature of its business it was evident that the Reserve Bank would require only one small office in Wellington with a staff probably not exceeding twenty in number.

The concluding section of the article is in the nature of a reply to criticism of the proposal to establish a Reserve Bank. It is contended that much of this is due to a misunderstanding of the functions of such an institution. The idea that the setting up of a central bank means placing the control of our currency under the domination of the Bank of England is described as fallacious The article is as follows:

Although much that is written and spoken on the subject of central banking is unsound, the public interest in matters of currency and banking is evidence of the growing recognition of the fact that banking and currency play a very Important part in our economic life. In fact, all our business and all our values are in terms of money, and, as is now generally recognised, if the currency is not kept sound and relatively stable in value, trade and industry are seriously upset, and there is grave disorganisation and trouble.

Our banking system, like that of most other countries, has evolved with the development of the Dominion, and adequate facilities for commercial banking (deposits, advances, and exchange operations) are offered by the six commercial banks doing business in New. Zealand. These banks are organised primarily to make profits for shareholders, and the control of our credit and currency, which at present remains with them, is only incidental to maintaining the soundness of their own business.

The commercial banks have not altogether neglected the public interest and pursued the course which seems best in the interest of their shareholders. In the long run the banks’ interest must coincide with the interest of the Dominion as a whole, and it may be said to their credit that the banks operating in New Zealand have in the past acted together in pursuing a common policy that perhaps was not always in the immediate interest of their shareholders’ dividends. Some of the great banks of the Old World, notably the Bank of England, started as purely profit-earning concerns, but have now developed into national institutions in which profit-earning is quite subsidiary to serving the public interests in the regulation of credit and currency.

Credit and Currency.

In modern times the control of credit and currency has become so fundamental to the welfare and prosperity of the people that it has been recognised in country after country that such vital matters should not be left in the hands of the commercial banks. To meet the need the art of central banking has been evolved. A central or reserve bank is sometimes described as a bankers’ bank. It is certainly part of its job to hold the reserves of the commercial bank and consolidate and coordinate the banking system of the country; but more than that is required of a central bank. It is really a national institution set up to maintain the stability of the currency, and carry into effect the monetary policy as determined by Parliament. This is its real function, and, to ensure that it acts solely in the best interests of the country, the Reserve Bank, in the absence of the binding traditions (which obviously could only be acquired over a long period), is hedged round with various stringent restrictions designed to keep it free from other interests and any bias or influences other than economic considerations.

The control of a central bank is made effective not by means of any judicial authority, but by its power to cut across the business of the trading banks. In order that its weight may be felt when necessary the Reserve Bank cannot compete regularly with the trading banks. Its funds are normally held in reserve to be brought into active use if necessary to make its policy effective or as a stabilising factor. The Reserve Bank, however, regularly offers, but normally only as a lead to the market, to do certain classes of business, such as discounting of bills and exchange operations at rates fixed by its board from time to time. For such purposes it will be readily understood that the Reserve Bank in its capacity as regulator does not require branches all over the country like a trading bank. So far as New Zealand is concerned, one relatively small office in Wellington will probably be sufficient.

Functions and Conditions.

Sir Ernest Harvey, a director of the Bank of England, when visiting Australia in 1927, summarised the accepted functions and conditions of a central bank as follows:—

1. A central bank should possess the exclusive right of note-issue.

2. A central bank in its management and policy, should be free from Government control and the influence of politics.

3. A central bank should be entrusted with the entire banking business of its own Government.

4. A central bank should be the banker of the trading banks, and should act as a settling agent for clearing differences between such banks.

5. A central bank should not ordinarily compete with the trading banks for general banking business.

6. A central bank should ensure to the public the provision of adequate banking facilities on reasonable terms.

7. A central bank should not take moneys at interest on its own account.

8. A central bank should quote publicly the rate at which it is prepared to discount approved bills, and should publish at regular and frequent intervals a clear statement of its position.

9. The assets of the central bank should he of the most liquid character possible.

10. A central bank should not draw or accept bills payable otherwise than on demand.

11. A central bank should not engage in a general exchange business on its own account for the purpose of earning profits.

12. A central bank should not engage in trade nor have any interest in any commercial, industrial, or other undertaking.

13. A central bank should have no branch outside its own country, but may have agencies abroad.

It should be understood, however, that the powers and duties of any particular central bank are governed by its statutes, and naturally vary according to the monetary system as laid down by the Parliament of the country concerned. On broad issues the overriding control always remains in the hands of the Government.

A central bank would enable us to have a uniform and absolutely secure note-issue. A uniform note issue would be a commercial convenience. But what is of greater importance, a centralised note-issue backed by the combined banking resources of the country would inspire the utmost confidence, and have a prestige that would be of great value in emergencies. In addition, a single control of the note-issue is an important factor in the maintenance of sound economic conditions.

The centralisation of the cash resources of the commercial banks not only provides a method of control for the central institution, but greatly strengthens the whole banking system. In one pool the combined reserves will safely support a much greater credit structure than the same aggregate amount held by half a dozen banks. The analogy of a water-supply is appropriate. If everybody in a town had a few buckets of water and held on to them when a fire started, the whole town would be destroyed. If, however, the supply is collected in a central reservoir, the outbreak could be dealt with effectively as soon as it was discovered. At present each commercial bank has to carry sufficient reserves to meet any possible financial strain, but with the central institution to fall back on an appreciably smaller cash reserve is needed.

National Economic Welfare.

Holding the reserves of the other banks is not only economy, but puts into the hands of the central bank the power to make its credit policy effective. Under modern conditions control of the credit structure is the keynote of sound banking. The idea is to obtain deliberate control quite apart from profit-earning or other influences, whereby the credit structure is expanded or contracted in accordance with the needs of business and in the interests of national economic welfare.

Any monetary action in the direction of raising world prices is to a large extent dependent on international cooperation, and a great deal might be possible, given co-operation among the central banks of the world. Incidentally it appears likely that we will shortly see a great forward movement in this direction. Individually, however, even the largest of such institutions is powerless to prevent a major world-wide depression like the present one; but, internally, expert control can do much to prevent or flatten out violent fluctuations in trade or anything approaching panics. It is generally accepted that cyclical fluctuations in business activity are to some extent associated with credit policy and business psychology, and these can be influenced by central banking operations. The functions of a central bank are thus all designed to promote stability, without which business is unsettled and haphazard, and steady progress is impossible.

In addition to these general but far reaching advantages, the setting-up of a central bank in New Zealand will undoubtedly lead to cheaper credit. For instance, a considerable saving will assuredly accrue to the State from a lowering of Treasury bill rates which at present are high in comparison with those ruling in London and Australia. Further, the organising of a bill market by the Reserve Bank must result in cheaper discount rates for commercial and agricultural bills, and consequently savings for farmers and traders generally.

Central Bank Control.

The functions of a central bank are very important and purely national in character. At first sight it would appear that such an institution should be directly controlled by the State, but in this respect we can profit from the experience of other countries. On this point a standard work (Kisch and Elkins on “Central Banks”) remarks as follows:—

“The theory underlying the conception of a State Bank centres on the proposition that since a wise central banking policy is the basis of a sound national economic life, the bank should be under the control of the national Government. But the dangers of this course are great. Just because the decisions of the bank react on every aspect of the economic activities of the country, it is essential that its direction should be as unbiased as is humanly practicable, and as continuous as possible. But clearly if the bank is under State control continuity of policy cannot be guaranteed with changing Governments, nor can freedom from political bias in its administration be assured. In most economically developed countries the probabilities are that the national Government will be the largest individual customer of the local money market. In such circumstances it is evident that, if it also controls the administration of money-market policy, it may easily find itself in an equivocal position where it may be called upon to decide between two courses, one of which may be immediately convenient to itself and the other conducive to the ultimate interest of the country as a whole. The creation of such dilemmas should be avoided.”

To obviate these difficulties many of the central banks of the world have shareholders and private capital. But such shareholders are in quite a different position to the shareholders of a trading bank, for the temptation to exploit the central bank for their own benefit is avoided by definitely limiting the dividend on shares and requiring all excess profits (normally the greater part of the bank’s earnings) to be paid to the State. The whole idea is to combine the advantages of private management and operation with those of State control, while avoiding the disadvantages of both as far as is humanly possible.

Need For Conference.

A reserve bank cannot successfully discharge its all-important function of safeguarding our currency and controlling our credit, which is the lifeblood of trade and industry, unless the motives of the board of management are free not only from the fact, but also from the suspicion, of being influenced by other than the economic welfare of the Dominion as a whole. It is highly desirable that all members of the community, whatever their political leanings, should have the utmost confidence in the reserve bank as a national institution. If the management was wholly appointed by the Government of the day, it is obvious that this would not be the case, for at least there would always be the possibility that the appointment of directors would be influenced by any political questions or policies which happened to be the subject of sharp differences of opinion at the time.

On the other hand, as the well-being of the whole community could be materially affected by decisions of the board of management, it is advisable that the Government, which carries an overriding responsibility for the conduct of the affairs of the Dominion generally, should be in a position to ensure that a wise selection of directors is made by the shareholders of the institution. To this end it is not unusual for the State to reserve the power of veto over the appointment of the governor and deputy governor or even over the appointment of the whole of the directorate. In other cases some of the directors are appointed by the shareholders and some by the State. As a further safeguard against precipitate action on the part of the shareholders or the Government of, the day, and to achieve an essential measure of continuity and stability of management, provision is made for directors to retire in rotation, so that, apart from the initial appointment on the establishment of the bank, at no time will a majority of the board come up for appointment.

While independent management of the bank is necessary, for success in its actual operations close co-operation with the Minister of Finance and the Treasury and with other financial authorities is practically essential. Each must have an intimate knowledge of what the other is doing, otherwise two powerful financial forces working in opposing directions would tend to render both ineffective.

Function of State.

Although experience has shown that it is not advisable for the State to interfere in the active management of the bank, it is clearly the function of the State to lay down by statute the monetary system to be adopted. The State prescribes the system—be it gold standard, sterling exchange, or any other standard —and the duty is cast upon the bank to control the operation of that system.

Here it should be observed that the idea, often met with, that in giving the Reserve Bank the right of note issue for a period of years Parliament is surrendering its right to determine matters of monetary policy is quite fallacious. The time limit on the rights of note issue is merely for the purpose of automatically bringing the Act up for review after a period sufficiently long to obtain adequate experience of its operation, but it is open to Parliament to amend the Act at any time.

All fundamental issues, such as the framework of the monetary system or the basis of the monetary unit, are determined by statute, and it is always within the power of Parliament to amend or repeal a statute. Thus Parliament can never surrender its overriding control. A good example of this was recently furnished by the United States, where Congress in its wisdom deliberately suspended the gold standard as a matter of monetary policy. In the same way, if at some future date Parliament laid it down that the New Zealand pound was to be worth only half the pound sterling or so many pounds of wool or butter, the Reserve Bank would have no option but to work on any such basis, and endeavour to maintain it at the prescribed value. It is only the administration of the monetary system that should be free from political influence.

Legislative Restrictions.

Although the bank is constituted on the company model in order to secure the benefit of a form of management that has been found the most successful in all large-scale business, the central bank is hedged round with legislative restrictions and safeguards all designed to ensure that the Board of Directors remains free and unbiased in carrying out its all-important duty of safeguarding the currency and controlling the credit of the country in the best interests of the people as a whole. In this respect the Reserve Bank of New Zealand Bill embodies the experience of other countries in providing for the following:—

1. That only shareholders who are British subjects ordinarily resident in New Zealand are entitled to vote at meetings of shareholders. This means that companies or other corporate bodies could not vote.

2. Every such shareholder would be entitled to one vote for each share held, but with a limit of 500 votes. With 100,000 shares as is proposed the ideal would be to have 100,000 shareholders adequately representing every economic activity in the Dominion. The shares in the first instance are to be allotted by the Minister of Finance. Once a year a list of the shareholders must be sent to the Treasury.

3. No person shall hold office as governor, deputy-governor, or director who is not a British subject by birth or who is a member of Parliament or is employed in the Public Service or by any other bank.

4. The governor and deputy-governor, whose appointment must be approved by the Governor-General in Council, cannot engage in any other business or act as director of any other concern, or hold any interest in any other bank, whether in New Zealand or elsewhere.

5. To ensure that the directorate is representative, two of the directors must be men who are or have been actively engaged in primary industry, and two in industrial or commercial pursuits. Only one of the directors may at the same time be a director of any other bank.

These legislative restrictions would effectively prevent any large vested interests from gaining control of the Reserve Bank and obviate the possibility of the policy of the board being dominated by any one section of the community. The ideal aimed at is freedom from the influence of politics on the one hand and of the trading banks and vested interests generally on the other hand.

The Monetary Standard.

Many people seem to have the idea that the setting-up of a central bank implies the adoption of the gold standard as a matter of monetary policy, or, alternatively, means handing over the whole question of currency and banking to the central bank with power to act as it thinks fit. Both of these ideas are mistaken. The central bank is nothing more than a machine or device for co-ordinating and controlling the banking system in accordance with the monetary policy as laid down by Act of Parliament. No matter what monetary system was adopted it could best be given effect to through the medium of a central institution. In fact, it is being increasingly recognised throughout the whole civilised world that a central bank is essential whatever the monetary system of the country. Parliament determines the system to be adopted, but the management of that system should be non-political.

It is easily demonstrated that even in pre-war times the amount of gold held by the banks in New Zealand was not, in fact, the controlling factor of the volume of credit and the price-level. For the June quarter of 1914, for instance, the note issue amounted to £1,700,000, whereas coin and bullion held amounted to £5,500,000. In this instance the note issue could legally have been increased to £16,500,000, provided the required amount of Government securities had been purchased. This possible maximum issue would not have been advisable in practice, as gold was in circulation at that time, and could be demanded from the banks.

Still, the fact that the maximum note issue amounted to over half the deposits (at that time about £29,000,000) is a clear indication that further credit expansion was not prevented by lack of cash resources. Further, a study of the published banking figures over a period of years will show that deposits and advances have varied without any apparent relationship to notes in circulation or cash resources, and, in fact, in a manner that would be quite inexplicable in a self-contained banking system.

The explanation, of course, is that our banking system is not self-contained, in that the banks normally hold a large amount of funds in London. In fact, these London balances are the real regulative factor and the key to our whole banking system.

In New Zealand there is no bullion market, no bill market, or short-loan market, and generally no money market in the full sense of the term. The all-important work of our banks is financing our external trade, which per head is one of the highest, if not the highest, in the world. Furthermore, a very large part of our trade is with Great Britain, wherein is situated the premier international money market of the world. Under these circumstances, supported by the ties of Empire and the fact that this country has been borrowing steadily in Great Britain practically ever since these islands were brought under the British flag, the dominating portion of our banking business has centred in London.

London Balances.

The deposits and advances which constitute the credit system of this Dominion are thus governed predominantly by the rise, and fall in the aforesaid London balances, but up to the end of 1930, at least, the system was rendered definite and complete on a voluntary basis by the uniform traditional exchange policy adopted by the banks. This traditional exchange policy consisted of maintaining steady, even rates of exchange, unaffected by any but very exceptional trade disturbances. For instance, the rates of exchange for telegraphic transfers New Zealand on London stood at 17/6 per cent, for at least ten years prior to 1914, despite marked variation in the trade balance between 1907 and 1911. This exchange policy was the real regulative factor in controlling the volume of credit, and through credit the issue of currency in New Zealand. The result was to keep the New Zealand pound at approximate parity with sterling.

As is now well known throughout this, Dominion, a decline in British prices results in a lessened yield in sterling for our exports. This means so much less added to the London balances of the banks, and correspondingly so much less added to deposits in New Zealand. With less credit available in New Zealand, there is less scope for the purchase of imports, and less spent on imports, which means less drain on the London balances. When British prices rise the effects are in the reverse direction. Wide swings in prices bring booms and slumps alternately, and while international co-operation between Governments and central banks may do much to prevent such undesirable features, it has to be recognised that this Dominion has no option but to accept the prices ruling in the British markets. In fact, the London balances must obviously increase or decrease by the amount of the balance of international payments, but this, of course, does not prevent us from taking any necessary appropriate action at this end to cushion the shock and spread the loss involved in a heavy fall in sterling prices.

Sterling Exchange Standard.

All these facts definitely prove that the New Zealand banking system is operating on a sterling exchange standard. Credit is not controlled through the currency, but, on the contrary, the volume of the currency is controlled through 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 notes and coin are definitely subsidiary, being required for little beyond payment of wages and till-money in the retail trade. The chief characteristics of the New Zealand banking system may be summarised as follows:—

1. That in fact the 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 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.

Throughout the war and since, the pre-war sterling exchange system was maintained without any fundamental change, and the rise in New Zealand prices which reached the peak about 1920 and the subsequent fall in prices was not due to any independent action taken in New Zealand, but was simply a reflex of a similar rise and fall in British export prices.

Real Regulative Factors.

Economic facts and the traditional exchange policy of the banks—which hitherto have pursued a common policy—are at present the only real regulative factors of the banking system.

The control, however, was not deliberate and disinterested, but was simply evolved as the system best suited for the purpose of carrying on commercial banking in the Dominion. Such vital matters obviously should not be left to the discretion of institutions that may at times have to choose between the national interests and the immediate interests of their shareholders, who look upon the commercial banks as profit-earning concerns. Obviously the national interests should always prevail, and to ensure that this will be the case it is essential that the control be placed in the hands of a national Institution set up for that purpose alone.

On the question of the monetary standard, however, the experience of the past has shown that our trade is facilitated if our currency is based on sterling. This being so, the onus is on those who advocate any other basis to demonstrate that it would be more beneficial in practice, having regard to the fact that external trade and particularly trade with Great Britain is so important to the Dominion. Accordingly, in the Reserve Bank legislation it is proposed to do no more than confirm the existing voluntary system and place the administration of it in the hands of an institution specially constituted for the purpose. A sterling exchange system simply means working on London balances instead of on a stock of gold held in the country, the rates of exchange indicating when the value of our pound is rising or falling relative to sterling.

It may be emphasised, however, that the setting-up of the Reserve Bank does not involve forcing the exchange-rate back to parity with sterling if that is not in the interests of the Dominion. The commercial banks will continue to transact exchange and other banking business for their customers exactly as they do at present.

The only immediate outward change so far as the public are concerned will be that the commercial bank notes will all be replaced by Reserve Bank notes, but later, it is anticipated that considerable benefit will accrue from cheaper credit in the form of lower discount rates for agricultural bills and commercial paper, generally.

The New Zealand Bill.

It has been suggested that New Zealand is too small to have a central bank, but people who say this do not realise the true purpose and functions, of such an institution. One might just as well say that a throttle and brakes are necessary in a large motor-bus, but are superfluous in a small car. The banking habit is as highly developed in New Zealand as in many much larger countries, and there is the same need for regulation and control. A collapse of New Zealand currency might not shake the world to anything like the same extent as a collapse of sterling or of the dollar, but it would, nevertheless, be disastrous to our people. It might be pointed out that we have managed reasonably well without a central bank up till now, but to say that is to deny all progress. Our forefathers got along reasonably well with very primitive forms of barter, but now the credit system of the commercial banks has become practically indispensable.

The central bank merely represents, another stage in the evolution of monetary science, and in due course it will probably become just as indispensable as the trading banks are to-day. Apart from the important negative aspects of safeguarding the currency, there are distinct possibilities of positive benefits to be derived not only from internal co-ordination but also from Empire and international co-operation in monetary matters. As explained in previous articles, the control of credit plays such an important part in the welfare of the Dominion that unbiased control on a national basis is essential, in addition to which substantial savings from cheaper credit will accrue to the State, the farmer, and the commercial community generally. In short, there are many advantages to be obtained from setting up a central bank and no disadvantages.

A National Institution.

The Reserve Bank of New Zealand Bill provides for the setting-up of a central bank as a national institution to co-ordinate and control four banking system on a sterling-exchange basis, which is the basis on which the trading banks are at present operating. Thus no fundamental change of system is involved. Furthermore, in practice the dealings of the Reserve Bank when established will be confined to the trading banks and the Government. Thus the banking and exchange business of firms or individuals will not be affected in any way.

From the nature of its business it is evident that the Reserve Bank will require only one small office in Wellington with a staff probably not exceeding twenty in number. Thus, although its functions are very important and its powers and benefits far-reaching, the bank will not be expensive.

It is proposed to incorporate the bank by statute and provide that it cannot be wound up except pursuant to an Act of Parliament. The bank will have a capital of £500,000 to be subscribed by the public, while £1,000,000, to be subscribed by the State, will be paid into the reserve fund. The State’s quota goes into the reserve fund in order to keep the bank entirely free from the possibility of political influence in the management. This is considered to be essential by all authorities.

Private Capital and Shareholders.

The bank is intended to be a national institution, and private capital and shareholders are brought into the scheme to obtain stability and provide a non-political franchise for the election of directors. If the shareholding is spread far and wide through every section of the community the bank will have its roots in every branch of our economic activity and representatives of every section of society will have a personal interest in the bank, though the interest will be more of a public nature than private. The shareholders, however, will be in quite a different position to the shareholders of a trading bank or other private company. The operations of the bank are restricted and safeguarded by statute in all directions, and to ensure that the private interests of the shareholders shall always be definitely subordinated to the public welfare the dividend on the shares will be limited by law to 5 per cent. cumulative, and all surplus profits over and above this, normally the bulk of the bank’s earnings, will go to the State.

Only shareholders who are British subjects ordinarily resident in New Zealand will be entitled to vote at meetings of shareholders, so there will be no possibility of a controlling interest being acquired by people of other countries.

To guard against any person or group in New Zealand securing a controlling interest it is provided in the proposed legislation that no shareholder can have more than 500 votes, representing £2500 of capital, and cannot hold ,a proxy for more than 500 votes. The initial allotment of shares will be in the hands of the Minister of Finance, and later the board of the bank wall have power to refuse transfers without giving any reason for doing so. A list of shareholders must be submitted to the Treasury annually.

Directorate Proposal.

As to the directorate, the proposal is that the bank shall be managed by a board consisting of a governor, a deputy-governor, and five directors, of whom two at least shall be persons who are or have been actively engaged in primary industry and two who are or have been engaged in industrial or commercial pursuits. Not more than one member of the board can be a director of any other bank. No person shall hold office as a member of the board who—

1. Is not a British subject by birth;

2. Is or becomes a member of Parliament or a Public Servant;

3. Is employed in the service of any other bank.

The first governor and deputy-governor, who must be persons of actual banking experience, are to be appointed by the Governor-General in Council for a term of seven years, and thereafter shall be appointed by the shareholders, subject to the approval of the Governor-General in Council. The Governor, or course, is the managing-director. The other board members in the first instance are also to be appointed by the Governor-General in Council, to retire in rotation at the end of one, two, three, four, and five years respectively, the order of retirement to be determined by ballot. As to the method of appointment thereafter three courses are open: (a) Straight-out election by the shareholders; (b) election by the shareholders subject to approval by the Governor-General in Council; and (c) election of some directors by the shareholders together with appointment of others by the Governor-General in Council.

Right of Note Issue.

On a day to be appointed by proclamation, but six months notice to be given, the Reserve Bank will be given the right of note issue, and the trading banks will hand over their gold reserves in exchange for Reserve Bank notes and use these notes to retire their own notes. The change-over will take place gradually as the trading banks notes come in. The Reserve Bank notes will be legal tender in exactly the same manner as the present note issue. Eventually, however, to ensure the stability of value and formally establish the sterling exchange standard, the bank will be required by law to convert its notes on demand into sterling and vice versa accept sterling for notes within definite exchange limits corresponding to the cost of shifting gold. The effect will be exactly the same as a gold standard bank being required to give notes for gold and gold for notes at a fixed price. We will get all the benefits without the heavy cost of keeping our own gold reserve.

This provision has been put in the Bill to indicate the basis on which the bank is to operate, but it is not to come into force until a date to be fixed by the Governor-General-in-Council, and there is no intention of tying our currency down until such time as the present crisis is over and steps have been taken to definitely stabilise sterling on some basis or other.

At present sterling is off gold and floating free under the control of the Bank of England, and in view of what is happening at present in the United States of America and the uncertainty as to the reactions in Great Britain it is impossible to foresee the ultimate position of the pound sterling. While this continues it would be unwise to consider stabilising our currency by tying it down to any definite ratio of sterling. Such a position, of course, is purely temporary, and is by no means free of risk, but it is the only practicable course we can adopt in the meantime.

The bank will immediately assume responsibility for the management of our exchanges, but until such time as the definite link with sterling is established by the Government there wil Jbe no limitation of the rates of exchange that may be fixed. If the clause concerning the convertibility of the notes is not to come into force perhaps for years, it may be wondered why it is in the Bill at all, but a currency system must have some basis, even if it is a suspended one, in order to determine the mode of doing business and the form in which reserves are to be kept.

Deposits by Trading Banks.

On the day the bank acquires the sole right of note issue it will be entitled to commence business. As from a day to be appointed within twelve months thereafter the trading banks will be "required to maintain balances with the Reserve Bank at least equal to 7 per cent, of their demand liabilities, and 3 per cent. of their time liabilities. Such balances will not be lost to the trading banks, but will figure in their balance sheets as balances at Reserve Bank. The balances will be paid over in the form of gold or sterling, but, if necessary, to ease the introduction of the Reserve Bank, provision has also been made for part of the payments being made in Government securities. In turn, a statutory duty will be cast upon the Reserve Bank to maintain a minimum reserve of not less than 25 per cent, of its notes and other demand liabilities. This reserve will consist mostly of liquid assets held in London, for, as the system is to be based on sterling, the Reserve Bank will be relatively powerless until it acquires a substantial balance in London.

The other important function of the Reserve Bank is the taking over of the Government accounts. The Bill provides for this being accomplished within a period of twelve months, with a possible extension to eighteen months, after the bank is entitled to commence business. The Government accounts are usually kept at the central bank wherever there is one, partly for the reason that it is a national institution and partly because the Government’s financial operations are so large that without a complete inside knowledge of them control of credit and currency would be difficult.

General Business.

As already indicated, the Reserve Bank will not open accounts or do general banking business with the public. To do so would not only be unfair to the trading banks, but would seriously weaken the power of the Reserve Bank to carry out its proper functions. The whole idea is that the bank’s funds shall be held in reserve in a liquid form ready to be brought into action whenever required to meet an emergency, to act as a stabilising force, or to enforce its banking policy at the time.

Obviously the Reserve Bank would not give much assistance to the trading banks when their assets are frozen if its own assets were in much the same condition.

As a lead to the trading banks and the market generally the Reserve Bank will be required to make public the rates at which it will discount bills, etc. The bank will also facilitate the business of the trading banks by organising a clearing-house for the clearance of cheques between banks.

To ensure that the bank is always in a position to perform its important functions, the classes of business it may and may not undertake and the securities in which it may invest will be definitely prescribed by statute. It will be prohibited from buying or making advances on the security of real property, making unsecured advances, or allowing interest on deposits. The last-mentioned provision is to obviate the possibility of the bank being in any way forced to seek profitable investment of its funds, and thereby tying them up in undesirable ways.

A definite limit will be placed upon the extent of the assistance that may be granted to the Treasury or other departments of State. As to investments, provision will be made to permit the investment of capital and general reserves in long term Government securities, but otherwise the bank will be largely restricted to first-class commercial paper and Treasury bills of limited currency. To meet the special needs of the primary industries, however, up to 40 per cent. of the commercial paper may be agricultural bills with a currency up to six months. Liquid securities will doubtless be purchased by the bank as investments, but its chief business on the commercial side will' be rediscounting paper to facilitate the operations of the commercial banks. Above all things, however, liquidity must be the guiding principle of the Reserve Bank.

Misconceptions Removed.

Much of the criticism of the proposal to establish a Reserve Bank in New Zealand is undoubtedly due to a misunderstanding of the functions of such an institution, but it is hoped that the articles preceding this one will clarify the position and thus disarm criticism of this nature. Some of the objections that have been raised, however, are more general in character, and it is perhaps advisable to deal with them specifically. For instance, it is said that the setting-up of a central bank means placing the control of our currency under the dominion of the Bank of England. This idea is fallacious.

The bulk of our trade is with Great Britain, and we have large debts payable in sterling. In addition, we are also linked to Great Britain by strong ties of ancestry and sentiment. As is only too evident at present, the prosperity of the Dominion hinges to a great extent on the course of events in Great Britain, and it is useless to pretend that we can be indifferent to the monetary policy of tile Mother-country or do other than work in close consultation, with the British authorities.

We do it, however, because it is in 6ur own interest to do so, and not because we are dragooned into it by pressure from the Bank of England, That great institution is always ready to give us the benefit of its experience and knowledge, but that does not alter the fact that we are quite free to manage our own affairs as we think best. We lay down by Act of Parliament the basis of our monetary system and appoint a New Zealand board of directors to manage that system in the best interests of the Dominion. If we take care to appoint men of upright and resolute character to the board there is surely no reason to suppose that they would allow the interests of the Dominion to be sacrificed at the bidding of anybody in or out of New Zealand.

Monetary Independence.

In fact, our monetary independence is much more likely to be obtained under a sound and well-managed central bank than under the present haphazard arrangement. Consider the present position. All matters pertaining to our currency and credit’ are at present largely in the hands of the six trading banks carrying on business in the Dominion. These banks are commercial Institutions and as such are naturally primarily concerned with earning profits for their shareholders. The banks act together in fixing rates for deposits and exchange and in other matters conducive to their common welfare, but otherwise there is strong competition between them for business. In such circumstances they cannot have any defined or conscious policy relating to the volume of mopey and credit as a whole or take into consideration the effect of their united transactions on the price level of commodities in general. This is particularly the case when only one of the six banks has a New Zealand board of directors and four of the remaining five are predominantly Australian institutions with much larger, interests in the Commonwealth than in the Dominion.

Another statement given wide circulation is to the effect that to-establish a central bank means bringing our people within the amble of a vast conspiracy alleged to be operating through central banks for the economic enslavement of the world in general. The whole idea is fantastic, but if there were anything in it we could not hope to avoid our full share of the consequences unless we could make ourselves economically independent of the rest of the world, and that, of course, is impossible. In fact, we are more dependent than most countries on international trade, and our present position is eloquent testimony of the effect on this. Dominion of a fall in the overseas prices for primary products whatever may be the cause of such fall. If we do need any defence on the monetary side, should we not organise and properly equip our forces? Well, the way to do this is to co-ordinate and consolidate our banking system under the control of a national institution in the form of a central bank. On broad issues the responsibility for monetary policy rests with and cannot be taken away from Parliament, but any policy decided upon cannot be effectively carried out without the machinery of a central bank.

Reply to Bank Chairman.

The chairman of the Bank of New Zealand in his last annual report to shareholders offered certain criticisms, his main points being as follow: —
(a) That the bank is being set up at the dictation of London financiers.
(b) That it is not reasonable to require trading banks to hand over to another proprietary bank 7 per cent, of their demand deposits and 3 per cent, of their fixed deposits.
(c) That a restriction of credit would be imposed on the trading banks.
(d) That the South African Reserve Bank had failed to meet the situation, and had lost a large part of its capital.
(e) That the Federal Reserve system of America was unable to avert the rot occasioned by the closing of some 5000 banks, neither was it able to prevent America having to go off the gold standard.
(f) Quoted British Chancellor of the Exchequer as saying at Ottawa, “This is no time for rash experiments in monetary matters.”

As to these points, the first is definitely incorrect. The proposal is being undertaken because it is considered to be in the best interests of the Dominion. The idea originated in New Zealand, and a British expert was invited to come here and advise the Government on the matter. It is true, however, that practically every monetary conference since 1920 has recommended the step to all countries that have not already got a central bank. The Monetary Sub-Commission of the recent World Economic Conference unanimously adopted the following resolution—

’’The conference considers it to be essential, in order to provide an international gold standard with the necessary mechanism for satisfactory working, that Independent central banks, with the requisite powers and freedom to carry out an appropriate currency and credit policy, should be created in such developed countries as have not at present an adequate central banking institution.”

Term Hardly Appropriate.

On the second point, the description of the Reserve Bank as “another proprietary bank” is hardly appropriate; and, as to the alleged hardship on trading banks being required to keep minimum deposits with the Reserve Bank, the following extract from the report of the “Macmillan Committee” on Finance and Industry is fairly conclusive:—

“It is to the interest of every commercial banker that, in the short-run, his reserves should be as small as possible consistently with safety. It is equally to the advantage of each banker that there should be one institution carrying a large reserve available for the use of all in moments of emergency, provided that this institution is willing to' utilise its reserve for the common safety when the emergency does arise. Hence the one-reserve system, the foundation of all central banking practice, arose in this country to meet a practical need and found its organ in the Bank of England. The Immense importance of this system ( has had to be recognised, in newer areas in which commercial banks preceded the institution of central banking, by the system of compulsory reserve deposits at the central bank.”

As to the suggestion that the setting up of the Reserve Bank involved a restriction of credit, there is no justification whatever for such a statement. With the gold and sterling assets available the trading banks [note: this gold was soon confiscated from the trading banks and given to the new Reserve Bank] will have no difficulty whatever in meeting all their commitments to the Reserve Bank for notes and reserves against their present volume of deposits. In fact, the assets handed over when pooled in the hands of the Reserve Bank will be sufficient to form the basis for an expansion of credit if such is necessary or desirable. The bank will be required by law to keep a minimum reserve in gold or liquid sterling assets of at least 25 per cent. of its demand liabilities [note: a lie], but when it commences operations the reserve will probably be treble that percentage [note: another lie, the RBNZ soon started selling the gold].

Concerning the references to the South African Reserve Bank, inquiries addressed to the Government of that country brought the following reply—

“The ability of the central bank to function as intended was proved when South Africa remained on the gold standard and Great Britain abandoned it, and also when was decided to link Union currency, with sterling. The central bank has performed successfully its primary function of maintaining the country’s currency as by law established. The central bank affords machinery for giving effect to the Government’s currency policy. The central bank was called upon to face losses on sterling balances when Great Britain left the gold standard and South Africa decided to remain on gold. The Government has stood aside from participating in profits of the bank pending the restoration of the bank’s position which is now almost complete? The bank is covered under Act of Parliament against losses in maintaining parity between South African pound and sterling in a similar manner to that in which the Exchange "Equalisation Account operates in Great Britain.”

As to the position in America, it ls well known that the United States Government, departed from the gold standard as a deliberate act of Government policy, and not from necessity. Furthermore, all the information received shows that while many member banks of the Federal system failed, by far the largest number were non-members. In fact it is recognised that the fundamental weakness of the American banking system is the existence of a large number of small independent banks outside the Federal Reserve system. Authorities agree that otherwise the Federal Reserve system is sound and beneficial, and it is difficult to say what would happen during the current crisis If it had not been in existence. Similarly, when Great Britain was forced off the gold standard, the Bank of England was not able to prevent it, but a disaster of much greater magnitude would probably have happened if the bank had not been there to control the situation. On the last point being referred to the British Chancellor of the Exchequer, he stated that his remarks in question had no reference to the proposal to establish a Reserve Bank in New Zealand, but, as the context shows, were directed to policies of a totally, different character. In fact, his'remarks were directed at novel and untried monetary systems such as are being urged in this and most other countries to-day.

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DOMINION, 15 SEPTEMBER 1933, PAGE 8
N.Z. RESERVE BANK
Views of Correspondents (Letters to the Editor.)

Sir, —A careful analysis of the Government’s lengthy statement on the Central Reserve Bank shows that the Minister of Finance gives many excellent reasons why such an institution should not be given a place in our economic life. Mr. Coates shows that the Central Reserve Bank is to be State controlled. Even the shares in the first instance are to be allotted by the Minister of Finance. Again, the public is baited with the prospect of a lowering of Treasury bill rates. To Mr. Coates full credit must be given for his plucky attempt to bolster up the decayed foundations of a worn-out financial system, but to-day’s economics require a system of finance based upon the common wealth of the Dominion, not upon a paltry capital of £500,000, subscribed by a few private individuals. It is not reasonable to expect a privately-owned monopoly to be able to guarantee to the people of New Zealand access to the prosperity which has already been supplied by bounteous Nature. The office of Minister of Finance calls for vision of a very high order, but Mr. Coates is intelligent, so, when he reviews the question of central banking, keeping in mind the paramount necessity for a powerful State bank, with an estimated backing of £640,000,000, with sole right of note issue, retaining the present trading banks for the facilities of trade and commerce, he may then elect to give to New Zealand and the Empire a lead for reconstruction so essential for the protection, development, and advancement of civilisation.— I am, etc., E. L. APPLEGARTH. .Masterton, September 13.

Purposes to be Served

Sir, The Minister of Finance’s lengthy ’article in connection with the Reserve Bank of New Zealand is one which I have read with great interest. Mr. Coates makes many claims for the necessity of, and the advantages to be gained by, the establishment of the Central Reserve Bank. While I do believe in the necessity for central banks in the great financial centres of the world where trade and general conditions justify their existence, I do not believe they can serve any useful purpose here, but would only add an extra overhead charge. The present banking system has passed through boom conditions, and the reverse, and at the same time has always granted all legitimate needs of the public and the Government. The banks have undergone much criticism for being unduly conservative in the past, but affairs now show that if anything they were not conservative enough.

Lower interest rates is among the advantages claimed (this appears to be a sop to the commercial and farming classes), but as interest is fixed chiefly by supply and demand for money the reserve bank will be unable to make any great change. The note issue would not be any more secure than the present issue, which by Parliamentary enactments and safeguards is made absolutely “giltedged,” while I cannot see how “a single control of the note issue is an important factor in the maintenance of sound economic conditions.” At present notes are only issued in response to the needs of the public, but if issued by a central bank, to a greater or lesser extent under political domination, there is always the danger that if the Government gets really hard pressed for money it would force the central bank to increase the note issue, with all corresponding attendant dangers of inflation.

In any case restrictions on the note issue are not really important, as in an economically advanced country like New Zealand with a total note issue of around £6,000,000 the notes play a comparatively small part in the finance of the country compared with yearly cheque clearing of around £150,000,000 and advances of about £50,000,000, on which there are no restrictions bar the sound common sense of the bankers. There would certainly be an advantage to the public in having a uniform note issue, but this could just as easily be obtained by granting one of the present banks, say the Bank of New Zealand, the sole right to issue notes.

Considerable mention is made of commercial bills and the bill market, as if bills were an important factor in bur financial system. This is not so, as the total bills discounted in the country amount to under £1,000,000, compared with advances £50,000,000, and, beyond bills discounted, the amount of “sound commercial paper” is not great. There does not appear to be any advantage in organising a bill market insofar as the commercial community is concerned, as in the majority of cases it would appear to prefer to borrow by overdraft with its more elastic system of repayment and also with its considerable saving in the use of bill stamps and labour.

The establishment of a clearing house for cheques would be a definite disadvantage, as I understand that with only six banks operating in the country the present system is adequate and more satisfactory for all concerned. Much is made, and rightly so, of the necessity for the central bank keeping its assets liquid, and although they would have no trouble in London with a well organised short-term market they cannot do so in New Zealand. It is proposed to invest New Zealand funds in Government securities, commercial and agricultural paper, and Treasury bills. This appears to make the bank but a further means of easy Government borrowing. None of the above investments can be characterised as liquid, as in the event of a crisis all of above would be absolutely unsaleable.

At present the commercial banks keep a large amount of gold in New Zealand, and this forms a sound foundation for our system, but the reserve bank would transfer all the gold to London and thus remove the very basis of our banking structure. Experience in other countries has shown that a central bank can only make its interest rate effective by operating on the shortterm money market, and the absence of this market in New Zealand removes their only really strong weapon of control over interest rates.

An essential feature of the system as outlined by Sir Otto Neimeyer was the maintenance of exchange on London within the limits fixed by cost of shipping gold—probably not more than 1½ per cent. This is now deleted, and in any case would be useless, as the balance of our London funds is governed by our exports and imports, and control is exercised by use of the exchange rate, which to be effective must have very elastic limits. This has been clearly demonstrated in the last two or three years. Without this control—and there does not appear to be any other effective method of controlling London balances—the central bank, after say a couple of very bad export seasons, would probably be bankrupt of London funds, and thus ruined or forced to submit to the domination of English financiers.—l am. etc., MARS. Wanganui, September 11.

Douglas Credit View

Sir, —The article by the Minister of Finance explaining the Central Reserve Bank Bill calls for some comment. The adverse criticism of the Bill by the chairman of the Bank of New Zealand indicates that the representatives of the banking system consider the privilege of note issue to be too valuable for them to lose. Doubtless if the various trading banks were allowed to tender for this privilege there would be keen competition for it. This valuable concession the New Zealand Government proposes to hand over to a company with half a million of private capital. The statement that, although the right of note issue is to be for a period of 25 years, the Bill can subsequently be amended by Parliament, ignores the fact that once the right is granted it cannot be withdrawn without compensation being given. The power of note issue at present exercised by the trading banks can be taken away when Parliament chooses, the proposed new semi-private Reserve Bank is to be given an inalienable right for 25 years. In other words, the Government proposes changing the existing separation between the people and money creation to a legal divorce.

The claim for the measure that it will result in cheaper money for the Government, illustrates the sublime futility of the Government where finance is concerned. The New Zealand people are to provide £1,000,000 as a reserve fund for the bank and pay interest upon Treasury bill finance, based upon this reserve and upon the taxation capacity (which is really the productive capacity of the country). The setting up of a national credit authority would save the whole cost of Treasury bill financing, and lay the foundation of a scheme for the comparatively costless financing of our producers. If the proposed Bill is passed, another rampart will have been raised which the people of New Zealand will have to scale before they can obtain control over their monetary system.

How “far and wide the shareholders will be spread among every section of the community” can be estimated from the fact that a shareholder’s limit is to be £2500. Clearly they will be members of the same financial section, against whose operations protection in the form of legislation has had to be granted during the past two years. Providing one-third of the capital, they are to have—after a short time—the right to elect the members of the'board. Should this board decide upon a financial policy opposed to the well-being of the community as the deflationary policy adopted by the New Zealand trading banks during the past three years, this policy will be carried out. To call such a concern as this Bill proposes to bring into being a “national institution” is a complete misnomer. The temptation to tie up New Zealand finance with the international financial institutions will be irresistible. This measure will place our activities as producers (both primary and secondary), and our interests as consumers, more completely under the domination of those institutions manufacturing and controlling currency and credit. —We are, etc DOUGLAS SOCIAL CREDIT ASSOCIATION. Wellington, . September 12.

Defence of Existing System

Sir.—lt would appear that the majority of the farmers are against the establishment of a central reserve bank, and, according to Captain Rushworth's recent statement in the Town Hall, Wellington, the Douglas credit enthusiasts also appear to be against it. Commercial and industrial interests are largely opposed to the establishment of a reserve bank, at any rate, at the present time. It would seem that the whole matter as far as the country is concerned is a cut-and-dried issue. It is stated that the art of central banking has been evolved to control credit and currency in modern times; further, that it is certainly part of its job to hold the reserves of the trading banks. As a shareholder and depositor with one of the trading banks, I would not feel nearly as secure with that particular bank’s reserves invested by the more or less amateur board of directors of a central reserve bank, as I feel to-day. It is absurd to suggest that the trading banks of this country, Canada, and Australia could not have maintained a reasonably sound financial system had it not been for the actions of politicians from time to time.

I, personally, cannot see how future Governments are likely to be any more amenable to the advice of a central reserve bank than they have been in the past to the advice of the trading banks. Mr. Coates must admit that the central reserve banking system of America has been an absolute failure from the point of view of doing those things for which he states a central banking system has been evolved. Further. he overlooks the fact of the failure of the Central Reserve Bank of South Africa to carry out these functions. The Commonwealth Bank of Australia has also not functioned successfully as a central reserve bank, and it is safe to assume that the Bank of England, the greatest central reserve bank in the world, would also have failed, if it has not done so, had it not been for the support of the trading banks of the Empire.

Mr. Downie Stewart made the statement, when Minister of Finance, that the Bank of England demanded that the New Zealand banks should provide a million a month in London for its use, as a condition of the renewal of certain Treasury bills. No doubt similar demands have been made upon the big five in London and upon all other banks in the Empire. This form of dictatorship is not a thing which New Zealanders can welcome. For some unknown reason, great pressure must have been brought to bear by the Bank of England, and it seems that they are insisting that a central reserve bank be established in this country, quite obviously to strengthen its position and not ours.

The single control of note issue by the board of one bank cannot to my mind be nearly as satisfactory as the control by half a dozen banks, The present decentralised system of control by six different boards of directors gives one chance in six of being wrong, whereas the odds in favour of the decisions of the Central Reserve Bank Board being wrong are so much greater. It is also absurd to suggest that the centralisation of the cash resources of the commercial banks would strengthen the whole banking system, and would offer greater support to the whole credit structure than is the case at the present time. Nobody probably knows the tremendous assistance the trading banks have been to the Government of this country during the present crisis, and I would say, without fear of contradiction, that no Central Reserve Bank could have stood to the New Zealand Government as loyally and to the same extent as the trading banks have done.

It is absurd to suggest that the trading banks of this country are not in just as close touch with the London money market as any Central Reserve Bank in this country could possibly be. The information under the heading of “London Balances and the Sterling Exchange Standard” does not establish any case in favour of a Central Reserve Bank and is irrelevant in this matter. The Coalition Government are nice ones to criticise the banks on their exchange policy, or on the matter of deliberate and disinterested control. The public know and appreciate the position and attitude of the banks toward our Government’s exchange policy, because it will be remembered that the chairman of the Bank of New Zealand stated that an increase in the rate of exchange to 25 per cent. would be profitable to that bank, but that it did not consider that such action was in the interests of the country.

If the Government would let all the banks ship their gold to London and take advantage of the high prices ruling today, tax them on the profit thereon which might amount to about a million additional taxation to the Government, and allow the banks to hold British Treasury Bills as a backing for their note issue instead of gold, the position which the reserve bank is supposed to create would be brought about immediately, incidentally with a profit to the Government of a very large sum by way of taxation.

If Mr. Coates will clearly set out an analysis of the advantages which other countries have derived from their Central Reserve banking systems, and can convince the public, there would be some excuse for the Bill. He states that there will be no disadvantages, but I would ask him to give the Government’s estimate of what the Government will lose in taxation from the trading banks by the establishment of the proposed Central Reserve Bank. There is no doubt that in its first year, the Central Reserve Bank might be exceedingly profitable if, by legislative action, the trading banks are forced to hand over the whole of their gold at considerably less than the current market price. The question of dealing with the banks’ present gold reserves is probably the nigger in the wood pile, and it seems that the Government or the Central Reserve Bank will take the whole of the difference between the mint par value and the present market value of the trading banks’ gold reserves. The Government is so hard up to-day that it could, not finance a Central Reserve Bank and is not likely to for many years. It would have great difficulty, and is not justified, in even raising its share of the capital, and where it would get the funds to retire its liabilities to the trading banks is not stated. This apparently means that the Government is going to force through as a party measure this Central Reserve Bank legislation to which they cannot give effect for many years, have us committed to a system which they, themselves, do not understand, and which the leading bankers in the world have failed to operate successfully, and place upon the rising generation a burden of oppressive taxation which may take generations to lift.

The deposits to be made by the trading banks look quite easy, but there is a catch about this which is probably not generally appreciated. Where are these funds to come from? Some may come from the banks’ reserve funds which are shareholders’ money and which shareholders would not be confident could be safely invested by an inexperienced board of directors of the Central Reserve Bank, and the balance would probably have to come from other assets of the banks, including advances. The immediate establishment of a Central Reserve Bank might necessitate a considerable liquidation of existing advances by the banks, and as legislation has tied up a large proportion of the banks’ advances (I am referring to rural advances and the Mortgagors’ Relief Act), this liquidation could only be made from commercial advances. Any restrictions of advances to commercial and trading interests would be disastrous to-day, and manufacturers and importers should, on this account alone, oppose the setting up of a Central Reserve Bank with all the forces at their command. SUSPICIOUS. Wellington, Sept, 12.

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EVENING STAR, 14 OCTOBER 1933, PAGE 8—BANKS’ GOLD RESERVES, WHOSE PROPERTY? A CRUCIAL POINT IN CENTRAL BANK PROPOSALS

October 13; The following statement has been made by Mr J. T, Grose, chairman of; the Associated Banks;— When the Reserve Bank Bill was first mooted the Prime Minister agreed that the proposed Bill should be discussed with the banks, which, though some of them were opposed to a Central Bank, had agreed to assist the Government in seeing that the Bill was drafted on the best possible lines. As a result of this, small committees were appointed by the Government and the banks, which went through a preliminary Bill in detail and made recommendations to the Government, and though on one or two major points agreement could not be reached, the Bill was drafted.

Following that, the heads of all the banks were invited to meet the Cabinet and the whole matter was again discussed, and a good deal of discussion took place in respect of the true value of the gold held by the banks. The gold is held largely against their note issues, but also substantially as a reserve in the ordinary course of their business and quite apart from the requirements of their note issues.

The banks held that the gold was their property; and that the true value of it, of. course, was theirs also. As is recognised, at law, all gold and silver paid into a bank becomes the absolute property of'the bank, and those who pay it in become depositors and have a claim against the banks as their debtors. Conversely, a deposit of gold or other currency by a customer might reduce his overdraft and so reduce the bank’s claim as a creditor against the customer as a debtor. No satisfactory conclusion between the Government and the banks was then arrived at in respect of this matter.

Many meetings between the heads or representatives of the banks and the Minister of Finance and others followed, and in the end, though the banks did not in any way depart from their claim that the true value of the gold held by them belonged to them, it was agreed that a clause should be put into the Bill under which the contention of the banks was set out. It was also set out in the Bill that, having regard to all the circumstances, it might be contended Reserve Bank or the Government would be equitably entitled to a proportion of such value, and the clause provided that on realisation the value of any gold coin transferred to the Reserve Bank by any bank “shall be credited to that bank or apportioned between that bank and the Reserve Bank as may be agreed between the governor of the Reserve Bank and the said bank.” Failing that, the question was to be determined by others mutually agreed on by the bank concerned and the governor of the Reserve Bank, and, failing that, by a special tribunal comprising the Chief Justice of New Zealand and two other persons. This clause was arrived at, as stated, after very many consultations and discussions, and was incorporated in the Bill

The Bill was introduced into Parliament last session, but did not get beyond the first reading. The banks now learn that there have been deliberations by members of the Coalition Government, and that an amended Bill will be introduced shortly. It has been stated on behalf of the Government that, even if any possible changes should prove necessary and desirable in the Bill, it would remain substantially as first presented so far as general principles were concerned, and also that there were to be no major changes in the method of the working of the Reserve Bank. This would seem to dispose of the reports that were circulated recently that it was intended to have a majority of Government-appointed directors, or even that the Government should provide the capital for the bank in lieu-of subscription by private shareholders.

As stated, the banks hold that their gold, with its true value, is their property, and it is not generally known that a great deal of the gold coin imported into New Zealand by the banks and held by them has never been in circulation, but has been retained in the banks’ safes. It may also be explained that a good deal of the gold thus held has been received in exchange for bullion purchased in New Zealand by the banks. There is another factor that is not generally known and that is that until recent years settlements of exchanges between Australia and New Zealand, were frequently made in gold.

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EVENING POST, 18 OCTOBER 1933, PAGE 10—BANKS' GOLD, WHO OWNS IT?, AN OFFICIAL STATEMENT

KING COUNTRY CHRONICLE, 19 OCTOBER 1933, PAGE 5—GOLD IN THE BANKS, WHO OWNS IT? AN OFFICIAL STATEMENT.

Ownership of the gold coin at present in the vaults of the banks in New Zealand appears to be questioned by a large section of the public. With the idea of obtaining some light on this matter —one of great importance to the banks —the chairman of the Associated Banks (Mr. J. T. Grose) was asked by the Wellington Post if he were disposed to discuss the matter. For the erroneous opinion that the banks do not own the gold a lack of knowledge of the facts is responsible, the chairman explained. “It is not true,” he said, “that when bank notes became legal tender under war regulations, gold coin to' the extent of millions flowed into the banks. Indeed, the flow of gold into the banks consequent upon the note issue becoming legal tender has never been as appreciable as has been imagined. This fact is substantiated by verified statistics, which show that the total of all coin held by the banks for the June quarter, 1914, amounted to £5,287,527; while for the September quarter, 1933, the amount is shown to be £5,061,244, or a decrease of some £226,000. “During the years 1914 to 1932 inclusive the total exports of gold coin from this country amounted to £2,897,544, but it should be noted that these exports are covered practically to the full extent by imports of gold coin, the total during the same period being £2,766,969. The importing of gold coin by individuals during that time would be negligible.

Gold Held by Public

“It is thus clear that the gold coin now held by the banks and the gold coin exported by them could represent, to only a minor extent, gold coin received from the public of New Zealand since bank notes became legal tender.”

In answer to inquiries as to what has happened to such gold coin as was in the hands of the public at the outbreak of war, the chairman said that “an exaggerated opinion of the quantity of such gold coin seems to be prevalent. It has never been the practice of the public to carry gold on their persons to anything like the extent they carry bank notes, and it is probable that prior to 1914 the amount of gold coin in circulation in New Zealand did not exceed half a million pounds of thereabouts. Of this a great deal has left the country privately in the hands of travellers overseas, who until a few years ago were permitted to, and did, carry varying quantities of gold coin. Some of such gold coin was obtained from the banks, but a very great proportion of it possibly was obtained from firms or individuals who had retained it when gold ceased to circulate. The aggregate of gold coins which left the country in this way (without, of course, appearing in export statistics) was probably much greater than the amount which was received by the banks from the public since 1914.

Another Error.

“Another erroneous impression is that the gold is, or was, entirely used as a backing for the note issues of the banks, but the fact is that the statutory requirement was that the individual banks’ gold reserves should be not less than one-third of their note issues; and it was, of course, the practice of the banks to keep available as a specific reserve for their notes such an amount of gold as in their judgment was warranted to be likely to be the full measure of their note circulation at any time. “In addition to this note issue backing, however, it was the prudent practice of the banks to purchase overseas considerable quantities of gold coin, which were imported into New Zealand and held here by the banks, not as a statutory reserve against their note issues, but as a reserve against their general liabilities, including deposits, etc..

Gold Bought by the Banks.

“This gold was purchased with the banks’ own assets, and was, and is, as undeniably their own property as are their premises. To take this gold at anything less than its real value would be straight-out confiscation. Had the assets which the banks devoted to the purchase and importation of such gold been invested in sterling balances in, say, the Bank of England for the same purpose, that is, a general reserve in respect of their business, there would have been no thought of depriving them of the value of such property. It is greatly in the interest of sound banking, as well as of the country in which the bank trades, that a prudent policy of setting aside reserves should be followed. That the banks in New Zealand held part of such reserves in the most liquid form possible (that is, gold coin in excess of note reserve requirements) is evidence of their careful principles of trading; under not [sic] pretext could this be taken as any justification for confiscation of the reserves the banks voluntarily built up from their own resources, and which, beyond question, are part of their assets, and their own property.”

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DOMINION, 2 NOVEMBER 1933, PAGE 14—Banks’ Gold Holdings

Strong protests have been sent to the New Zealand Government by Australian trading banks, which have branches in the Dominion, against the action of the Government in including in the clause in the Reserve Bank of New Zealand Bill relating to the gold reserves of the banks a provision that the gold shall be taken over at par value, and that any profit made on its sale shall be paid into the coffers of the Government, states the Melbourne “Argus.” The Australian manager of one of these banks pointed out that the coin and bullion reserves of the banks in New Zealand amounted to £5,076,000 at par, and that only £500,000 represented silver and copper. The New Zealand Government did not want the unprofitable silver or copper, but audaciously went only for the £4,500,000 of gold. If the gold were sold at the price ruling at present, the Government could make a profit of more than £1,000,000 which rightly belonged to the banks. The gold holdings of the banks were not only a reserve against their note issues, but formed portion of their general reserves against their liabilities, including their deposits. If the assets of the banks, which had been used to purchase the gold, had been invested in sterling to strengthen the reserve position of the banks, there would have been no thought of depriving the banks of their investment. He expressed the hope that “this act of brigandage” would not be permitted to disgrace the statutes of New Zealand.

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PAHIATUA HERALD, 4 NOVEMBER 1933, PAGE 2
AN OPPORTUNITY MISSED. BANKS AND THEIR GOLD RESERVES.
Electric Telegraph—Press Association WELLINGTON, November 2.
How the trading banks missed an opportunity and have themselves to blame for the terms under which the Reserve Bank of New Zealand will take over their gold, coin and bullion reserves, was described to a highly interested House to-day by the Hon W. Downie Stewart, who was Minister of Finance when the original Reserve Bank Bill was drafted and introduced. Mr Stewart gave some “inside” history of the gold clause. The original measure contained a provision that if there was any dispute as to the terms on which the gold coin and bullion should be taken over by the Reserve Bank, the matter could be submitted to arbitration. What was in his mind in submitting that clause, Mr Stewart explained, was that if Parliament held that the profit belonged to the people the banks considered that they rightly and justly had a grievance, and said Parliament was both judge and beneficiary in this matter. The banks, he continued, would not consider Parliament an impartial tribunal, so he took it upon himself, in order to avoid that accusation, without expressing an opinion on the merits of the case, to draft a clause providing for an appeal to a tribunal if no friendly settlement could be effected. “There was a good deal of argument before I got it to that stage,” continued the ex-Minister, “and if the banks find they have lost the benefit of a clause which would at least have given an appearance of an impartial tribunal, the blame is largely their own, because I made it quite clear that if the Bill did not get to the House within a reasonable time, there was no prospect of getting it passed before Christmas. The Bill was only introduced the day before Parliament rose.’ Mr Stewart reminded members of the way in which the Exchange problem that absorbed the attention of the House, so that it was impossible to deal with the Central Bank. “If the banks complain,” he declared, “the fault is their own in the delay which they imposed upon me.” Mr Stewart suggested even at the present stage some modification which would give the banks an opportunity of placing their case before an impartial tribunal.

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PAHIATUA HERALD, 4 NOVEMBER 1933, PAGE 2
A POLICY OF EXPROPRIATION.
(Wanganui Chronicle).
The Government of New Zealand has embarked upon a policy of expropriation. It is useless to evade the fact, and no good purpose is served by not facing the issue. Expropriation is theft, and theft is wrong, and it is still wrong to commit theft by the agency of Government action. The Ten Commandments are inexorable, they cannot be broken; the individual and the nation cannot alter them nor bend them. The only thing that an individual or a nation can do is to break themselves on those Commandments, and one of those Commandments is, “Thou shalt not steal.” Retribution is inevitable when these laws, are contravened. The issue which is placed before the country, or rather which is now being slipped through Parliament with as little notice and with as much speed as possible, is the expropriation of the gold holdings of the banks through the agency of the Reserve Bank Bill. It should be borne in mind that the taking over of the gold from the trading banks and the crediting of those banks with but the nominal value of that gold, and not its actual value, has nothing whatsoever to do with the establishing of a Reserve Bank. It is proposed that “Any profits that may be derived from the Reserve Bank from the sale of gold coin and bullion transferred to it by any bank…shall be credited to the Public Account.” The issue of the gold then, is an issue quite apart from the Reserve Bank issue. Sir Francis Bell has given his opinion that, in law and in fact, the gold is the private property of the banks. Could anything be more obvious? It requires no enunciation of legal principles to support Sir Francis Bell’s assertion. The whole facts of the case trumpet the truth that the gold is the private property of the banks. The gold has been imported into the country by the banks ; it has been regarded for the purposes of taxation as the property of the banks; it has stood at the risk of the banks, in that if it had been lost through earthquake or burglary the Government was under no obligation to replace it; the New Zealand Gazette publishes quarterly a “Statement of the Liabilities and Assets of the Undermentioned Banks.” in which the gold coin and bullion is shown as an asset of the banks, while even the draftsman of the Reserve Bank Bill can find no language appropriate to the Bill itself but that which admits the gold to belong to the banks in question, for the Bill speaks of the “gold coin or bullion then held by it (the banks) on its own account.”

The moral deterioration of the Government is its most alarming characteristic. The exchange rig was, and is, but a means of expropriation exercised by the Government against the general public for the benefit of the exporting section of the community or those financially interested therein. The expropriatory action of the Government in regard to the gold held by the banks on their own account is but a second dose of the same medicine. There are probably 10,000 shareholders of the banks residing in New Zealand, and it is a portion of their own individual property which the Government now proposes to appropriate. Whose turn will be next?

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NORTHLAND AGE, 17 NOVEMBER 1933, PAGE 3 — Reserve Bank Bill. Who Has Asked For It? An Unanswered Question.

In the debate on the second reading of the Reserve Bank of New Zealand Bill, our Member, in his speech asked several times the question—but received no satisfactory answer—who had asked that a Reserve Bank be established in New Zealand. The speech was listened to with great interest and made a deep impression. Mr. Rushworth said in part:

“It seems to me that there is a deliberate conspiracy to confuse the manufacture, issue, and retirement of money on the one side and the art or profession of banking on the other. I suggest that they are totally separate things and that the confusion has been deliberate in several instances. When the Minister of Finance was introducing the Bill I listened with a great deal of interest and some anxiety to what he had to say in support of it; and I was particularly interested in what he advanced as the alleged advantages, but I have to confess that so far as I was concerned the alleged advantages were so submerged in a cloud of verbiage that I could make neither head nor tail of them.

The Minister was good enough to summarise these alleged advantages, but as I heard them stated and saw them reported in the newspapers afterwards they seem to be merely a set of platitudes. I could make nothing of them at all, and I think they are really unintelligible. We have yet to hear the advantage that is going to be afforded to this Dominion by the setting up of this Reserve Bank.

The present situation is that the money of New Zealand is manufactured by six trading banks which have been licensed to manufacture money, and put it into circulation. These six trading banks work as an Association, and the largest, most important, and most powerful of these banks is the Bank of New Zealand. As has already been said the Bank of New Zealand is governed by 6 directors, 4 of whom are Government nominees. That is to say, the Government today has complete control over the manufacture, issue and retirement of money through its nominees on the Bank of New Zealand directorate. If the Government does not use that control, or if it allows someone else to use this power, that is a matter for the Government to explain.

“But the proposal in the Bill is to transfer these licenses to manufacture, issue, and retire money to the Reserve Bank. During the first seven years of the existence of the Reserve Bank the Government will have complete control, and that means that the gentlemen who occupy the Treasury Benches at this moment, or when the Bank is instituted, will be able to decide the policy of the Bank for seven years through the nominees that they are to first appoint, and at the end of that seven years the control of the Bank will pass into the hands of a private corporation.

Who Asked for the Bank?

“The question has been asked and as far as I know, it has not been answered —who asked for this Bank. It is true that the Rt. Hon. gentleman said that the most important body in the country had asked for it, the Government, and I agree with him. But in looking around to those supporters of the Government who have been sitting in their seats during the last three or four years when the subject of the monetary problem has been raised, members who have sat there, wrapped in a cloak of impenetrable silence, one wonders if that is the Government that has asked for this bank.

The Hon. Member for Waipawa, in speaking just now, said that he had his doubts but he was prepared to accept the word of the Government; but he is the Government. He is one of the Government supporters, and I suggest to honourable Members on the Government side of the House that they cannot wriggle out of it that way. They are the Government and they must take the responsibility for the consequences of this Bill. I for one would very much like to hear the supporters of this Bill, those Members who are going to vote for it, give a concise reason for doing so. We have not had it yet. I have not heard any valid reason for the institution of the bank.

“Now I want to know who has asked for this Reserve Bank?

“The Rt. Hon. gentleman, in introducing the Bill, did not say that any responsible organisation or any individual of importance had asked for the Bank, otherwise he would have mentioned it at the time. “The fact remains that so far as is known nobody but the Government has asked for the Bank. And the question is who is the Government. Is it the gentlemen who have sat silent all these years and who professed to know nothing about monetary subjects, is it that these gentlemen have awakened to the fact that they must do something in the matter—or is it the Jupiter Tonans on the front bench who is referred to as the Government?

Where Did the Proposal Originate?

“Where did the proposal originate? Did it originate with those three gentlemen who have been out of the country and who have come into contact with the financial authorities in London who have asked for this bank? That is a probable explanation. There was a cablegram quoting from the London “Financial Times,” published in the New Zealand newspapers a little while ago which said: “It is feared that proposals that will vest control permanently in the Government of the day are receiving support. And the immediate assurance by the Premier that the bank will be managed on the soundest banking lines and in accordance with a permanent policy by financial experts would allay the anxiety felt.”

We have it on the authority of the Prime Minister himself that he has not replied to that threat. But we have another little illuminating remark. The Chairman of the Bank of New Zealand, in his annual address, said, “The Reserve Bank Bill is being put through at the dictation of London financiers.”

Mr. Speaker : Order, order. I am afraid that is out of order.

Mr. Rushworth : I do not know, Sir. I am merely quoting from the Chairman’s address at the annual meeting of the Bank of New Zealand.

Rt. Hon. Mr. Coates: It is not this Bill it has reference to.

Mr. Rushworth : I see : it was the other Bill. I accept the Rt. Hon, Gentleman’s suggestion : it was the other Bill that was dictated by London financiers.

I suggest that this House had a right and the country had a right to conclude that the request or demand for this Bill had originated outside the country and not inside ; also that the House and the country have a right and a duty to be extremely suspicious about the whole matter. The Rt. Hon. Gentleman said—and I thoroughly agree with him—that the control of the monetary system, that is to say, the right to manufacture, to issue and retire money, is a prime function of Government. As a matter of fact, under modern conditions, it is the most important implement of Government the control of the manufacture, issue and retirement of money. That is hardly debatable; and I am glad the Rt. Hon. Gentleman made that point himself several times in the course of his address.

The Rt. Hon. Gentleman is quite right when he says that there is no higher authority to which the control of the monetary system can be handed. The function of the control of the monetary system of New Zealand must remain vested in Parliament if New Zealand is to retain the right of self government. That being the case, what is the position if the proposition is advanced to remove this control of the monetary system —this powerful implement of government—from the constitutional authorities of King and Parliament, and to present it to a group of private individuals? If that is not high treason I do not know what is.

That is the issue : the proposal at the present moment, as I understand it, is to remove the control of the manufacture, issue, and retirement of money from this House into the hands of private corporations. The avowed purpose of the Bill is to remove the control of the bank which is to be made the sole fount of money—not only from the fact but also from the fear of political influence. And what is political influence? Is not “political influence” a synonym for “Parliamentary control”? What is the difference? It is only parliamentary control when something has to be loaded on to the people, but as soon as Parliament is called upon to exercise its functions of government, and to restrain exploitation and to interfere with vested interests then it becomes political interference — political control.

Control of Monetary System.

If the constitutional authority of King and Parliament over the monetary system is done away with then how is Parliament to perform its other functions, how is it to exercise its other powers of government? If it passes over the control of the monetary system how can it effectively control the army, the navy, the law-making machinery, the social services and such things, because whoever controls the monetary systern controls those things also. The Parliament of this country could neither make war nor peace if the control of its monetary system is placed outside its power. In the past Parliament has controlled—very, very badly, I know—the manufacture, the issue, and the retirement of New Zealand money. It has done it through its nominees on the directorate of the Bank of New Zealand. Has that been abused? Has it been done so badly that it can no longer continue? Has the abuse been so frightful that the Parliament and the Government itself that is making the proposed change can be no longer trusted with the power it has been wielding all these years? That is the allegation the Government is making against itself in proposing a Bill of this description.

It is claimed that this Bank would be a national institution and that it would fill a gap in our social organisation. Great stress was laid upon the fact, too, that it would be operated for the benefit of the people of the Dominion. But we find in the Bill there is a clause that definitely ties or anchors the monetary system of the Dominion ultimately to alternatively gold or sterling. I wish to point out to the House that neither this House nor the people of this Dominion have any control whatever either over gold or sterling, and yet the directors of the new bank are to have no option outside these two commodities. They must, under this measure, anchor the New Zealand monetary system to either gold or sterling. They have the choice between those two but it must be one of those two, and the people of this Dominion have no control over either of them. This, therefore, cannot be described as a national institution in any shape or form.

Reserve Banks and Ruin.

A point that has been made by some other speakers, that this Reserve Bank would be merely following the lead that has been given by other countries ; that other countries have established Reserve Banks and that the establishment of those banks has been taking place in different parts of the world during the past 14 years. It is true that Reserve Banks have been established in various parts of the world—in nearly every part of the world. New Zealand is one of the few parts of Western civilisation where a Reserve Bank has not yet been established.

But is it any satisfactory argument to say that, because those Reserve Banks have been established in other parts of the world, we should necessarily do the same? When we look at the effect of the establishment of the Reserve Banks in other countries we find simply a trail of ruin behind them. There is not a single instance of a Reserve Bank that has been established that has worked in the interests of the people. That they have worked in the interests of international financiers is perfectly obvious. If succeeding speakers or the Minister in reply could indicate one Central or Reserve Bank that has been established that has equated finance with the prosperity of reality he will have made at least one point in favour of this Bill.

In connection with this matter I would draw the attention of the House to the words of Mr. C. W. Armstrong, President of the Texas Steel Company. This gentleman says, “If the devil himself had sought to contrive a machine to absorb the wealth of the people of the world and subjugate them through their poverty, he could not have devised a more perfect one than the central reserve bank system.”

We have the authority of a number of leading industrialists and commercial men, financiers, diplomats, people in every walk of life, for condemning the central or reserve bank idea as thoroughly unsound and opposed to the interests, of the people—that is to say, central banks operated by private corporations.

Placing Our Monetary System Under International Control

We know definitely that there are proposals there is a school of thought on the matter —in favour of the handing over the control of monetary systems generally to either an imperial organisation or, preferably, to an international organisation. The argument is that the control of money should be international—that that is the only solution of our problems but the proposal includes the handing of the control to private corporations. We have on one side the Bank of England, a private corporation, and it is suggested, and there are a number of people toying with the idea, that it would be quite a satisfactory arrangement for the monetary systems of the Empire including this Dominion to be handed over to the Bank of England—handing over in that way the supreme power of Imperial Government to a private corporation. That is a danger which people have not fully grasped, but they are waking up to it.

An Honourable Member: Where does the Hon. Member find that?

Mr. Rushworth : It was propounded at Ottawa. That was one of the reasons for calling the Ottawa conference. That is only part of the main proposal. The world conference concentrated on it with the idea of amalgamating all the reserve banks in the world, and placing them under the direction of the Bank for International Settlements, with its headquarters at Basle. That was very nearly carried through. I believe that the principal reason for calling the World Conference was to bring into existence an international monetary system based on gold and controlled by the irresponsible directors of the Bank for International Settlements, and further that it was owing to a split in the upper regions of high finance that it was torpedoed.

There appear to be two groups struggling for supremacy—the Bleichroder-Mendelsohn groups and the Rothschilds group. They fell out. The Rothschild group having cornered gold had set the stage for setting up this international control, but at the last moment the BleichroderMendelsohn group made a dramatic move. Mr. Baruch, the representative of this latter group, was able to influence President Roosevelt at the psychological moment, and he refused to march to the tune arranged by the Rothschild group and so torpedoed the whole show. That was the only real reason I can find for the failure of the Conference. In my opinion that failure saved humanity from a terrible disaster. That is more or less by the way.

Danger of Foreign Financial Dictatorship

There is a definite movement to transfer the control of the monetary systems of the world to the control of a private junta, the directorate of the Bank for International Settlements, and if that scheme comes into operation, sooner or later the peoples of the present self-governing nations of the world will realise that they have lost, or have had filched from them, the supreme power of government, and that they have been subjected to a form of dictatorship from which there is only one escape and that is through a world-wide bloody revolution.

That is my opinion, and in my opinion the people of this country should be advised, their eyes should be opened to the danger which lies in the concentration of power such as proposed in that idea. The people of western civilisation have had enough experience to realise, as the Hon. Member for Dunedin West is reported to have stated recently in Canada, that self government is better than good government, and although the concentration of power in the international financiers control of the monetary systems of the world might for the time being make things a little better, inevitably and surely that power would be abused, as all history tells us it would, and when that abuse begins to be felt then the people of western civilisation will realise that the only method of escape is to regain their right of self government. Attempts to that end would be resisted and ultimately would turn into the avenue of revolution. The Bill differs in some material points from the Bill introduced last session. It is to the clauses that have been dropped that I have principally directed public attention, and it is on these matters that I have been

criticised by the Minister of Justice and the Minister of Finance. They are the very points that the Government has dropped.

Dangers in the Measure Every step that the Government taken has been suspicious, and has aroused suspicion. It could not be otherwise. There is a great deal of anxiety throughout the country, and I for one feel, as one of the national representatives, that I would not be doing my duty if I did not direct attention in the strongest possible terms to the dangers that may be inherent in this measure. The definite provision for tying our money to sterling is disturbing. Sterling, we all know, is controlled directly by the Bank of England. Lord Beaverbrook has been mentioned in this debate, and I would like to mention what he has to say on the subject. In his paper, the ’Daily Express,’ published in London on 13th April, 1932, he says : “The time is “long overdue for a reversal —and a “dramatic reversal—of the monetary “policy of Great Britain. The national need is for a steady expansion “of credit facilities. The . Bank of “England is the obstacle in the way “of that need, and because of its “vested powers it has imposed upon “the Government for ten years a “policy of deflation. In other words “the Bank of England, which owes “no responsibility to the electorate, “dictates the Government’s financial “policy. The system is definitely “wrong. It has played an enormous “part in bringing about the post-war “economic distress, and the men who “conducted the Bank’s affairs then “are still in charge. It is no use “tinkering with the question of re“form. The present situation should “be brought to an end. The Govern“ment must be master in its own “house ; the Government must dictate the nation’s monetary policy, “and the Bank of England must be “relegated to its rightful place as “the servant of the nation.”

Servant or Master? Is this proposed Bank going to be the servant of the nation, or is it going to be operated in the interests of the shareholders and foreign financiers. I know the Right Honorable Gentleman will tell us that the shareholders are limited in their profits to 5 percent. That is true. But the profits of a Bank of this description are a mere bagatelle. There are the reserves. The Bill says that the Bank is to make the customary reserves. What are the customary reserves made by banks? Nobody knows. They have never been publshed. There are the general reserves which are included in the balance sheet, but there are the secret reserves that are sometimes just mentioned in the balance sheet but the figures are never published. Nobody who has control of this Bank need worry about the chicken feed that could be derived from the payment of interest, or the setting up of reserves, however. Periodic deflations and inflations, so slight as to hardly attract general attention, could be brought about. What are called trade cycles, in fact. These are, I believe, deliberately engineered. Those who control the Bank can cause values to fluctuate, and, knowing beforehand, they can buy and sell. They can make enormous sums ; and sums they like. That has been done, and the Bill enables it to be done again in New Zealand. The people who control a bank can by the issue and retirement of money cause prices to fluctuate, and can make any amount of money by manipulating affairs in that way. Those are the points that require some explanation and a good deal of consideration. Movements that are taking place throughout the world for the people to recover their right of self-government in finance--a power that they have allowed to be usurped by private corporations—have caused a flutter in the dove cote, and there seems to be a desire by the usurpers to retire to a sort of Hindenburg line—a setting up of institutions still under private control but removed further back and protected by either express or implied contracts which succeeding Parliaments will find it exceedingly difficult to break. I wish to say here that it is fully realised that the Government has determined to steam-roller this Bill through. The Honorable Gentlemen have been counted and those in charge of the Bill know they have a majority and can do it. The Bill is being put through without the knowledge or the consent of the people of this country. That is t the position as I see it.

The Government has overstepped the bounds wherein party allegiances and affiliations exert an influence. The Government is striking at the very root of the order of society, and it is providing excellent precedents for any other future Socialist Government to follow.

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