MASSEY AGRICULTURAL COLLEGE

Manawatu Standard, Volume LIII, Issue 27, 29 December 1932, Page 10

MASSEY AGRICULTURAL COLLEGE

MONTHLY BULLETIN.

BANKING REFORM (By D. O. Williams, M.A.)

The introduction of the Bill to create a “Reserve Bank of N'ew Zealand’’ is an important event. Tho general desirability of establishing a Central Bank has gained wide acceptance in the last twelve months, although opinion is divided as to the wisdom of acting now. Opposition to the proposal has chiefly taken the line that a Central Bank can be of no immediate value in our present difficulties and ought therefore to be delayed until a more appropriate time. Others urge that the chief functions to be performed could be entrusted to a Currency and Exchange Board which could operate as a transitional institution during che next few years. These objections appear to overlook the facts that the creation of a Central Bank is not an emergency measure and that our banking evolution has already lagged a long way behind that of most civilised countries. A Central Bank will be of little immediate help in the crisis because of some years of experimental development must pass before it can.find its most effective mode of operation. An earlier start might have placed such an institution in a powerful position by now. It might have enabled it to share actively in that Imperial and international co-operation which is the object of Central Banks elsewhere. World reconstruction will place a growing emphasis on tho functions of Central Banks. The sooner we organise our banking on modern lines the better. In doing so we must not look for immediate miracles but for a future benefit. In all probability the crisis will be over long before the bank has passed the “teething stage”; but if we can evolve a sound institution by the time prosperity has returned we will have performed a notable thing. It is in prosperity that bad banking is both least apparent and most dangerous_ There is nothing in our present banking system which offers a reasonable protection from a repetition of past credit extravagance, and although a Central Bank may not at once achieve an adequate control it is better placed to undertake the experiment. CONTROL OF CREDIT.

The possibility of experimentation in credit control and the opportunity of linking up with Imperial and other Central Banks are two sound reasons why the Hon. Mr Downie Stewart’s Bill should receive our sympathetic attention. Another reason may be added. If the Bill is dropped now there is little chance of its re-appearance in more prosperous times. The fact of prosperity will be used as a weapon to kill the proposal. It will be argued that it is unnecessary since things are moving happily without it. Present supporters will secede because they will fear that a Central Bank would put a brake on credit expansion. And when the next crisis comes with, a new tale of inflationary recklessness it will again be urged that a Central Bank is valueless in the emergency. Tho time to reconstruct is now, when the need for it is evident.

A comprehensive comment on the chief clauses of the Bill is impossible in this short note There are one or two points of special importance, however, which require careful consideration before the Bill takes its final form. The first point is one of omission. There is nothing in the Bill to bring stock and station companies and similar concerns into direct relation with the Bill. It may be impossible at present to do this; but the possibility should not be neglected. Stock and station companies are in effect banking institutions of great importance. Bike the trading banks they have in the past played a great part in economic development. But, like the trading banks they have in the past shown themselves incapable of resisting the competitive pressure of inflationary finance. Banking coordination which excludes these institutions is incomplete, and may prove fatally incomplete. An assurance from the Minister of Finance that this aspect has not been overlooked or that it will receive consideration, would be helpful. The Bill provides that the rate of exchange shall be fixed by the bank within limits which are not to depart from sterling parity by more than thirty shillings for each hundred pounds. Having thus placed its first emphasis on sterling parity, tho Bill provides that this restriction shall not operate until the board of directors wishes to enforce it. In effect, the Bill first declares that exchange policy should be directed to tho attainment of parity with sterling but then leaves it to the board to choose the time. But that time may never come. No one can possibly know what the future rates of exchange aro going to be. What is to bo gained from insisting on a pa.r of exchange which subsequent events may provo to havo no contact with reality? To insist on parity with sterling is to pre-judge tho whole issue and is therefore unfair to the board. If the board is to be charged with tho full responsibility of exchange control, it should be freo to pursue its policy according to ideals of its own devising. Tho desirability or necessity of prescribing any limit to exchange vnriatdons before tho bank is founded and before the trend of exchango rates can be known must therefore be questioned. THE RESERVE. Tho clause which provides for the reserve requirements of tho bank will almost certainly come under freo discussion. A minimum reserve of 30 percent against note issue and other demand liabilities is provided for. These reserves may be reduced below the legal minimum by permission of the Minister of Finance and on payment of a tax which is so graduated that it increases as the reserve falls. In such circumstances tho bank is required also to raise its rate of discount by specified amounts. Tho important thing in the matter of reserve requirements is to give adequate security without making the system too rigid. With established Central Banks of sufficient standing these objoctivec could best be secured by leaving the whole matter to the bank itself. With a new bank, the quality of whoso management has yet to bo known, some legislative guidance

is probably wise. In the Bill under review tho requirements are not harsh and may serve well enough until experience suggests that modifications arc desirable.

The remaining point calling for consideration is the directorate. Tho board is to consist of a governor, deputygovernor and five other mombors. All aro to bo appointed in tho first place by tho Governor-General in Council; but at tho end of their initial term they will be elected by the sharehoders at a general meeting. Tho election of tho governor and deputy governor requires the approval of the GovernorGeneral in Council beforo it is valid. No provision is made for including a Government representative on tho board. Is it wise eventually to place all these appointments in tho hands of shareholders? Consideration should bo given to the suggestion that tho directorate should consist partly of clectod members and partly of members appointed by tho Governor-General in Council. This is not to suggest that the bank should be subjected to any political control in the conduct of its ordinary, business. But some Government representation on the board seems desirable. A more satisfactory directorate might result if it combined nominated and elected mombors and if the right to veto tho election of the chief officers were retained.

It is to bo hoped that differences of opinion over individual clauses will not succeed in slaying tho Bill. Its intention is sound and in line with modern banking developments elsewhere. The risk of imperfection is well worth encountering if the original structure of tho bank is understood to be provisional and experimental only. To foster this idea it is well to avoid too rigid a definition of function and powers and to allow room for internal adjustments as experience accumulates.