8.—16.

which bills are being used, and to exclude from the benefit of the comparatively low discount rate any bills which do not answer to the test of desirability. Apart from the financial standing of the parties thereto, the principal essential of a first-class bill of exchange used for trade purposes is that it should be self liquidating ; that is, the proceeds of the goods against which it is drawn should be available for payment of the bill at maturity. So long as this condition is observed, the improper use of bills should be avoided and the establishment of a sound market should be facilitated. Although a bill market is a useful adjunct to the financial structure of any country where banking is widely established, it is undesirable to attempt to force the use of bills upon the trading community unless that means of financing transactions can be proved to offer advantages over alternative methods. In other words, a bill market could hardly be expected to exist for the benefit of the banking system unless the users of bills were satisfied that their requirements were being met by that means better than, or at least as well as, by any other form of accommodation. Trade bills are divisible into three classes —namely, those covering exports, imports, and domestic transactions respectively. In the case of export bills the question of exchange enters into the transaction, as the bills are ordinarily payable in another currency ; moreover, such bills are in practice remitted forthwith for acceptance overseas, and they cannot therefore form the nucleus of a local bill market. Import bills and inland bills, however, would ordinarily be payable in the Dominion. They might therefore be eligible for discounting at the Reserve Bank provided they complied with the statutory requirements of two or more " good signatures " —that is, if they bore the signatures of at least two parties either of whom might be regarded as undoubted for his engagement. In the normal course, holders of bills who wished to discount them might be expected to offer them first to their ordinary bankers. The rate of discount which the banker would charge would no doubt be influenced by the Reserve Bank's published discount rate and by the nature of the bills. If the endorsement of the discounting banker were necessary to make such bills eligible for discounting at the Reserve Bank, that fact would doubtless be taken into consideration in quoting a rate to the customer. If, however, the bills already bore two signatures which would be regarded as " good " by the Reserve Bank, they might be expected to command a rate not appreciably higher than the Reserve Bank's rate. Thus, although the Reserve Bank might not actually be discounting any bills, its rate should have the effect of determining the maximum rate which the public would be charged for eligible bills. Moreover, eligible bills held by trading bankers would provide one of the best means of their obtaining accommodation at the Reserve Bank in case of need. A bill market implies, of course, the existence not only of bills but also of a group of persons or corporations prepared to deal freely in them. Whilst such a market in New Zealand may be regarded as a highly desirable objective, its complete establishment does not appear to be capable of immediate realization. Nevertheless, the Board is of the opinion that all practicable steps should be taken to promote such a development, and that the proper use of bills should be encouraged as much as possible. In reducing the rate of discount to a level considerably below that quoted by the trading banks for overdrafts, one object of the Board was to create conditions in which producers, manufacturers, and merchants would have the opportunity of testing whether the balance of advantage for them lies in the use of bills discountable at a relatively low rate or in the more flexible overdraft at a higher rate. In recent years the use of Treasury bills has been extended very considerably in many countries, and it is not unusual for such instruments to form the major part of the contents of the portfolios of dealers in bills in those countries. Treasury bills provide a useful and economical means of financing expenditure of a temporary nature ; and the Board is of the opinion that recourse to this means of borrowing, if kept within reasonable bounds, would not only be convenient and economical for the State, but would in addition assist in the development of a bill market, thereby facilitating the control of credit in the Dominion. It is, however, considered that the issue of Treasury bills should ordinarily be restricted to such extent as is necessary to cover expenditure incurred during certain periods of the year in anticipation of revenue or other receipts to be received later, and to such further strictly limited amount only as can be kept outstanding without risk to the financial structure. Recourse to the issue of additional Treasury bills may become a practical necessity in certain circumstances, and it is therefore regarded as most desirable that latitude should ordinarily be allowed for an increased issue to meet aii emergency. London Funds. Although naturally fluctuating on account of the usual seasonal demands, the combined totals of the London funds held by the Reserve Bank and those shown in the monthly returns of the trading banks as held in respect of New Zealand business varied only slightly over the whole year. The figures (in New Zealand currency) shown as on the last Monday in March of each year were as follows

2—B. 16.

3

r, T, , Tiading Banks m * i Reserve Bank. (Nej . / igures) . Total. (000 omitted.) £ £ £ 25th March, 1935 .. 22,435 16,605 39,040 30th March, 1936 .. 24,830 14,143 38,973 -I £2,395 —£2,462 -£67