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Friday, 27 June 1930

Senator DALY - I understand that one section of the Opposition regards the bill as being another step towards the achievement of Labour's objective, the socialization of all the means of production, distribution and exchange. I can quite conceive that section arguing that, even if there is a doubt, it should be regarded -

.   . as a serpent's egg,

Which, hatch'd, would as his kind grow mischievous;

Andkill him in the shell.

There is another section of the Opposition which will regard the measure with a cautious eye, because of its, to them, hyper technical nature. I hope to be able to show in the course of my speech that there is no need for that fear. Already the Commonwealth Bank, in other words, the nation, controls 75 per cent. of the activities of a central reserve bank. The balance of 25 per cent. cannot be controlled by the nation because the national bank, in its present form, is a trading bank, and if private banks were forced to disclose the information necessary to enable such an institution to control all of the functions of a central bank it would be considered by modern parliamentary students as manifestly unfair. Before the bill reaches the conclusion of the second-reading stage, I feel confident support will be given to it by all sections of the Senate.

As set out in the preamble, the object of this measure is to maintain stability and security in the monetary and credit systems of the Commonwealth of Australia. This is a matter of common necessity to all sections of the community and to all parties in the Senate.

I may, perhaps, commence by briefly describing the functions which a central bank should carry out. The most important function of a central bank is so to control and stabilize credit and currency as to keep the financial position on as even a keel as possible at all times. In times of stress a central bank provides funds to the other banks, and thus enables them to continue making loans judiciously to their own customers, thus avoiding a further slump. Conversely, in times of overtrading and speculation, the central bank will withdraw money from the market by selling securities, and will also increase the rate at which it makes funds available to other banks, thereby applying the brake in time and avoiding boom conditions developing. The' concentration of reserves and the control of the money market, imperative for the mitigation and avoidance of financial crises, demand a central reserve bank organization. Such an organization standing behind the commercial banks is able, by the use of the reserves held, to bring support to any threatened point in the contingency of a crisis, and to avert loss of confidence, the continuance of which is necessary to maintain the stability of any credit system.

Amongst the particular functions of a central bank the following may perhaps be specially mentioned: -

(1)   to act as bankers to the Government, governmental bodies, other banks and investment houses, &c.

(2)   to control the note issue and be the sole note issuing authority.

(3)   to hold the reserves of other banks, both for the benefit of the country's banking organization and the protection of the public ;

(4)   to keep the country's foreign exchange on a sound and stable basis.

Having set out the particular functions of a central bank, let me now trace the history of the Commonwealth Bank of Australia in order to see the extent to which that institution has gradually developed central banking functions.

When the Commonwealth Bank was first created and commenced to function in 1912, it was merely an ordinary trading bank with a savings bank department attached. It continued to function in this way for some years. With the breaking out of the Great War in 1914, the Commonwealth Bank was immediately drawn into the maelstrom of war finance, and took the leading part in handling the Commonwealth war loans. From its inception the Commonwealth Bank had transacted the banking business of the Commonwealth Government; but during the war period it also gradually acquired the banking business of various State Governments as well as that of semigovernmental authorities, such as the city councils, boards of works, &c. Within a few years it had drawn to itself the majority of the larger governmental and semi-governmental accounts throughout the Commonwealth, thereby acquiring by natural evolution one of the particular functions of a central bank.

Its next step on this road was the taking over of the Australian note issue. Up to 1920 the Australian note issue had been conducted by the Commonwealth Treasury, not by the Commonwealth Bank. By that time, however, the Commonwealth Bank had secured the confidence of the public to such an extent that the act was amended in order to transfer to it the note issue functions. That was the bank's second big step on the road to central banking functions .

From 1924 onward the Commonwealth Bank gradually acquired its third central banking function, namely, that of becoming a bankers' bank. In that year there was a further amendment of the Commonwealth Bank Act, which provided that from a date to be proclaimed the other banks were to settle their exchanges by means of cheques on the Commonwealth Bank. This necessarily meant that each other bank had to open an account with the Commonwealth Bank at the various capital cities of the Commonwealth. To show the extent to which the other banks realized the necessity for some institution carrying out central banking functions, I mention that up to the present day no proclamation has been made under the section of the act referred to, as the other banks opened, and have continued to conduct, their . exchange settlement accounts with the Commonwealth Bank voluntarily. There .was no necessity for any proclamation. Indeed, the other banks have gone considerably further than was necessary, as they have kept with the Commonwealth Bank, not only sufficient funds to enable them to carry Out their exchange settlements, but also a large part of their own reserves which previously they had held in their own strongrooms in the form of gold or notes.

A publication recently issued by one of the banks - I think the National Bank of Australasia Limited - set out that the trading banks between them had on deposit with the Commonwealth Bank upwards of £13,000,000, thus clearly indicating the extent to which the other banks- are to-day using the Commonwealth Bank as a central banking institution.

Among the important functions of a central bank which I have mentioned there is only one other which has not yet been achieved by the Commonwealth Bank of Australia, namely, the keeping of the country's foreign exchange on a sound and stable basis. It is to some extent owing to this lack of control that our exchange with London and other centres of the world is at present largely disorganized.

Senator Thompson - A central reserve bank will not cure that.

Senator DALY - I must assume that the honorable senator has an open mind in connexion with the bill before the Senate. I, therefore, ask him to wait until I have finished speaking before he expresses adverse comment.

To enables central bank to keep proper control of the overseas exchange position, it is necessary that it should get periodical figures from other banks indicating the amount pf funds which they have available in London and foreign centres for the purpose of Australian overseas exchange. These figures have never been supplied to the Commonwealth Bank by the trading banks,- because the trading banks have naturally regarded the Commonwealth Bank as a potential competi tor for their overseas exchange business, and have therefore been' reluctant to disclose .their figures. It. follows, therefore, that each trading bank ' knows its own position, but has no idea qf the position of any other bank. Nor is there any central authority which can ascertain the aggregate, position. Had the Commonwealth Bank or any other central authority been in possession of such figures, the trend of the Australian overseas exchange position, would have been foreseen very much earlier than is possible under present ' conditions, and prompt and energetic, steps could have been taken to remedy the position.

From these remarks honorable senators will see that, although the Commonwealth Bank of Australia is at present carrying out, say, 75 ' per cent, of the functions of a full central1 reserve institution, it would hardly be right to amend the Commonwealth Bank Act in such a way as to give it the remaining 25 per cent., and force the other trading banks to supply their confidential internal .figures to the Commonwealth Bank, acting as a central institution, thereby also disclosing their position to another institution which, acting as a trading bank, might use the information thus obtained for competitive purposes. Therefore, it is proposed to transfer to the nation the outstanding 25 per cent, of the functions of a Commonwealth bank, but not to an institution in the capacity of a trading bank. It is proposed to divorce from the Commonwealth Bank its central banking functions, and then to transfer to the new body such functions together with the 25 per cent, functions which, at the present time, are the right and property of the private banking institutions.

I hope that I have clearly indicated that the present bill will not bring into being any new or radical banking machinery, but will merely confirm by legislation, practices and methods already largely in existence. At the same time, the opportunity is being taken to place the central banking functions - and central , banking functions only - on a sound basis, with the object of keeping both the local position and the overseas exchange position as sound and stable as possible at all times. The method by which the Government proposes to maintain stability is, therefore, by the creation of a properlyconstituted and fully-equipped central reserve bank.

It has been contended that the present time is inopportune for the introduction of a measure of this nature; but I submit that the time was never more opportune, for at the present moment the country is experiencing considerable economic and financial stress, and the prompt organization and use of the powers of a central bank can do much to ameliorate those conditions. Many of the countries of post-war Europe, when faced with difficult economic and financial conditions, under the advice of the best financial authorities of the world, promptly turned their attention to the creation of a central banking system to help themto overcome their difficulties. The experience in every case was that a wise and judicious use of central banking powers was, of inestimable assistance in obtaining monetary and financial relief and stability.

Under modern economic and financial conditions the banking system of a country is not complete without a properlyorganized central bank. The principle has been so fully recognized that central banks have now been created in 27 of the leading countries of the world, including practically all European countries, as well as in the United States of America, Japan, and even theRepublic of China.

Another great advantage of having a recognized central banking institution is that, in times of stress or crisis, it gives a definite leadership. Such an institution, being on a plane of its own and not in direct competition with the trading banks can always set a lead, whereas the other banks, if left to themselves, being competitors, are not likely to work in coordination and in the best interests of the community.

All banking and financial authorities have, for some time past, realized that an inherent weakness exists in the Australian banking system through the lack of aproperly organized central bank; and in an endeavour to meet this difficulty the Commonwealth Bank of Australia has, as I have indicated, attempted, to some extent, to carry out central banking functions during recent years. The constitution of the Commonwealth Bank, however, made it quite impossible for that institution fully and effectively to carry out such functions.Furthermore, the Commonwealth Bank, as originally created and envisaged by its founders, was not intended to carry out such functions; indeed, many of the provisions of the Commonwealth Bank Act are quite antagonistic to such an intention. The mere fact, however, of the endeavour of the Commonwealth Bank to carry out such functions, and the partial cooperation of the other trading banks, clearly indicates that the banking community realizes the imperative necessity of bringing into being a central banking organization.

In press comments on this bill the proposal has been made that, instead of creating a central reserve bank the Commonwealth Bank of Australia should be allowed gradually to evolve into a central reserve bank; but, as I have indicated, it is quite impossible for one institution effectually to carry out the functions of both a trading bank and a central reserve bank at the same time, because at times the policy of a central reserve bank and of a trading bank must of necessity be absolutely at variance.

We in Australia are handicapped to some extent in our financial operations owing to the fact that no true money market has developed similar to that' in many other large centres of the world. This is, to a considerable extent, due to the national habit of obtaining accommodation by way of overdrafts, instead of by way of discounting bills. This national habit, in turn, is almost entirely due to the fact that up to the present time no central institution has been in existence to rediscount such bills when they are of a satisfactory class. The creation of a central reserve bank will, therefore, be of inestimable value in the way of bringing into being a more elastic money market in Australia, thus facilitating all financial transactions.

Senator McLachlan - It will be harder on the man who wants an overdraft, because he will have to pay interest.

Senator DALY - We must look. at this matter, not from the point of view of the man who wants an overdraft, or even that of a bank which wants to retain its profits in connexion with overseas exchange, but from the point of view of the nation, irrespective of whether the national interest inconveniences individuals or sections of the people.

In other countries when banks desire to make advances to their customers, but are unable to do so from their own resources, they immediately go to the central bank and rediscount bills, and with the money thus obtained they continue to make advances. In Australia bills are not used as freely as in other countries, the national practice being to work on an overdraft instead of discounting bills. The banks in Australia would, therefore, not have bills to rediscount with the central bank; but exactly the same object can be achieved by their getting direct advances from the central bank, as authorized in the bill.

In drafting the bill which I am now bringing before the Senate, close and extensive study has been given to central banking systems throughout the world, in an endeavour to formulate a thoroughly sound and orthodox measure which will produce practical results, and at the same time be thoroughly applicable to Australian local conditions.

Although ordinarily, in a secondreading speech, matters which properly belong to the committee* stage are not dealt with in detail, in order that honorable senators may understand the system by which the Government intends the central bank to operate, I propose briefly to touch on some of the more important aspects of the measure, leaving the discussion of the details of the various clauses and sub-clauses until the committee stage.

Sections 8 and 9 set out respectively what the reserve bank may and may not do. Perhaps the more important of these is what the bank may not do, as this clearly defines the new institution as a true central reserve institution, not in any way a competitor with the trading banks. A perusal of these clauses will clearly indicate that the main intention is that the resources of the central bank shall be kept in a thoroughly liquid condition and not tied up in long-term advances. This is absolutely essential in order that the reserve bank may, at such times as are necessary, use its liquid resources in ameliorating conditions in times of temporary stress.

In aiming to keep complete liquidity of resources, which is one of the fundamental requisites of a central reserve bank, advances against fixed assets or unsecured advances should not be made, and it will be seen that provision has been made to this end. An exception has been made as regards advances to the Commonwealth or State Governments and governmental authorities and to other banks. I should like to point out to honorable senators that such advances, though nominally unsecured, will actually be very fully secured as government and governmental bodies can, at all times, issue their own stocks and debentures as security should such a course be desirable. Special provision has been made by a later clause of the bill by which debts due to the reserve bank by any other bank have priority. That in effect means that the whole of the assets of the borrowing bank become security for any advances made by the central bank. In its capacity as bankers to the Government and various governmental .authorities, the central bank will need to make temporary advances to those authorities from time to time, pending receipt of revenue and the issue of loans to the public. The practice of governmental authorities, such as the city councils of the capital cities, the Melbourne and Metropolitan Board of Works, the Sydney Water and Sewerage Board and other such bodies, is to finance themselves by an overdraft from their bank pending the receipt of their annual revenue. In addition to this they finance themselves by way of overdraft to provide money for capital works, pending the issue of loans. Honorable senators will readily appreciate that it would be bad finance for these bodies to raise a loan from the public before they began to spend the money, as that would mean that they would be paying interest on the whole amount of the loan before the money had been put to reproductive use. It is for this reason that the central reserve bank has been given power to make temporary advances to such bodies by way of overdraft.

Though the bill gives the central bank power to accept money on deposit the bank has no power to pay interest, and will thus not attract deposits away from the ordinary trading banks. The reserve bank will not do what may be described as "retail banking," but will have as its clientele the other banks and financial concerns such as trust companies and stock exchange firms.

Clause 10 makes definite provision for other banks to maintain reserves with the central institution and such reserves are set down as being 10 per cent, of a bank's demand liabilities and 3 per cent, of its time liabilities. In fixing these proportions reference has been made to the practice in other parts of the world. For the information of honorable senators I would mention that in the United States of America, perhaps the leading exponent of the central banking system, the proportion of reserves is fixed on a geographical ratio and ranges from 13 per cent, down to 7 per cent, on demand liabilities, and at all points is 3 per cent, on time deposits. In South Africa the respective ratios are 10 per cent, on call liabilities and 3 per cent, on time liabilities.

In order that there may be no misunderstanding as to the approximate amount of reserves to be lodged by the trading banks, including the trading department of the Commonwealth Bank, I quote the following figures for the information of honorable senators. They are based on the quarterly average returns of the banks for the quarter ended 31st March last. After allowing for government balances, which will be transferred to the central reserve bank, it is estimated that call deposits, on which the banks will have to lodge 10 per cent., will aggregate £104,702,000, whilst time deposits, on which only 3 per cent, will have to be lodged, will aggregate £188,004,000. The combined figures total £292,706,000, against which the banks will be called upon to lodge £16.110,320. This works out at only 5.5 per cent, of the total deposits held by the trading banks and as the trading banks at present hold aggregate reserves against such deposits to the extent of 15.5 it means that after lodging the necessary reserves with the central institution they will still continue to hold in their own possession approximately 10 per cent, of their reserve cash. That will be used for till money and other general purposes. This clearly indicates that the reserves which the banks will be called upon to lodge are by no means onerous, and it cannot be denied that great benefits will accrue, both to the banks and the general public, from the existence of a central institution. "Whilst dealing with- the reserves to be lodged by other banks I should like to touch on an inexplicable misconception of the position that has been widely disseminated through the public press and other sources. It is that the lodging of these reserves with the central institution will, to some extent, impair and reduce the capacity of the trading banks to lend to the public. This is quite incorrect; in fact the very reverse is the case. Banks must, as a matter of necessity, hold reserves against their liabilities to the public. Whether these reserves are held in their own vaults or by a central institution on their behalf makes no difference in regard to their power to lend to the public. Furthermore, where the reserves are held by a central institution, that institution can, as I have already indicated, make further funds, available to the trading banks for the purpose of advancing to the public. Instead, therefore, of impairing the power of the other banks to lend to the public, the creation of a central bank will increase their power tq do so.

It will be seen that sub-clause 3 of clause 11 provides that the banks shall furnish returns containing particulars of the state of their business in the United Kingdom and elsewhere. This is essential in order that the central reserve bank may be able to follow the overseas exchange situation and make all necessary provision to keep exchange on a stable basis. As I have mentioned it is one of the weaknesses of our present banking system that there is no authority who is able to keep in touch with the aggregate exchange position and ascertain its trend.

I now come to the proposals for the management of the" reserve bank. The capital of the bank not having been subscribed by shareholders there is no one who can definitely claim to be represented on the governing body. The Government recognizes, however, that the whole community is vitally interested, as also are the banks which are by law obliged to keep their reserves with the central institution. It is considered that the provisions laid down in the bill meet the necessities of the case and will result in a strong and effective governing body representative of all sections of the community and quite free of political control.

In passing, I may suggest that honorable senators will readily appreciate that in times of stress a central bank has, perhaps, to adopt a policy against the wishes and the temporary interests of the trading banks. Such a policy may be vitally necessary in the interests of the community as a whole though unpalatable to the trading banks and it therefore follows that any undue proportion of representation of the trading banks on the governing body of the central bank may be most embarrassing. From press comments which have come to my notice, it is observed that a fear is expressed that the constitution of the board of management of the central reserve bank is such that it may be subject to political influence, which admittedly would be most undesirable. However, I cannot see how that contention can be maintained. The method of appointment of the directors and the governor and deputy governors of the central reserve bank is on practically the same footing as that of the Commonwealth Bank of Australia, and it is generally admitted that the latter institution has been quite free from political control or influence of any kind. The appointment of the first directors for periods varying from one year to five years, thus having one only retiring each year, and the appointment of the governor and deputy governors for periods up to seven years, will place the directorate of the bank far beyond the reach of political influence, and should ensure the board being able to adopt and carry out a stable and consistent policy without regard to political parties.

Regarding the question that has " been raised by some critics as to whether the governor of the reserve bank should also be chairman of directors, the Governs ment is convinced ' that the principle (aid down, in the bill is the correct one.

The governor of the bank will be a tried banker of long experience, and with a comprehensive knowledge. of high. finance. If one of the outside directors were elected chairman of directors, and happened to be a man of strong character, he would inevitably assume some of the functions of management, which should properly be in the hands of a trained and experienced banker. "When the original Notes Board of the Commonwealth Bank of Australia was created, the then Governor of the bank, Sir Denison Miller, was, under the act, also, chairman of directors, and this arrangement worked admirably and without the slightest friction.

The note issue sections of the bill require no comment, as this is merely a transfer of the present powers of the Commonwealth Bank of Australia to the central reserve bank. This brings me to the portion of the bill dealing with the statutory reserves that the bank must hold to protect the note issue and its deposits. It will be seen that clause 50 divides the reserve into two separate parts, one of which is held against the note issue and the other against the bank's deposits and general liabilities. The reserve against the note issue is set at 25 per cent, of the amount of Australian notes in circulation, which is the present figure, and one that has been found over an experience of many years, to be an adequate reserve.

Turning to the reserve to be held by the bank against its deposits, it will be seen that a slightly different principle has been followed.' It is estimated that immediately the banks lodge a portion of their funds with the central reserve bank, and the government banking business is undertaken, the minimum amount which the reserve bank will hold on deposit will be in the vicinity of £20,000,000. In order to conform with the provisions of this bill it will be necessary, as I have already indicated, for the trading banks to lodge amounts of approximately £16,000,000 to £17,000,000, whilst government balances, &C., will readily make up the difference.

Before arriving at a decision in- regard to the reserves to he held by the bank the practice and laws of other countries were carefully studied. After full, consideration it was decided that the basis laid down in the hill was the one . most applicable to Australian local conditions, and at the same time would give proper elasticity to enable both the note issue and the bank's deposits to rise and fall according to seasonal and business conditions.

Sub-clauses 3, 4, arid 5 of the clause under review make provision as to the constitution of the reserve, which is to consist of at least 50 per cent, of gold, and the other 50%per cent, can be held in British Government securities and first-class trade bills that must not, however, have a currency of more than 120 days. Here again prevailing practices throughout the world have been closely studied, and; in a large number of cases, similar provisions exist. At least eight European countries, among which may be mentioned Italy, Sweden, Denmark, and Germany, provide for a portion of their respective Central Banks' reserves being held abroad in bills of exchange, &c, whilst the South African Act provides that 25 per cent, of the reserve may bo held outside the Union of South Africa. British Government securities and trade bills with a currency not exceeding 120 days, such as bills for export of our wool, wheat, and other products, can rapidly be turned into gold in London should the trend of circumstances make it desirable. Furthermore, the fact of reserves of this nature being held in London, gives the central bank an opportunity to build up large balances in London, either in gold or its equivalents, and by this means enables it to place itself in a position to meet a drain on London exchange balances such as that we have recently gone through, and are, in fact, still going through. This will perhaps be one of the most important functions that the reserve bank will be called upon to carry out for the benefit of the Australian community.

Clause 51 merely embodies in part in this bill the provisions laid down in the Commonwealth Bank Amendment Act which was passed by the Senate during the last session. It will be observed that the provisions that are embodied in that amendment giving the Treasurer of the Commonwealth power to prohibit the export of gold, .have been eliminated from this bill. At the time the amendment to the Commonwealth Bank Act went before -the Senate there was no properly constituted central reserve bank, and, in these circumstances, the Government thought it proper that they, through the Treasurer, should exercise some measure of control. However, with the creation of a central reserve bank, as provided in this bill, the Government is quite prepared to leave the full protection of the country's gold reserves in the hands of that institution, as is the usual practice in other countries, and to withdraw from any part in the control which they previously considered it desirable to exercise.

Coming to the general and miscellaneous provisions of the bill there is very little that needs comment as, broadly speaking, they are simply a repetition in this bill of clauses which previously were in other acts. In passing, however, I would draw attention to the fact that as with the Commonwealth Bank of Australia, half of the ordinary trading profits of the central reserve bank will be paid to the National Debt Sinking. Fund, though this provision will not take effect until the bank has built up accumulated profits to the extent of £2,000,000 in addition to its original capital fund.

In conclusion I would say, Mr. President, that though the whole central reserve banking subject is one that can be readily surrounded with high-sounding and abstruse technicalities I have endeavoured to give this House full information in plain and every day language, and I trust that I have made clear the Government's reasons for the introduction of this bill and the anticipated effect of the various clauses. There is no division of informed opinion as to the desirability of the creation of a properly constituted central reserve bank in the Commonwealth of Australia, and I venture' to claim that the bill now before the Senate lays down an absolutely sound and orthodox basis for such an institution. Its existence should do much to mitigate any financial or economic difficulties that may arise in the future, and will put Australia's banking legislation and organization in line with those of the leading countries of. the world.

Debate (on motion by Senator Sir George Pearce) adjourned.

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