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1929-30.

THE PARLIAMENT OF THI~ COMMONWEALTH OF AIT TR LI .

THE SENATE.

REPORT FROM THE

SELECT COMMITTEE APPOINTED TO CONSIDER AND REPORT UPON THE

CENTRAL RESERVE BANK BILL TOGETHER WITH

MINUTES OF PROCEEDING~ OF THE COMMITTEE, MINUTES OF EVIDENCE, AND APPENDICES.

Brought up and ordered to be printed, 3rd Decernher, 1930.

t . ot given. 840 copies; approximate coat of printing and publishing, £84.) [Co•t of P aper.-Prepara ,on, n '

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EXTRACTS FROM THE JOURNALS OF THE A J.

THURSDAY, 10TH! JULY, 1930.

CENTRAL RESERVE BANK ~ILL.- Order of the Day read for the adjourned debate on the Que tion- Tha the Bili b now read a second time. Debate r esumed.

Senato~ ~ir William Glasgow moved- That the Bill be referred for consideration and report by a elect ommitt c cons1 tmg of Sen.ators Dooley, Dunn, Sir Hal Colebatch, La wson, Carroll , O' Hall oran, ampson and the mov r; that uch Committee have l'eave to send for persons, papers and records, and t o move fro m place t o plac ; and that the Committee report to the Senate on this day four weeks. Debate ensu ed.

(Debate interrupt,ed by precedence of Private Business under S essional O,·der.)

CENTRAL RESERVE BA K BILL.- Order of the Day r ead for t he adjourned debat e on the Ques tion-Tha t t h Bill be now r ead a second time-And on the follo - wing motion moved by Senator Sir William Glasgow, viz. - That the Bill be referred fo r consideration and report by a Select Committee consisting of Senators Dooley, Dunn, Sir Hal Colebatch, Lawson, arro ll ,

O'Hall ran, Sampson and the mover; that such Committee have leave to send for persons, papers and reco rds, and to move from place to place; and that the Co~mittee report to the Senate on this day fo ur weeks. Debate r e urned. Que tion- That the Bill b e r eferred for consideration and report by a Selec t Committee consisting of enator

Dooley, Dunn, Sir Hal Colebatch, L awson, Carroll, O'Halloran, Sampson, and t he mover ; that such Committee have leav t o send for persons, papers and records, and to move from place to place; and that the Committee r eport to the Senate on this day four weeks-put. The Senat divided-

Ayes, 14.

Scnator-arroll. hapman. olebatch, Sir H al. Cooper. Cox.

Senator­ McLachlan, Ogden . P earce, Sir George.

Plain. Thompson.

Gla gow, ir William. H J B T eller: aye , . . John ton. Senator Sampson.

And so it was resolved in the affirmative.

FRIDAY, 11TH JULY, 1930.

oes, 6. Senator­ Barnes . Daly.

Dooley. Hoare. Rae.

TeUer:

Senator Dunn.

BANK BILL---SELECT CoMMITTEE.-The Vice-Pres ident of t he Ex utive

MINISTERIAL STATEMENT : CENTRAL RESERVE d th S t e that for certain reasons the Government co uld Lake no CorLUcil (Sena tor Daly), by leave, mform_~t °£ tr ea Senate on the Cent ra l R eserve Bank Bill , an 1 bo~orahl part in the inquiry by th e s e;ect C~f;n-Ho::eo bad asked to be excused fr om attend ance on such omm1tte . Senator on the Government side of . d f S t r Dunn a letter aski ng to be excus d fr om

The President informed the Senat~ he had receive .rom ena o attending meetings of the Committee. D d O' Halloran be discharrred from attendance a

Senator Daly then moved- That Senators Dooley, unn, an ic,

members of such Committee. Question- put and passed.

WEDNESDAY, 16TH .JULY, 1930. .

· s· · W"ll' Gia

S t Sir William Glasgow brought up a Progr R por

SELECT COMMITTEE.- ena or .

CENTRAL RESERVE BANK BI~L. th Central R eserve Bank Bill-from the Select Committee on ~ d

and moved- That the Report be pnnte . d D I ) That consideration of the Question- put and passe . . "d t f the Executive Council (Senator a y - , . f the Vwe-Pres1 en o . .

Ordered, on the mot10n o D for the next day of s1ttmg. .

Report b e an Order of the ay

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THURSDAY, 7TH AUGUST, 1930.

CENTRAL RESERVE BANK BIL1r-SELECT CoMMITTEE.-The Order of the Day having been read fo r bringing up the Report of the Select Committee-Senator Sir William Glasgow moved- That the time for bringing up the Report be extended until the second Thursday after the first meeting of the Senate after the forthcoming extended adjournment. Debate ensued.

Ordered- That the debate be adjourned till a later hour of the day, and that Senator Lawson have leave to continue his speech on the resumption of the debate.

FRIDAY, 8TH AUGUST, 1930.

CENTRAL RESERVE BAi'l"K BrLir-SELECT CoMMITTEE.-Order of the Day r ead for the adjourned debate on the motion (by Senator Sir William Glasgow), viz.- That the time for bringing up the Report be extended until the second Thursday after the first meeting of the Senate after the forthcoming extended adjournment. Debate resumed. Question-put and passed. Arloption of Progress Report.-Order of the Day read for the consideration of the Progress Report of the Committee. Senator Lawson moved-That the Report be adopted.

Question-put and passed.

THURSDAY, 13TH NOVEMBER, 1930.

CENTRAL RESERVE BANK BrLir-SELECT CoMMITTEE.- The Order of the Day having been read for bringing up the Report of the Select Committee-Senator Sir William Glasgow moved-That the time for bringing up the Report be extended until Thursday, 27th November, 1930. Debate ensued. Question-put. The Senate divided-

Ayes, 23.

Senator-Carroll. Chapman. Colebatch, Sir Hal. Cooper. Cox. Duncan. Elliott, R. D. Glasgow, Sir William Greene. Guthrie. Hayes, J.B. Hays, H. Johnston.

Senator­ Lynch. Millen. New lands, Sir John. Ogden. Payne: Pearce, Sir George Plain. Reid. Thompson.

Teller:

Senator Sampson,

And so it was resolved in the affirmative.

Noes, 7. Senator­ Barnes. Daly.

Dooley. Hoare. O'Halloran. Rae.

Teller :

Senator Dunn.

MINUTES OF PROCEEDINGS.

PARLIAMENT HOUSE, CANBERRA. FRIDAY, 11TH JULY, 1930.

Present:

Senator Carroll. Senator Sir Hal Colebatch. I

Senator Sir William Glasgow. Senator Sampson.

T~e entries in the Jour~als of the Senate of Thursday, 10th July, 1930, recording proceedings in connexion with the appomtment of the Committee, were r ead by the Clerk. On the motion of Senator Carroll, Senator Sir William Glasgow was elected Chairman Committee delib erat ed. · ·

Ordered-That the Committee meet in Sydney on Saturday, 19th July, and following days, and in Melbourne on Monday, 28th July, and the following day.

Witnesses. - Ordered- That the follo wing persons be summoned to give evidence before the Committe Th Governor of the Commonwealth Bank, the Chairman of Directors of the Commonwealth Bank, tl1e General Manager of the Bank of New South Wales, the General Manager of the Commercial Banking Company of Sydney, the General Manager of the Queensland National Bank, the Chairman of the Associated Banks, Melbourne, and representatives

of the As o iated Chambers of Commerce. Order d further- That the Right Honorable the Treasurer be communicated with and requested to nominate an offic r of his Department to give evidence; also that the Australian Workers' Union and the Australian Labour party in Sydney and Melbourne be asked to send representatives to t ender evidence on behalf of those organization .

Finance.-Ordered-That the Chairman communicate with the President of the Senate, and ask him to obtain the Trea urer's approval of the provision of funds sufficient to cover the expenses of the Committee. Hour of M eeting.- Ordered-That the Committee meet during the following hours on days when the Senate does not sit :- 10 a.m. to 12.45 p.m., and 2.15 p.m. to 4 p.m.

Committee deliberated. Committee adjourned till 10 a .m. on Thursday, 17th July.

WEDNESDAY, 16TH JULY, 1930.

Senator Carroll. S nator Sir Hal Colebatch. enator Cox.

Present:

Senator Sir William Glasgow, in the Chair. Senator Lawson. Senator Sampson. Senator Thompson.

~~: ~~r~;e:e~i tt;e P::i;ufn ~t:ti~~;~:!/~~d;:Ja;~nNt~etly, recording the discharge of Senators Dooley,

Dunn and O'Halloran from attend~nce on the ~ommh!ttdee. b th S ate appointing Senators Cox and Thompson as The Clerk r eported the passmg of a motion t 1s ay Y e en

members of the Committee. Committee d·eliberated. d t · ·dence-The hairman of

Witnesses.- Ordered- That the following additional witnpessfes be sDumBmoC~pl:nr:etr: Deputy Governor of the . . . . · S d and in Melbourne · ro essor · · ' h p f f the W oolbrolang Association m Y ney, . . d B nk" C m any Limited, Brisbane ; and t e ro es or o ~Commonwealth Bank; the P ermanent Bmldmg an a mg O P Commerce, Adelaide University. ·tt ·th ference to correspondence that had taken

Finance.- The Chairman _made a statement to th; 3ioem~a::r:1 onr!he question of the provi_sion of funds for place between himself, the Pres1de~1t of the Senate, an h Chairman stated, the Treasurer had decided to grant the the Committee . As a result of this correspondence, t e expenses of the Secretary and a Reporter only.

Committee deliberated. . 1 t S d

Committee adjourned till 10 a.m on Fnday, 18th Ju y, a y ney.

COMMONWEALTH BANK BUILDING, SYDNEY. FRIDAY, 18TH JULY, 1930.

Present:

Senator Sir William Glasgow, in the Chair. Senator Sampson.

Senator Carroll. I Senator Thompson.

Senator Sir Hal Colebatch. Senator Cox. . d and confirmed. · ed

The Minutes of the previous meetmg whereC rea nwealth Bank, was called, sworn and examm . . . dl G or of t e ommo

Ernest Cooper Rid e, overn called sworn and examined.

Witness withdrew. . G 1 Manager of the Bank of New South Wales was ,

Alfred Charles Davidson, enera Witness withdrew. t morrow

Committee adjourned till 10 a.m. o- .

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SATURDAY, 19TH JULY, 1930.

Present.

Senator Sir William Glasgow, in the Chair.

enator Carroll . enator ir Hal Colebatch. enator Cox.

Senator Sampson. Senator Thompson.

The linutes of the previous meeting were read and confirmed. Lesli e Angwin Parker, Chi ef I nspector, Commercial Banking Company of examined. Witness withdrew.

Committee adjourned till 10 a.m. on Monday, 21 st July.

MO DAY, 2lsT JULY, 1930.

Present :

Senator Sir William Glasgow, in the Chair.

Sydney, was called, sworn, and

Senator Carroll. Senator Sir Hal Colebat ch. Senator Cox.

I

Senator Lawson. Senator Sampson. Senator Thompson.

The Minutes of the previous Meeting were r ead and confirmed. .

Hugh Traill Armitage, Deputy Governor of the Commonwealth Bank, was called, sworn, and exammed. Wit ness withdrew. Committee deliberated. Marmaduke Granville Haymen, General Manager of the Queensland National Bank, was called, sworn, and examined.

Wit ness withdrew. Commit tee deliberat ed. Committee adjourned till to-morrow at 10 a.m.

TUESDAY, 22ND JULY, 1930.

Present:

Senator Sir William Glasgow, in the Chair.

Senator Carroll. · Senator Sir Hal Colebatch. Senator Cox.

I

Senator Lawson. Senator Sampson. Senator Thompson.

The Minutes of the previous meeting were read and confirmed. Alfr ed Edward Bond, General Manager for Australia of the Australian Mercantile, Land and Finance Company, Limited, was call ed, sworn, and examined. Witness wit hdrew.

Ernest Cooper Riddle, Governor of the Commonwealth Bank, was re-called and further examined. Witness withdrew. Art hur Spencer Watts, Merchant, representing the Sydney Chamber of Commerce, was call ed, sworn, and examined.

Witness withdrew. Committee deliberated. Committee adjourned.

TEMPLE COURT, MELBOURNE.

enator Carroll. Senator Sir Hal Col ebatch. Senator Lawson .

MONDAY, 28TH JULY, 1930.

Present:

Senator Sir William Glasgow, in _the Chair. Senator Sampson. Senator Thompson.

The :Minute· of the previous meeting were read and confirmed. Committee deli berated. Charl es Herbert Tranter, Chairman of the Associated, Banks, Melbourne, was call ed, sworn, and examined. Ernest Henry Wreford , Chi ef Manager of the National Bank of Australasia, was called, sworn, and examined. George Daniel Healy, President of the Bank of Australa ia, was called, sworn, and examined. The witnesses withdrew. George Stanley Colman, Chairman of the Melbourne W oolbrokers' Ass ociation, was called, sworn, and examined. Witness wi thdrew. Edward Owen Giblin Shann, Professor of History and Economics, University of Perth, was called, made affirmation, apd was examined.

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Witness withdrew. Douglas Berry Copland Professor of Eco · u · ·

Witness withdrew. ' nomics, ruversity of Melbourne, was called,

Committee deliberated. ~~:~~: !~1.:e~~ffy, Secretary, Melbourne Trades Hall Council, was· called, sworn,

Committee deliberated. Committee adjourned till 9 a.m. to-morrow.

TUESDAY, 29TH JULY, 1930. Present:

Senator Sir William Glasgow in the Chair

Senator Sir Hal Colebatch. I ' Senator Thompson.

Senator Lawson.

worn, and examined.

nd examined.

RW~btert Be:11nhedt Lemmon, Treasurer of the Melbourne Chamber of Commerce, was called sworn and examined 1 ness wit rew. ' ' ·

The Minutes of the previous meeting were read and confirmed Committee deliberated. ·

Committee adjourned t ill a date to be fixed by the Chairman.

Senator Cox. Senator Lawson.

PARLIAMENT HOUSE, CANBERRA. TUESDAY, 5TH AUGUST, 1930. Present: Senator Sir William Glasgow, in the Chair.

I Senator Sampson.

The Minutes of the previous meeting were read and confirmed. The Chairman submitted a Draft Progress Report. Committee deli.berated. Draft Progress Report considered.

Paragraphs 1 to 10 read and agreed to. Resolved- on the motion of Senator Lawson-That the Progress Report be presented to the Senate by t he Chairman. Committee deliberated.

Committee adjourned till a date to be fixed by the Chairman.

WEDNESDAY, 30TH OCTOBER, 1930. Present: Senator Sir William Glasgow, in the Chair.

Senator Sir Hal Colebatch. \ Senator Sampson.

Senator Cox. Senator Thompson.

The Minutes of the previous ~eeting were r ead and confirmed. Committee deliberated. Committee adjourned till Wednesday, 12th November, at 4 p.m.

WEDNESDAY, 12TH NOVEMBER, 1930. Present: Senator Sir William Glasgow, in the Chair.

Senator Carroll. I Senator S~pson.

Senator Sir Hal Colebatch. Senator T ompson.

Senator Lawson. The Minutes of the previous meeting were read and confirmed. Committee deliberated. . . th S te to-morrow-That the time for bringing up the Report be

Resolved.-That the Chairman move m e ena extended for two weeks. Committee deliberated. Ch ·

Committee adjourned till a date to be fixed by the airman.

TUESDAY, 25TH NOVEMBER, 1930. Present: Senator Sir William Glasgow, in the Chair.

I

Senator Lawson.

Senator Carroll. Senator Sampson.

Senator Cox. Senator Thompson.

Senator Sir Hal Colebatch. d

The Minutes of the previous meeting were read and confirme . Committee deliberat~d. d hi dr ft port which was read by the Clerk. The Chairman submitte s a re

Committee deliberated. Committee adjourned till 10 a.m. to-morrow.

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Vlll

WEDNESDAY, 26TH NOVEMBER, 1930.

Present :

Senator Sir William Glasgow, in the _ Chair.

Senator Carroll. enator Cox. Senator Sir Hal Colebatch. The finutes of the previous meeting were read and confirmed. Committee deliberated.

Senator Lawson. Senator Sampson. Senator Thompson.

Committee adjourned till Wednesday, 3rd December, at 10 a.m.

WEDNESDAY, 3RD DECEMBER, 1930.

Present :

·Senator Sir William Glasgow, in the Chair.

Senator Carroll. Senator Cox. Senator Sir Hal Colebatch. I

The Minutes of the previous meeting were read and confirmed.

Senator Lawson. Senator Sampson. Senator Thompson.

Committee proceeded to the consideration of the Chairman's Draft Report. Paragraphs 1 to 49 r ead and agreed to. Paragraph 50 read and negatived. Senator Thompson moved-That the Draft Report, as submitted and amended, be the Report of the Co=ittee.

And the motion, having been seco,nded by Senator Lawson, was agreed to. Committee adjourned sine die .

. ·· .... - .

• .. ;I. •

REPORT . .

The Select Committee of the Senat . .

Reserve Bank Bill, has the honour to pres::f f 01~edS to consider and _ report upon the ntral 0 e enate the followmg report ._

1. A progress report was presented to the S .

August, on which latter date the time for b . . enate on 6th August and was adopted n t h se~ond Thursday after the first meetin of t~m§mg up th~ final r epo~t was extended "to th ad1ournment." g e enate on its resumpt10n after t he forthc minu

. 2. Your Committee has held further sittin s d h · ·

Bill and to the evidence submitted to it. g ' an as given mature consideration to the

3. In its progress report your Committee r ecommended th h advantage of the presence in Australia of Sir Otto N. d p fat t e Government take

£ them ~n opinion as to the lines on which the propos~~m~r~~ ~tou1l\:sso~ iretoJ toTs heek from or this recommendation was stated in the following terms:- es a is e . . e reason

It is felt that their exact knowledge of the operations of the Bank f E •

genera)ly, combined with the sound ·appreciation of Australian conditio~s w~~l~nd {tnd of Central Reserve ~ an.~ng on which they are now engaged, will give to their advice unrivall d 1 ic d w re~ult from _the mvest1gat10ns confidence of the banking, financial, commercial and industrial e va u~ :'1n au~hori_ty, assu~mg that complete i~~~~ft~~g of a Central Reserve Bank, and which alone could secure f~~:::~~:i e~;i~fs~e:~sr:tt~e;fodt~; u~~;!~i

. The importance of this r ecommendation was emphasized on behalf of the Committee id~ a sp~ech by ~enator Lawson (Hans.1.rd, pages 5,581 and 5,582), whereupon the Senate without 1scuss10n or dissent, adopted the report. '

4. Your Committee feels that it is in duty bound t o direct attention t o the fact that by the adopt10n of the p~ogress report, the recommendation of the Committee in this particular b~came a recommendat10n of the Senate. It was indeed the r eason given to and accepted without dissent by the Senate, for the adoption of the report. ·

5. ~n the circumstances your Committee regrets that the Government did not see :fit to comply with the re?orr:imendation. Your Committee further feels that the subsequent a t ion ?f the Government mcLicated a lack of courtesy not merely to t he Committee but to the enate itself.

6. Being desirous of proceeding wit h as little delay as possible to the completion of it report, your Committee·was anxious that the opinions of Sir Otto Niemeyer and Profes or Gregory should be made available as quickly as possible; and after waiting for nearly three weeks for an intimation from the Government, the Chairman of the Committee communicat d with the Acting Prime Minister on 27th August drawing his attention to the recommendation and a kinu

whether steps had been t aken in accordance with it. On the following day a reply ,va ent b the Secretary to the Prime Minister's Department intimating that the matter was beinu ubrnittecl to the Acting P rime Minister on that day_. No further communication ancl no reply of an kind has been received from the Acting Prime Minister.

7. After waiting another three weeks the Chai~man of your Co:n mittee wrote dir ct to Sir Otto Niemeyer informing him of the recommendat10n of the C~milllttee and_ of its desirn to secure his opinion on the Bill, and that of Pr~fessor Gregory, w:ho m the _ meantime had left for New Zealand. These opinions, with a covermg let~~r ~om ~rr Otto .... iem~y r, ,rnre handed to the Chairman on 27th October, after the return of Sir O to Niemeyer from :t\ew Zealand. The whole of the correspondence relating to this matter is attached to the report.

8. Your Committee- has felt it necessary to det ail these circumstances in order to mak clear the attitude of the Government towards a recommendation of tLe Senate involving no expenditure of money and direct e? merely to o~taining informati~n for the ~u~dance ~f the Senate in the consideration of the Bill. The delay m _ se?urmg the~.e reports made 1t 1mpra_ chcable to call the Committee together prio: to the reasse~b~ng of P arliament and thus necessitated a further extension of the time pernutted for the brmgmg up of the report.

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X

9. indicated in the second paragraph of t he progress report, your Committee feels that the matter submitted for its considerat ion can best be approached by inquiry and decision on three is ues-( a) Is the establishment of a Central Reserve Bank in Australia desirable ?

(b) I s the present t ime opportune fo r the establishment of such an institution? and (c) Is the Bill, as presented to the Senate, suitable t o the needs of Australia ?

10. Your Committee sees no reason to depart from t he tentative opinion expressed in its progress report regarding the first of these questions, and finds that a Central Reserve Bank would be likely to prove a valuable adjunct t o the fin ancial system of the Commonwealth, providing that it performed the recognized functions of Central Reserve Banking, and that it was assured, by its constitution, of freedom from polit ical or sectional control.

.

11. In regard to the second question your Committee would direct special attention to the closing paragraph of the memorandum submitted by Sir Otto Niemeyer:-

Whatever may be thought of the merits of t he t echnical arguments of one side or the other, I venture to suggest that the present moment, when Australia has to deal wit h serious :financial problems, is particularly unsuitable fo r making a change in the structure of a financial organ which, under great diffi culties , is dealing with an urgent position. To choose such a moment to t ransfer t hese diffi cult questions to a new and ent irely untried organization which, while open to technical criticism, woul d have no acquired status or practical experience to guide it, would seem exceedingly dangerous.

The very wide experience and high financial reputation of Sir Otto Niemeyer gives aut hority to this opinion. It is in accordance with the view expressed by practically all the witnesses who appeared before t he Committ ee and who were widely representative of banking, financial, and commercial · interests.

12. In coming to t he reasoned conclusion that much injury would result from the establishment of a Central Reserve Bank on t he lines proposed in the Bill , your Committee is influenced by its conviction t hat the clamant nee d of Australia to-day is a restoration of confidence at home and abroad in the fin ancial int egrity of the Commonwealth. The sister dominions of Canada and South Africa have recently placed loans on the American and London markets at interest rates of 4! per cent. and 4! per cent. respectively, both loans being largely over-subscribed. Quotations for New Zealand stocks indicat e that that dominion will have no difficulty in securing its loan requirement s at reasonable rat es whether for new money or fo r conversions. Your Committee is convinced that the relatively deplorable position of Australian stocks in LondQn, America and Australia is chiefly due to fe ar- not of the defi ciency

of Australian resources, but of unwise fin ancial manipulation calculat ed to imperil the interests of investors. Your Committee is further convince d t hat the establishment of a Central Reserve · Bank under polit ical control and designed in large measure to meet the supposed requirements of Governmental expenditure would confirm existing distrust and prevent t hat return of

confidence which is essent ial to the well-being of Australia.

13. In this connexion your Committee would appeal to the long view of national requirements. This you ng and sparsely populated country cannot be developed without the investment of capital fr om abroad in both public and privat e enterprises. A restoration of confidence is essential before such capital can be attracted. To ignore this essential is not merely

to delay a return to prosperous conditions · it is to imperil the very existence of Australia as a British, and a self-governing white community.

I

14. \¥hi.1st deprecating-for the reasons given-the establishment of a Central Reserve Bank on the lines suggested, your Committee fee ls that it is not relieved of the responsibility of considering the last of the t hree issues suggested in paragraph 9 of this report. Your Committee is strongly of opinion that t he Bill as presented is not suitable to the needs of Australia. The reasons for this opinion will indicate t he directions in which the Bill should be amended, before any attempt is made t o establish a Central Reserve Bank under its provisions.

15. In considering t hese points it is essential at the outset to arrive at a clear understanding as t o the purpo es a entral Reserve Bank is to serve. It is intended " to centralize, regulate, and protect the banking and currency reserves of a country."

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. . 16. Sir Ernest Harve D.

mvitation of the Corn y, t Hector of the Bank of n la

of local circumstances !o~:e: th Gove~nrnent in 1927 and h n of a Central Reserve 'Bank in o:~e of his ~eport lays down th a nn n,-,. +r,..J . irteen brief sentences a follow

( l) A central bank should possess the exclusive ri (2) A central b k · · ue.

an m its management and li h

control and the influence of politics. po c oul b fr fr m

(3) A ~~~:~::: should be entrusted with the entire bankin . bu in

(4

ce:ral bank should b~ the _banker of the t radin banks an . ng agent for clearmg differences between suc1 banks. D A central bank should n t d. ·1

banking business. o or many compete with the trading bank

(6)

f!~Mtfe:::\::z~~br:st!~!~ the public the provi ion of adequa

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

( 8 ) A central ban~ should quote publicly the rate at which it is pr ar

:ftt:::ndt bifll~t' and ·ts~ould publish at regular and frequent \nter o i s posi 10n.

(9) The assets of the central bank should be of the most liquid character

(10) A central bank should not draw or accept bills payable otherwis than on

(11) A central bank should not engae;e in a general exchang business on i account for the purpose of earnmg profits.

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(12) A _centra_l bank should not engage in trade nor have any inter est in any comm r ial mdusnal, or other undertaking. '

(13) A centr_al bank should have no branch outside its own country but may h agencies a broad. ' av

17. The main functions of a Central Reserve Bank in practice are to­

(a) Manage the note issues.

(b) Keep the other banks' current accounts for settlement of daily exchan banks, &c.

(cy Transact Government business.

b W 11

(d) Make advances to banks either on overdrawn account or by di count f ra bills held by banks by way of rediscount.

(e) Lend money to Governments, but in all cases all loans should be ofpur ly t mp rary . nature with date of repayment clearly specified.

18. In Kisch and Elkin's Central Banks (1930 edition), page 20, will be foun outline of the functions of a Central Reserve Bank and of the need for preserving t i and freedom to serve common rather than sectional intere ts:-The theory underlying the conception of a State Bank centres on the proposition that ince a wise c ntral banking policy is the basis of a sound national economic life, the bank should be und er: the control of he na ional Government. But the dangers of this cours~ a~e great .. Just be?au. ~ the_ deci ion of the bank react on v ry p ct of the economic activities of the country, it 1s essent~al that its _direct10n ..., hould be as unbia ed i humanly practicable, and as continuous as possible. But clearly if the Bank 1 under State control continuity of poli canno be guaranteed with changing Governm~nts nor can f~ e.e~om fro m political ~ias in its admin' trati n be a ur d. In most economically developed countries the probabilities . are that the . n3:t10n3:l governm ~t . will be the lar e ,t individual customer of the local money market. In such crrcum tances 1t 1s eV1dent that 1f it also ·on rol h administration of money market policy, i~ may easil~ find i~self in an eq~ vocal J_JO ition where it may b call up n to decide between two courses, one of which may be immediately converuent to 1t elf and the oth r c n ucive th ultimate jnterests of the country as a whole. The creation of such dilemmas should be avoided. In their r par in support of the Bill creating the Central Bank of Chile, the . Commission of Financial Advisers, under the pr iden · of Professor E.W. Kemmerer, pointed out that there was a widespread and pronounced four lest the succ of hP. bank should be wrecked by politics and undue Gov~r~ental influences, a fear which the p ast banking history of many ou h American countries has shown to be fully Justified.

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Xll

19. For convenience of reference your Committee ventures to repeat a further passage from the same authorit ies, which was quoted in its progress report :-There can be no question that the power of Government t o force increased loans from the Bank of France intensified the depreciation of the. franc and contributed to the :financial crisis that culminated in 1926. Such extreme abuses of Government power are of course only possible when a country has ceased to be on a gold basis. As long as convertibility is maintained the worst evils resulting from Government intervention in banking and currency control are avoided. Doubtless the Governments which have laboriously dragged themselves out of the morass of inflat ion will not readily slip back ; nevertheless if the control of the operations of the Central Reserve Bank lies directly or indirectly with the Government, it becomes fatally easy for the· Government to fin ance itself for the time by means of book entries, a course which is the first step towards currency inflation and inconvertibility.

20. Your Committee feels that the solemn warnings contained in these authoritative statements cannot be disregarded. Australia is no longer on the gold standard and consequently there would be no protection, under a system of Government control, against " ext reme abuses of Government power ". Commonwealth notes are not now convertible in the accepted meaning of the term and consequently the door would be open for " the worst evils resulting from Government intervention in banking and currency control". Incidentally, and as having some bearing on the question of the wisdom of immediately establishing a Central Reserve Bank as contemplated in t he Bill, your Committee would draw attention t o sub-clause (b) of clause 33, relating to the issue of notes :-

Australian notes . . . shall . . . (c) bear the promise of the Reserve Bank to redeem t he notes

in gold coin . . . on demand at the Head Office of the Reserve Bank.

This might well be regarded as an expression of cynical indifference t o existing circumstances .

21. Your Committee feels that as between the Central Reserve Bank contemplated by the Bill, and t he Central Reserve Banks established in most other countries there is a fundamental difference in the conception of the part that money has to play in the life of the communit y, and consequently an irreconcilable difference in the basic principles of the Bank's constitution. This

on the face of it is highly undesirable. Authorities on Central Reserve Banking are agreed as to the importance of progressive co-operation between Central Reserve Banks " as promising with the gradual rehabilitation of State :finances, a rich harvest of benefits t o national well-being and industry". Framed to meet the supposed purposes of an isolated Australian economy, a Central Reserve Bank would necessarily fail to bring any real benefit to the community-.

22. Your committee cannot accept the doctrine that money is either the creation or t he possession of Government. Money is t he civilized alternative t o barter, and on its wise employment the well-being of t he community must largely depend. Considered as an expedient of social economy it is a lubricant which gives free play to the joints of the body-to the cog-wheels in the mechanism of society. In it are expressed the prices of all goods and services, which prices, like a self-adjusting circulation of oil , keep the cog-wheels in play at a pressme nicely refl ecting the

variety of individual demands.

23. To the individual money is freedom. To the length of his income each is free to obtain his fellows ' services or to retain the right to

or holders, is age-old but incessantly new. Gold, though the best commodity money because of its durability and natural scarcity, is too scarce to be the only money of the world. A money that is too scarce means that as men grow more skilled to make and transporiJ things in plenty more and more goods are given for each unit . Prices fall and every active producer is discouraged.

24. The task of · expanding the money supply by steps parallel with the progress of skill and trade cannot he safely left tu n. number of competing banks. Their special kill is to extend credit , i.e., to bring together more and more folk who can trust one another to traue without the use of money. Banks spread this device of t rading by the transfer of rights to share in a stock of dep osited cash , a "reserve." The more successful they are in spreading this economy of money

the more buoyant do prices become. The cramp on trade is eased. The new confidence has, however, its own dangers. y overdoing it a cotmtry may get out of line with its neighbour ' price-levels, or the world of kade at large may e ' pand its credit-supply more rapidly than its delivery of goods and services. Communities who see this danger ahead fly in a mas t o a mood of fear and call for payment in money. Prices tumble and the whole task of building up the economical credit system must begin again.

xiii

25. During the p t t

the destruction wrou 1t~~ cen ury all c?untr~es ri in 1 di . h that follows the collatse of theJ:t fin;~cial crises, and abo e 11 or central reserve bank It cfre it : e most thorou D"h- ·oin , ·

f · s unc 10ns are (I) t I th pre erably on a par with th f th O {eel e oun r h . - ose o o ers, and (2\ t 1- f . pure as1ng power, as can be attained. i o wor ~ r a

. 28. The measure of a·ssistance tha~ a Central ~~serve Bank can give in a t im of c isi IS largely dependent on the strength of its own posit10n, on the r eserves it has b n 1 acc~ulate during periods of prosperity. This has an important bearing not onl u 0 p~h.cy that such a bank should follow, but also on the question of it s establishm nt dur · ct a crisis .. If establi_s~e.d at such a period it is imperative that the greatest car e should b take to avoid the possibility of further weakening the position. A Bank so established has nor s rv to contribute to the' common fund. It must depend on the reserves that have been ace ulat by other institutions. Your Committee is definitely of opinion that a Central Res rve B k established under the Bill would weaken instead of st rengthening t he financial posit ion.

29. It has been no part of your Committee's work to co~sider the provisio of h Commonwealth Bank Bill which was introduced to the House of R epr esentatives short ly ft the Central Reserve Bank Bill. At the same time sight has not been lost of the obviou int i n of treating the two Bills as part of a common policy. The passage of bot h he ills w ul render possible a wide extension of credit on the part of the Commonwealth Bank, in lvin the need for large assistance by the Central Reserve Bank. This assistance could · r d r only out of t _ he reserves deposited with the Central Reserve Bank by the private tradin The pursuance of such a policy might mean the complete disappearance of these reserv f 11 w by financial collapse.

30. Whilst recognizing these and ot)ier difficu~ties in the way .of es~ablish' g a Reserve Bank in time of crisis your Committee has given careful con~iderat10n t oo h r a«,,., .,-,.,.,.., of the question. During the Australian crises of 18.43 and 1866 and m ~893 th r w r expressions of expert opinion in fayour of the estabh~hment of a t ruly ~ational ba~ closely allied with those for wh1~h. Centr~l. Reserve Banks hav sm?e come many countries. In each case pohtic~l o;rnmon seems to ha_ve det ermmed that inopportune. · The crisis passed, and with it the recommendat10ns of the expert

31. Your Committee also has in mind the fact that in many r ecent J?Stances Banks have been established in time of crisis for the purpose of h~lpn:~g a ?Oun ry difficulties; and since there is no re.asona.ble assll!a:11-ce that Aus~raha will qmckly r. its present depression your Committee is of opm10n that Parliament i~ay w 11 n i advisableness of providing the structure for a C~ntral Reserve Bank along Imes t hat ha ....,. .,,, . .,.=,,,r1 effective in other countries. A bank so estabh~hed, t~ough byfir~a

1 sonff of lahckul odf c 1

ula

reserves it could not be expected to have much immediate bene cia e ect, s o e

XIV

a strengthening influence .. It is worthy ?f record that where Central Rese~ve Ba~s have ?een established in certain contrnental countnes to safeguard and render effective the rnternat10 nal assistance afforded to those countries, the control of such banks has been removed entirely from the people of the country concerned. The bank has in fact been imposed upon the country by out ide finance and controll ed accordingly. Australia is free to erect, of its own volition, a Central Reserve Bank whose constitution would inspire confidence in any intending investor in Australian securities or Australian industries .

32. In an appendix to this Report will be found a comparison of the constitutions and powers of Central R eserve Banks in no less than thirty countries. No attempt has been made to compare details of the laws, charters and statutes regulating these banks, but the appendix deals comprehensively with four essential points :- (1) ownership; (2) management and control;

(3) the powers of the banks to lend money to Governments or to authorities subordinate to Governments; and (4) the amount and nature of the reserve each bank has t o maintain against its note issue. It will be seen that the predominant form of ownership is by individuals or legal persons. There are in all sixteen of these shareholder banks. Then there are nine Central Reserve Banks owned partly by the Stat e and partly by shareholders. The purely State banks are confined to only five, those of Bulgaria, Finland, Latvia, Russia and Sweden.

33. The control, or management of Central Reserve Banks in other countries follows the ownership. Even in banks entirely owned by shareholders there is some measure of Governmental influence, whilst in all cases of banks owned partly by the Government and partly by shareholders the latter influence predominates in the selection of the board of management.

34. In the matter of the power of Central Reserve Banks to assist in the financing of Governments it will be seen that of the whole 30 there is not one that is permitted

(as contemplated in the Bill now beforn the Senate) to make unsecured .advances without limit of amount or time, even to the Central Government. The State Bank of the Russian Socialist Federal Soviet Republic, whilst purely a State organization, is strictly limited in its powers to make loans to the Commissariat of Finance, and all such loans made in bank notes must be covered as to 50 pet cent. by precious metals and as to the balance by interest-bearing bonds. Each of the other State banks is so constituted as to secure its independence from political control.

35. It will be seen that the minimum reserve to be held against notes is generally much higher than the 25 per cent. provided in existing Australian legislation and contemplated in the Bill.

36. It is worthy of note that the Labour Report on Currency, Banking and Credit recently tabled in the British Parliament accepted the principle of co-operation between Central Banks, whilst the Prime Minister (Mr. Ramsay MacDonald) and the Chancellor of the Exchequer (Mr. Philip Snowden) emphasized the conviction that the control of credit and currency must be kept free from political influence (s ee Fortnightly R eview, February 1, 1929, page 248).

37. Your Committee ·would most strongly urge that any Central Bank established in Australia should be on such lines as will permit of easy co-operation with similar institutions in other countries. There is good reason to hope that some relief from existing world causes of depression may be devised by the Financial Committee of the League of Nations, whose second report is promised early next year. If so, it is through Central Reserve Banks that this relief

will be rendered. In such circumst ances a bank subject to violent alterations of policy with each change of Government, and possessing unlimited powers of making unsecured advances to Governments, would not be ·regarded as an efficient instrument of Central Reserve Banking. The experience of other countries that have received international assistance strongly suggests that Australia would not be helped under such conditions.

38. The evidence submitted with this report sets out in some detail the guiding principles of Central Banking Legislation in other countries . The memorandum by Professor T. E. Gregory is particularly valuable from this point of view. He indicates the guidance at the disposal of Australia in the form of the experience gained elsewhere during the last decade, and emphasizes the two primary functions of a Central Reserve Bank so important as to swamp all other considerations-

( a) To secure fin ancial stability at home; and (b) To secure parity of the local currency with the international gold standard.

xv

39 .. y ?ur _Committee, after an exhaustive s ud defects existmg m the Bill can most conveniently b e di 1. Ownership ; 2. Management ; and

3. Powers.

. 40. Ownership: The arguments against exclusive ~-tate owner hi h 1

reviewed and s~e1T1. t.o ~e u~a:1-swerable. At the same time t here i abundant~ an f r: ., the close relat10ns~ip m wmch a Central Reserve Bank must tand to th , rnm n a

h

conseq.uent. necessity for ~o~e measury of Governmental influenc in it c n n ' ...

Committee is str ongly of opm10n that the bank should be owned bv har h ld r · 1 · · ~IT

Govern11:1-ent, and that the shareholdings should b e so controlled as " t o pr J nt th· m 1 ~ m r-­

any ~ecti~m ~he~her Government or otherwise. Your Committee sees no r a on wh ~m, ~iY bankmg mstitut10ns as such should b e included amongst the sharehold rs. "

. 41. Your Co~mittee sugges~s t hat t h~ Government holding cshould be ~hi~d. of the t~tal ,. pn:'ate subscnpt 10ns covermg the remaining two-thirds. 'Ih mdividual or u~~titut10n shoul~ be strictly lirr;ii~ ed. The pro:6.t to be derived y shar h l r from the operl:t10ns of the b anK s?ou]d at no time exceed a percentage laid d n in h

Profit makmg rn not a proper funct10n of a 9entral R es~rv~ Ba? k, and even the maximum of p fit all_ owed to shareholders ~hould not be available for distribut ion until a determined p r nt · of r~seryes _to share capital has been accum~lated. The b uilding up of an ad quat r r f r service m time of stress should be the first aim of the b ank. Over · and above this shar h 1 profits should be strictly limited, and any further balance should be the propert f

Commonwealth. No pront should accrue to shareholders out of the note issue.

42. Management:' Management should follow ownership, in like proportion, on hir of the total number of directors being nominated by the Government and two thirds elect d the shareholder ~. The directors should be elected fo r a suffi ciently long period to mak it unnecessary for them to consider the pr obable p opularity or otherwise of their actions, nd th likely effect of such actions on their chance of re-elect ion. Their removal from office h ul

be made difficult.

43. Powers: Your Committee feels that nothing need be added to t he compr h n iv statement of the powers and functions of a Central Reser ve Bank as set out by Sir Ernest ar y in paragraph 16 of this report. That they differ fundamentally from the powers contempl in the Bill is obvious. The Bill would empower the Bank to make unsecured loans or advances,

without limit of time or amount to " the Government of t he Commonwealth or a ~ tate, or any authority constituted under the law of the Co~monwealth_ or of an . ta , or _ n

corporation carrying on the business of banking" _. ~ our Committee regards .1~ as be on1d c n question that the exercis.e of suc1: power woul~ mev1tably d~stroy t~e stab1~1t o_f n r 1 Reserve Bank and render 1t utterly impotent to discharge the primary obJects of its exi ten

44. It will be seen that in regard to the three essent ial t eat~r~s of ?wne:ship, man g . . and powers the Bill requires comp~ete alteration in ord:r to brmg it mto lme with the . on l 1 1 n of the Committee based on the evidence presented to it.

45 . Other important alterations considered desirable by the Committee may b

indicated :--­ (a)

XVI

46. Many other amendments of a minor or consequential character will be recommended by your Committee.

47. In emphasizing the opinion expressed in its progress report that there is nothing to justify hasty action in the establishment of a Central Reserve Bank, and that such a bank formed on other than completely sound lines would be a source of weakness rather than of strength, your Committee desires to point out that the Commonwealth Bank is at present carrying out the more essential functions of a Central Reserve Bank. It is the banker to the Government, it controls the note issue, and-jointly with the Treasury-the export of gold. It is the clearing house for the other banks, and holds their cash reserves. By arrangement with the private banks it fixes the general rate of foreign exchange. These functions the Commonwealth Bank should

continue to discharge, without political or other pressure or interference, until a Central Reserve Bank can be established in conformity with the constitution of similar organizations in other countries.

48. Whilst an attempt has been made in this report to indicate the salient points of the evidence submitted, your Committee desires to commend to the Senate a close consideration of that evidence. Every effort was made by the Committee to secure an expression of all points of view. A general invitation was extended through the press in Sydney and Melbourne to persons desirous of giving evidence, and in addition special invitations were directed to banking,. financial , commercial, industrial, and labour interests. Reference has been made to the memoranda supplied by visiting authorities, and evidence was also furnished by professional economists of the highest standing. The Committee feels that the evidence constitutes an important addition to the existing literature on Central Reserve Banking.

49. Consistent with the opinions outlined in this report, your Committee is arranging for the preparation of detailed amendments to the Bill, and these will be presented to the Senate as soon as they are available.

Senate Committee Room, 3rd. December, 1930.

T. W. GLASGOW, Chairman.

xvii

APPEND IX " A ".

COPY OF T1ELEGRAM RECEIVED BY THE ACTING PRil\ 1 J GLASGOW, CHAIRMAN, SELECT COMMITTEE ,r~~~fSTER, CANBERRA, FRO:lf IR WILLIAN QUEENSLAND, DATED 27TH AUGUST, 1930_ ' . AL RESERVE BANK BILL, B \YE.', P~esume Leader of Senate has submitted to G ·Bank Bill. I d esire invite attention of Gov, ~vtrnment report . of Select Committee on cntral Re. rv

and Professor Gregory be obtained and inquire w~:~:n t o re?~=b enldat10n tha_t opinion of ir tto ~riem r s eps w1 e ta rnn to obtam those opinions.

T. w. GL.\SGOW.

COPY OF TELEGRAM RECEI VED BY THE ACTING PRil\ r GLASGOW,. CHAIRMAN, SELECT COMMITTEE ·i~:~~.t-zE:E~ANBERRA, FROM IR WILLLLII QUEENSLAND, DATED 27TH AUGUST, 1930_ ' ERVE BA K BILL, IA 'l AY,

d P WEith reGference mby tSelegram evidence given before Select Committee can be made available to S" 0 an ro es8or r egory y ecretary of Committee with whom I have communicated. ir tto Tiemeyer T. W. GLASGOW, Chairman Select Committee.

COPY OF TELEGRAM ADDRESSED TO SENATOR SIR WILLIAM GLASGOW MACKA y QUEE LA m BY THE SECRETARY, PRIME MINISTER'S DEPARTMENT, ON THE 28~H AUGUST, 1930. ' . You1: telegrams _27th ~eceive~ _r elat~ve report Select Committee Central Reserve Bank Bill. Question raised bemg submitted to Actmg Prime Muuster m Melbourne where be returns from Sydney to-day.

COPY OF LETTER TO SIR OTTO NIEMEYER FROM SIR WILLIAM GLASGOW, CHAlRMA , SELECT COMMITTEE, CENTRAL RESERVE BANK BILL.

Commonwealth of Australia.

DEAR Srn OTTO,

The Senate, 15th September, 1930.

As you are aware, the Select Committee of the Senate, appointed to consider and report upon the Central Reserve Bank Bill, made a progress report, which was presented to the Senate just prior to the atljournm t of Parliament. In that report the Committee strongly recommended that the Government should obtain from your elf and Professor Gregory, an opinion as to the lines on which the proposed Central R eserve Bank should be established.

ot having heard from the Government, whether or not they intended taking action in accordance with the Select Committee's Report, I t elegraphed to the Acting Prime Minister, asking him if the Government wa · going to carry out the r ecommendation. The telegram was acknowledged by the Secretary to the Prime l\1inister' s Department, but no answer to it has reached me.

Before completing their r eport, the Committee, as set out in the Progress R eport, are desirous of having your views and those of Professor Gregory. I would, therefor e, ask if you would prepare, for the information of t he Committee, a report in accordance with

its recommendations. Yours faithfully,

T. W. GLASGOW, Chairman,

Select Committee of the Senate on the Central Reserve Bank Bill.

Sir Otto Niemeyer, K.C.B.

COPY OF LE'£TER TO SIR WILLIAM GLASGOW, CHAIRMAN, SELECT COMMITTEE, CENTRAL RE ER E BANK BILL, FROM SIR OTTO NIEMEYER. C/ o Oommonwealth Bank of Australia, ydney. 27th October, 1930.

DEAR Sm WILLIAM GLASGOW, t Chai man of the Select Committee appointed by the Commonwealth enate In accordance with your reques l? ~s t ~f a Central R eserve Bank for the Commonwealth, I enclose some to repor~ upon the ~ill for the es~·~f ~: a~:e I have had occasion in the last ten years both as Controller of Finance observati?1:1s on the Bill. As.you " 1 . with'the LeaQ"Ue of Nations, to study the Statutes of Central Banks at horn at the British Trea~ury, ~nd 111 co~nefwnd t" al ap"plications. and it is on the ground of that experi ence that I and abroad both m their theoretica an prac IC li ' Bill

com 1 with ,our request for observations On the present Austra an · . .

p y J · d m on the same subject which has been written mdependently by

I also enclose a more detailed nkiemor'.1nC u O 1 Professor of Banki~g at L ondon University. I nm in gen ral Professor T. E. Gregory, who as 7ou. now is as.,e agreement with Professor Gregory s views. Yours very truly,

0. E. IEMEYER.

Sir William Glasgow. F.3395.-2

XVlll

OB ER ATIONS ON THE CENTRAL RESER E BANK BILL (1930).

1. The object of the entral Re erve Bank Bill are pre umably to provide Australia with a Reserve Bank analogous to the Reserve Banks of other countries and capable of rendering similar services to the Commonwealth, and thus to improve the :financial machinery of Australia, with a view to the maintenance and stability of credit, internally and externally.

The experience of practically all :financially important countries, as embodied in the legislation governing their Reserve Bank Statutes, has shown that to secure these objects it is vitally important to protect the Reserve Bank, in the exercise of its difficult technical function , from political pressure. Obviou ly every R eserve Bank must be. the servant of the community; but it ha not been found that in thi particular sphere the best and mo t eff ective service to the community is given by a State controlled institution. In order to secure the independence of the Reserve Bank, in practically every country in the world the capital of the Bank is provided in whole or part by private shareholders, with whom (under the necessary safeguards) rests the appointment of the Directors or at least of a majority of the Directors. The reason for such provisions is not to secure to private individuals the profits of the Bank (and indeed their dividends are very u ually limited by Statute and the voting rights of any individual shareholder are restricted) ; but that experience has shown that the existence of private shareholders is the best safeguard from the dangers of political interference, particularly as to the appointment of Directors.

This aspect of Reserve Bank theory bas acquired added importance in recent years from the emergence of a number of monetary problems which involve international relationships and can only be d alt with by international co-operation between the various Reserve Banks of the world. Many of these problems, particularly those relating to world prices, are of especial importance to Australia.

If Australia is to obtain the greatest possible advantage from Central Banking co-operation, it would seem wise for her to place her Reserve Bank on the same plane as the other Reserve Banks with which it has to co-operate.

If, for domestic reasons, it is not desired in Australia to conform to the practice and experience of other c;ountries, it becomes all . the more important to secure the independence of the Reserve Bank by every other means.

I can see little in the provisions of the present Bill, as compared with existing Australian legislation, which secures this vital object. The proposed Directorate of the Bank, all of whom are appointed by the Government, will consist of nine, or possibly fewer, persons of whom not less than four will be in effect public officials, dependent for their position and prospects on the Government. The predominance of this official element is even more marked in the proposed Executive Committee, and in the fact that the Governor (so appointed) is also to be Chairman of the Board.

On this fundamental issue the present Bill, so far from being an advance towards the general practice of Reserve Bank legislation, is even less satisfactory than the existing legislation.

2. There are other points on which the Bill appears to be unsatisfactory. It is not necessary to enumerate them all, and I will only refer to the more important-(1) It is quite unusual for a Reserve Bank to pay interest on Government accounts, as appears to be allowed by Section 9 ( e) of the Bill.

(2) It is unsound and inconsistent with the function of holding the central reserve against emergencies for a Reserve Bank to make unsecured loans and advances of any kind, but this seems to be pe:rmitted by Section 9 (g) of the Bill in a considerable number of cases.

(3) The obligation to cash notes in gold coin in Australia (S ection 33 (1) ) neither corresponds to present practice nor is it desirable in it elf. It is likely to prove very embarrassing and expensive to Australia, and is quite unnecessary in modern monetary theory and practice.

(4) The provisions with regard to minimum reserves (S ection 50) are likely to prove unnecessarily rigid. Though some Central Bank Statutes provide for a reserve against deposits as distinct from notes, that has not hitherto been the practice in Australia any more than in the United Kingdom, and there is little reason for the cbange. The effect of including deposits as well as notes in the min,f,mum r eserve provisions is to increase the aggregate amount which the Bank must by Statute

hold in its reserves, and tends to encourage an unnecessary locking up of gold in reserves.

Further, it i not desirable that the location of the reserve and the proportions of the various constituents of the reserve should be restricted by Statute, as is done in Section 50 (4) and (5). The Bank should have full discretion to hold its r erve in the proportions and in the place where it is of most service to Australia.

3. W.hatever may be thought of the merit of the technical arguments of one side or the other, I venture to suggest that the pre ent moment, when Australia has to deal with serious fin ancial problems, is particularly un uitable for making a change in the structure of a financial organ which, under great difficultie , i dealing with an urgent position. To choo e such a moment to transfer these difficult qu stion to a new and entirely untried organization, which while open to technical criticism would have no acquired tatu or practical experience to guide it, would eem exceedingly dangerou .

O.E.N.

XIX

MEMORANDUM RELATING TO T SPECIAL REFERENCE TO T~~ J:tto~IZEuDATION AND F B.Sc. (EcoN. ). RESERVE BA

2. ~he process of classification has been much assist ed b th . · . . . .

world outside Europe. Unt il the establishment of the F d 1 R y e Sgrowth_ of Cent~al Bankma m itut10 m th stability of the world's financial arrano-ements r est ed up~n e;a es~rve·i/stem~n 1913, it was ~rue to ay that ul ima and th as o ,iation of the money m:rkets of the p. rimary wp::a1~ p1 ars- tt· e ge~e hralEadopt10n of the g ld tand r t · r d th t t h E C ucmg coun n es wit urope and this in tl 1

resor , imp ie a , e uropean entral Banks (and particularly the Bank f E 1 d) -h .'

1 a

monetary conditions all over the world. This traditional ~uzerai:O.ty h o . ng an wer e t e guardian o~ . u~

. 3: Two consequence_s follow. First, when~ver_ it is proposed to establish a new Central Bank, or O m dif an exist_mg on , less room is left for d~mbt and hesitat10n a? to what form the institution should take, and with wh t powe~s it should be endowed. The wider_ t~e area over which Central Banks already exist, the less r oom th re i for experiment and the less excuse for deviatmg from commo~y accepted models. Secondly, the fact that xi tin banks conf~rm to _a more or less co11:1-mon pattern, and funct10n successfully only when that pat t ern is not d parted irom too widely, m?reases th_e certamty that_ the de f acto scheme of Central Banking ha cientific validity in the sen ~ that the expe:ien~es ':hich th'.1 t scheme mcorporates are o~ s'.1-ch gen~ral significance that t o neglect th min th frammg of n ew legislat10n is to heighten the chances of committmg avoidable errors. Thus the events of th la t de?ade c_onfirm both the desirability o~ mainta_ining a Central Bank in Australia, and the expediency, in doina bemg gmded by the accumula.ted experience gamed by other countries.

4. The two primary functions of a Central Bank-functions so import.ant as to swamp all other consideration -are to secure financial stability at home, and parity of the local currency with the international gold standard. Th concentration of the gold reserve in its hands, its monopoly of the note issue, its right t o hold the depo it of t h Government and the clearing and r eserve balances of the trading banks, its discount and investment powers, ar n t ends in themselves, but means by which these two great ends of any Central Bank are to be achieved. If a entral Bank is to satisfy the requirements imposed upon it in these r espects, it must not be hampered, either by a con titution which prejudices its ability to act, or by being given tasks which either dive.rt its energies or distort i · policy.

Central Bank should not ask for powers wider than those n ecessary for the control of credit a nd , change, and should not be content with less. All the elements of the Central Banking situation-owner hip, note is u , di count investments, res e.rves, deposits, disposition of profits-should be judged from one standpoint , and one standpoi nt alone-how they impinge upon the Bank's ability· to control cr edit and exchange conditions.

5. In considering the establishment of a n ew bank, or t~e modific'.1tion of an ex_i~ting one, ~he lem n ?f the situation most likely to give rise to diffi culties are the scope of its operat10ns, the provis~on_ of capital, own r hip an government, and the location, nature and amount of the r eserve _to be kept .. As alr_eady ms1sted upo~, a nt~ l _ nk must be given the right to discount and to make advances, but it becomes 1mperat1ve to define Wlthin what lm11 operations under these heads should be confined-

( a) It is axiomatic that there are certain kinds of lendi~g operation which are no_t witrun th . Central Bank such as direct loans upon the secunty of r eal property. But m newer ountr1 , a highly org~nized money market does not exis~, and . where therefore ~hort-t rm lo investments of the most liquid kind are not so easily obtama?le as they _a:e m ~he older an m?re advanced areas, the t emptation to allow a Central B~nk_ the r1_gbt to participate m yp of l nding

Ii "d than loans upon land and yet not a hqmd as mvestments or advances up n 11 more qui ' b · · · · · di · dated bills, becomes very great, especially at times when pu he opm10~ 1~ P! JU c aaam commercial banks or when the supply of credit_ to would-be borrowers 1 lilllt d. mand arise that the circle of customers should be w~dened: ~h~t the Ba:1k sh~~l~ b allo w do a

· 1 b nl 1 ·ng busi·ness and that the aap m the ex1stmg finan01al fac1htie houl fi ll commercia a c 9 . . · h d t t" th Central Bank with some specialized ta k alien to its central purpo e. u man en r~s mg e ·nee they may easily lead to a situation in which the Central Bank ha a um a~t ~I:gero;s, si tomers which it is morally incapable of suddenlv cutting off, with h r ul ha ?t iga ibons ohcauv si.ly involved in a credit situation as the other ba~s, and is thu unabl t i may e as e . . . -11- ·d dit' th · · tance · in other words, it, itself, may be m an i 1qm con 10n. eu ass1s . , h.b. · · , For this situation, education of the public, rather than over-el~boratef 1 gal pr 1 1 1ti nk _ ill · h · t emedy A general understanding of the true funct10ns o a n r a a w1 t e aptproprti_a e lr deman .ds for a widenina of the activities of the Bank in a parti ul r · ti n Preven sec 10na O • · h b · d · f b · d ngerous and will at the same time enable the Bank to assist t e usme an ra g rom ecommg a

xx

community generally in the only way which is not inimical to its proper functions, viz., through advances to the commercial banks, which they, in their turn, can pass on to t heir customers in the shape of increased credit facilities . It may be argued that the commercial banks will not be willing to make use of the facilities afforded by rediscounting at the Central Bank. Even in t hat

case, if the Cent ral Banks deem it in the general interest that credit conditions should be made easier, there are more efficacious, certainly less dangerous, methods by which the Central Bank can achieve its ends than direct commercial operations. It can always buy securities in the open market. The funds so released find their way through the sellers into the commercial banks and finally increase the bankers' balances at the Central Bank. Thus it is not necessary, in order that

credit may be made easier, for the Central Bank to engage in commercial banking operations, which may easily prove to be an embarrassment when credit conditions require curtailment . The danger, indeed, with Central Banking in all new countries is that the Central Bank should be looked upon simply as an engine by means of which cheap money is pumped into the economic mechanism. But the degree to which contraction may become necessary is proportionate to the degree of previous expansion. By r efusing to expand credit too easily in a period of expansion, the Central Bank lightens the task of subsequent contraction. Whilst, therefore, it would be a mistake t o tie the

Central Bank down too rigidly by means of legislation, its executive should be supported by public opinion in any effort it makes in normal times to prevent its resources being so fully engaged as to limit its freedom of action and its power to exercise control.

(b) What has been said of commercial (and, a fortiori, of agricultural) loans, applies of course even more to loans t o Government and other administrative instrumentalities. Close and intimat e relations between Governments and Central Banks are a necessity, for the easy working of the money market and of public finance alike. The Central Bank must assist the market in periods of maximum revenue collections ; it must help the Government in periods when its ways and means position reveals a normal deficit of income in the early part of the financial year. But to confer upon a

Government an unlimited power of borrowing, especially an unlimited power of borrowing by means of unsecured advances and to confer upon the Central Bank the right to accede to these r equests, is a policy which all experience reveals to be full of danger. Just because the Central Bank is not an ordinary banker, and just because the Government is not an ordinary borrower, some degree of control over the relations between the two is a necessity, in the interests of sound public finance and of sound banking conditions. The Government should lean upon the Central Bank as little as possible, and one method by which undue dependence may be avoided is the building up of an active outside market in short-dated Government securities, such as Treasury Bills. If the Central Bank stands ready to take up these bills from holders at its published discount rate, no risk ( other than a normal commerical one) is run by outside institutions holding these bills: the Central Bank

is not constantly aiding Government, and Government is not encouraged to r egard the Central Bank as a constant source of supply. It may be argued that in new countries a Treasury Bill market does not exist. But one of the most important aids in building up such a market is some limitation upon the borrowing powers of Government, or, alternatively, some limitation upon the lending powers of the Central Bank. To sum up, up to a point the right to borrow at the Central

Bank helps not only the Government, but also t he money market (for it helps to stabilize the total volume of funds at all times employed in t he market). But if borrowing is pushed to the point at which it threatens the liquidity of the Central Bank it becomes a major danger to be avoided at all costs. Some legislative check would, therefore, be in place to prevent the contingency from even arising.

(c) Whilst public opinion concerns itself mainly with the possibility of credit expansion, it remains the unpleasant truth that it is much easier to expand credit t han to contract it. Looking at the Central Bank problem from the stand-point of a new and developing area, the question arises : how is it possible for t he Central Bank in such an area, where an organized short-term money market does not exist, to contract credit 1 Expansion is popular and extremely easy ; contraction is unpopular and technically difficult. Nevertheless the utility of a Central Bank is ultimately to be measured, not by its ability to add to the credit stream in periods of expansion, but by its ability to contract

credit when necessity demands it.

In so far as the local commercial banks borrow from the Central Bank, the appropriate instrument of control is the rate of interest which it charges. But the local trading banks may not be borrowing at all, or conduct their borrowing operations in another centre (London or New York). Under these circumstances the direct use of the discount rate is subject to limitations. But the

bank is not without other weapons at its comm.and. The mere fact that it raises its rate is a danger signal to which, in the course of time, the local business and banking community can be trained to pay attention. It is still open to the Central Bank to sell long-dated securities and to throw upon the outside market the burden of financing t he current needs of the Government, thus absorbing part of t he credit of the local banks and in turn forcing these to borrow from it . But in its attempt to secure control, the Central Bank will find that one of its most important weapons is the moral

pressure it can bring to bear. To be able to bring moral pressure to bear, it must secure and retain the confidence and friendship of the local trading banks ; so that it can stand to them in the relation of a constitutional monarch to his cabinet, armed, that is, with the right to advise and the right to warn, even if it does not possess the right to coerce. Thus to limit its trading operations may prove to be wise, not only because this abstention relieves it of immediate difficultie , but also becau e it increases the degree of co-operation between all sections of the market. And to be in a position to advise wisely, it must cultivate friendly and intimate relations with other Central Banks, which can bring to its aid intellectual as well as material assistance in times of stress. And t hus the form of government of the Bank is important, not only as regards the bu iness operations of t he

bank in the narrower sense of the word, but also as aiding or hampering it in its r elations to other Central Banks-relations which are of much more t han .nominal importance in the modern world.

6. In discussing the Form of G ownership of the bank Th over1:ment of a Central Bank th fi . .

diffi cultie_s to which Ce.ntr~l ~~:~:nt reaction ag':inst State-owned Cen!ra{ ~ag;:_111~ {h_1oh n. . arily ri . is th

;it~;~:~t e~f1,s:;;~::ti!:t :h~c!t~~t:~~I!:i;!~~~~:;::f ~r!I~~t~~:~r ~t~od~1~~~~ :- rt;:1·~:r~> n~~t m avour o tate-owned banks cann t b d . . a ere e:iosts m certain countr· . . a

points are borne in ~ind and brou~ht ;rom~ne~~~;dbe~~;e ~t: ~~~~r~of that feeling can ~e i!od1r:edg i} ~~~ f I ci ,;f~ .. (a) Th~ mherent danger that a State-owned bank _-rnstrumentali t y of unsound finan will, under political pre ure b mnd a m r

(b) The case for a government bank is c~ . l '

of J;>roviding all the initial ca;it~l v;~u~e;e::est where there ! a broad capital mark t busmess experience upon which the barJr ,d d fwh~re there_ is a fund of b nking and n r I doubt to all the British Doininions. can raw or its executive personnel. Thi appli without

The view that the Central Bank ou.aht to b ~ .

control the currency is deficient insofar a c\ l e "tate-o wned becau e of th right to i u and

interests, t o delegate these powe;s_ Grant" l t~ef ~~ts to prove_ that the State ouaht not, in i own of prerogative, it is still open to questione as t~ wh~p~;e\to :s~ue and con~ol curr n?y i matter The State has the power to determine wh . . e es lnBtr~rmentahty for thi purpo i .

follow t hat a State bank is the best . tat is the _best mstrum.entality, but it docs not in th I t direction. The t erms upon which tht~/~ment~~ty. l~deed, ~11 experience goes in the ontrary

;~is: ;!~~=~:~=~1~~~tttedit condition: t~ ~~~und!~ta;:t:ft~t~J{e01:::: a~:~~; Jf ~iu:~. h Wh!t science can throw no light.gathered from economrn experience, and is a matter upon which political

(c) The _P~pularity of th~ principle of the State-owned Central Bank in certain uarters is du h

~s~;f;}~ha~; /r;v~te profit: to ie made out ?f the operations of Central Binks and to the~ ~re i d, e a. e 0 · raw sue. pro ts as a r_e ava1l~ble. But it is not necessary to create a tato bank

f~ or c/ th~i pBnvate profi~eermg be ma~e ~rnposs1ble or in order to secure that the State shaU profit om en~ra ank operat10~s. Subscnpt10ns to the capital of a Central Bank can b, obtained at a rate of mteres~ not appreciably great er, if in~eed at all greater, than that which tlie tate it. lf hat to pay upon its l~ans. In o~her words, the dividends can safely he limited, and the tate b given as are, even a gro':mg share, m the profits _ of a priyately-owned Central Bank, either by curin to the Sta~e the entire profits fr om the note issu e (as m Great Britain) or by securina to it the who le of the r es1dua;1--y profits_ after payment of a fixed dividend and certain compulsory appropriation to reserve, as m the Umted States.

(d) No7 does the adop~ion of the principle of a" shareho~ders' bank" rule out altogether State participation ~n the o:wnership of t~e Central ~a~k ; all that 1t does is to limit the participation to a minority mte~est m t~e en_ t e~p!1se. The pnnc1p~e t hat the Bank should be owned by shareholders is perfectly consistent with hm1tmg t he powers of mterference of the shareholders · thev are so limited in mo t of the great Europea_n Central Banks. It is not too much to say th~t Ceiitral Banks do not exist for the benefit of their shareholders, but the shareholders exist for the benefit of the Central Banks. '.f'hey are ~ necessity because they prevent the danger of t he Bank being controlled by political ~nter e~ts ; m other words, they are a guarantee of independence for the bank's executive. That 1s their only justification which is conclusive.

I t should be obvious t hat a wide range of experiment is possible bet ween the two extremes of a bank tho whole of the capital of which is owned by the State, and a bank, the whole of whose capital is owned by individual or leaal persons. Th e latter is the prevailing European type, as exemplified by the Central Banks of Austria, Belgium, Fran~e, Germany, Italy, Poland, Switzerland, Holland and Norway, and it finds its classical example in the cas of th Bank of England. But intermediate t ypes are also possible, such as Central Banks with limited classes of shar hold r only as fo r instance the F ederal R eserve Bank of the United States, which are owned by the constituent mcmb r bank (i. e., trading banks) of the system, or Central Banks, such as those of Chile, Colombia, Greece (temporarily), Denmark and Czecho-Slovakia, owned in part by the State and in part by shareholders. Thus the pure State bank i very much

the exception, and reason as well as experience is against the further extension of t he principle.

7. If the main reason for the existence of a class of shareholders legally owning the Central Bank is to preserve the independence of the Central Bank, the main positive function of the shareholders is to assist in the selection of the Directorate. The principles on which the Government of a Central Banlc should be built up are three in numb r :-(1) The Directorate of a Central Bank should be free from sectional pressure of all kinds. There is a gr t

difference between appointing individuals because they have had a !arge ex perience ~n a particular branch of economic activity, and appointing them as representa//1,ves of that particular body of experience. (2 ) The Directorate of a Central Bank should be composfld on the understanding of the fact that it is an

executive rather than a deliberative, assembly. The Board of a Central Bank is not a "Parliament of Indust;y " but a Cabinet. There is the7efore a re~l <;1a_nger that if_ diversification of point of_~ w is the point chiefly aimed at, the result will be to dimm1sh the efficiency of t~e ~oa~. D c1 ions must be arrived at, and for that, something ~ e a~reemen:- upon g~nera~ pr7:11c1ples 18 absolutely essential. The safeguard against erroneous act10n li es, _not m over _di vers1ficati on of t he p r o~ 1 of the Board, but in choosing the proper electoral constituency and m a clear graap of the ent1al functions of a Central Bank. (3) The Directorate of a Central Bank should be appointed f? r a suffi ci~ntly l_ ong_period of offi ce to prev nt

their actions from being biassed by fears of what will happen if t~eir VIews do ~at hap~n to be immediately popular. Not only should they hold office f~r a suffic1 ently long pe~10d of tm1 ; _h t Of their appointment should be such as to make their removal fro m office difficult, otherwISe erms . d f ffi . ill the security afforded by a nominally long peno o o ce 18 usory.

XXll

8. The application of these general principles doe not necessarily imply any one single rigid method of selection. As in the case of member hip, a large number of alternative solut ions are possible between the two extremes of appointment purely by the State, and appointment by the sharehold ers without any, or at mo t sli ght con titutional limitation , upon their powers. Thus it is po ible to allow appointment or selection by shareholders on t he basis of definite con titutional limitation s, and/ or subject to the ultimate approval of Government. Examples of this method of olving the problem are to be found in the Central Bank of South .Africa and Japan and t he F ederal Reserve Board of the nited State . Or it is possible to confer upon the hareholders the right to appoint a majority of the Directors, but to give to the tate a right to appoint a minority.

9. In practice the shareholders of Central Banks do not participate actively in the choice of the Board, in the sense that the merits of rival candid ates are canvassed and discussed at a general meeting of the shareholder . In practice, the role of the shareholders is to confirm appointments, not to select appointees. Thus selection by sharehold ers is largely equivalent to co-option subject to a veto by the electoral body. The case of the Bank of England shows how admirably this system can be made ·to work ; in the sense of bringing to the Bank Board a wide range of talent and experience, fre ed from all suspicion of political influence, but expressive of the changing phases of economic opinion and practice. The charge that a " purely c01runercial board " will confine its recommendations to the shareholders to a narrow circle of wealthy mediocrities cannot be sustained in the light of British experience. In any case, the fear t hat the Board may be composed of unsuitable persons leads at most to a right of veto on the part of the State, not to the right of direct appointment by it . For direct appointment by the State carries with it even greater dangers than those which it avoids, especially when the majority or the whole of the Board is appointed in this wa !-

Due allowance must of course be made for the fact that lo cal circumstauces are not always the same. The demand that the State should appoint is based upon t he fear of undue conservatism and narrow-mindedness in the co=ercial community, and the apprehension that there does not exist among the individuals likely to be chosen the range of experience requisite for the directorate of a Central Bank. Where such fears prevail, still more where there is some justification for those fears, the appropriate remedy is not necessarily St.ate appointment, but, at most, an admixture of State appointees coupled with the right of veto and the fra ming of careiul provisions as to the areas

of knowledge and experience from which individuals are to be selected. But, as already pointed· out, a Directorate is an executive, not a deliberative assembly ; and a.n executive body of lo wer average intelligence and experience may work better if its members are homogeneous than a more brilliant body of individuals connected by no common point of view. Thus in framing the Constitution of a new bank even for a " new" country, the presumption is in favour of liberty of choice by the shareholders, rather than selection through political channels, more especially in countries in which party feeling runs strongly.

10. The last of the general is sues which requires discussion is the reg ul ation of the Reserve. In recent Central Bank legislation, four tendencies ar e apparent, viz. :-(1) The minimum reserve ratio is fixed in the neighbourhood of 35 per cent. or 40 per cent. of the liabiliti es to be protected.

(2) For the purpose of fixing the amount of reserve required to be kept, liabilities upou deposit account and upon account of note issues are assimilated.

(3) The Bank is given power to hold all, or some of the reserve, not in the shape of gold in vault, or gold earmarked on its account in some other country, but in t he shape of foreign exchange assets of divers kinds, provided that these assets are payable in gold on demand or at maturity.

( 4) The Bank is freed from the obligation to encash its notes, except in large amounts, and this not in gold coin, but in gold bar and/or stable foreign exchange, at its option.

These tendencies, representing a growin g degree of uniformity in the r eserve regulations of modern Central Banks, are primarily the result of the growing recognition that the function oi' the reserve is no longer to safeguard the Bank against insolvency in the event of internal panic, but to protect the Bank in its ta k of maintaining the international parity-value of all its obli gations, whether these take the fo,m of note or deposit liabilities. They are also in part a recognition of the circumstances that the pre-war gold standard- involving the domestic circulation

of gold coin and the holdina of large masses of gold physically in the vaults of the Bank-was extremely wasteful, not only from the minor standpoint of profit-earnings, but from the much more important standpoint of conserving the world's supply of monetary gold. Gold economy, which in the pre-war days of rising prices, might have been neglected with impunity, has now become a problem of grave importance; and the possibi lity of r eplacing holdings of physical gold by holdings of gold-assets in some form is a contribution of the first magnitude towards the solution of the problem. Indeed, there is every rea on to suppose that t he de facto po ition i lagging behind what is des irable inrespecttogold

holdings. The actual minima of 35 to 40 per cent. are high, and the amounts actually kept are higher still ; whilst of recent years a distressing tendency to convert foreign exchange holdings into actual gold holdings has been manifest in some quarters. Whilst it is impossi ble to conceive the problem of the price level being solved without international co-operation, an element making that co-operation possible is the removal fro m actual Central Bank regulations, and

the non-incorporation into new Central Bank regulations, of high minimum reserve requirements, and particularly of require~ent which hamper in any way the replacement of phy ical gold as ets by foreign exchange assets, whether such _ reqmrements ~ake the form of demanding a certain minimum holding of actual gold or the form of defi ning the locat10n of r eserve m such manner as indirectly to li mit the amount of foreign exchange a sets which may be held.

11 . In the decades which li e before us, the importance of co-operation among the Central Banks of the world -the need for ~·hich wa fir t empha ized by the Genoa Conference of 192 cannot be overstressed. It is not only that, as already sugge ted, each Central Bank is inter sted in having assistance from others in the control of it own local money market, and that all Central Bank are intere ted in the maintenance of so und credit condition over the whole of the commercial world. The world is co nfronted by a price problem of enormous magnitude, failure to solve which may involve social and economic catastrophe. Under these conditions, an intimate under tanding between the Central Banks is not a matter of academic interc t alone, but an absolute neces ity for orderly economic progress. _The degrees of int i1!'1-acy and personal understanding which will be nece ary if the world credi t machine 1s to funct10n adequately reqmre careful cultivation; and among t the chi ef aids to their cultivation is a reasonably

xxiii

common form of con~titution. It m ust be obvious that control, can ?~ certam that other Central Banks can c~r:nless Cen_t~al Banks, themselv~s ind pend n of poli ical free from poht10al pressures and interferences co ope t· . y bo~t dcc1s1on ' commonly arnYed at, in an atmo pit r consequences to the world as a whole and p~rt· - 1 .ra ltn e we~m ~hem will be made more diffi cul ' with . riou

. . ' icu ar Y ·O count ries mterested in primary production.

12. _If the cons1d~rat10ns so far adduced are a Jli d . .

of Austraha, as embodied in the Bill n d Pl e_dto t~e const1tut10n of the propo ed Cent ral Re rrve Bank constitution is d efective in certain essentiaf;es;~t:~cons1 eration of the Senate, it will at one app ar that th (1) The principle of State ownership is ado ted · ·t · ·

simultaneously with the creation of the new R . p B tn I s entirety, not_1V1~hstanding the fa t that it i propo ed bank, which is a lso to remain a pure Stat, Bser;;e. a~ to ~onYert t~e ex1stmg Commonwealth Bank into a tradina subject to Government appointment and e . t:t: ' I~ e sense ~hat its go ~ernment is to be in the hand of ffi r Since Section 7 of the Commonwealth Bank 7: i~g m tthe firs~ mstance with funds which are Govcrnm nt fund powers, ~nd since . Section 9 (.q) of the Central ~ef:;:: Ba:~r;1{f1 9 b3 a~ik pr_~cttlly unlimited banking and b~rrowing corporat10n carrym g on the business of banlcing" from th l sptt· ?a y exe_ mp'ts loans or advance to any

::1~t c~a:g;;ous situa~ion may easil_y ~rise from the financtr::!:~io~:\~t:~~:\t~a~:~ s::0: :r;~i: i:h~ '°: it could !oi hrv~\trad1~f banker b!mgmg pressu_ re to bea! upon the State in its capacity of Central ba~kcr which open to ob1· ectio r~u/5 : p.on al pm '.'lalte corporat10n. Whilst the principl e of a pure State Central Bank is in all cases n , 1 Is o v10us Y sti more open to question under the circumstances outlined above.

t St (2~ _ In a_ny case the composition of the proposed Board carries the subordination of the business of the Bank i/, , ~te ir;ct10nhto what must be regarded as an extreme point .. Out of the nine persons who are to compo e 'the oar no _e s t an four are to b,e . se~v~nts of the State, viz. :- the Governor, the two Deputy Governors

and _the Secretary of the Treasury.. 'Ih1s, ~t 1~ t:ue, leaves a bare majority 0£ one against what might be called the o.~cral _element 01:1 the Bo~rd, but m pra.ct1ce 1t 1s clear that much of the business of the Bank will be done by the Execut1~e Committee envisaged by Sect10n 23 (5) of the Bill ; and sin?e . the Exec utive Committee may consi t of as fe?, as t hree persons, o~ whom two may be official members (23 (6) ), 1t 1s clear that the official members will have a V:OICe out of all proport10n to their numbers, for there is no limitation in the Bill as to the " powers and duties " which may be d elegated by the Board to t he Executive Committee (23 (8) ).

(3) Wit h so la rge an official element on t he Board, t he question of safe<1uarding their independence of action beco1:11es one of ~he utmost importance. '.l'wo of the official members are to be Deputy Governors of the Bank, to be direc tly appomted by the Governor-General, it is truP., but necessarily in a subordinate position vis-a-vis that of the Governor, as is indeed r ecognized by the Bill (in Section 15 (3) ), which obligates a Deputy Governor "to perform such duties as the Governor directs". Whils t these officials are from the nature of their official position not likely in any case t o act in a direction contrary t o the views of their offici al superior, they and the Governor himself are liable to moral pressure of a most objectionable la nd owing to the insecurity of their tenure of office. Though these offi cials ar e appointed in the first instance " for a period not exceeding seven years '', they, and all the other direc tors, in virtue of Section 16 of the Bill "shall hold office only during good behaviour". What the intent of this clau se is is nowhere made clear, but if it is intended to confer upon Government a discretionary power to remove members of the Board more or less at will, it is obvious that action inconsistent with the wishes of the Government of the day is virtually excluded, however desirable that action may be in tl1e interests of tlie country.

I

(4) In view of the fact that the Secretary to the Treasury is an official member of the Board (subj ect therefore in any case to a divided all egiance) t he borrowing powers of_ the State appear unduly· wide''and inde~d dangerous to th e stability of the bank. Every Government r equires t he :ight t.o b?rrow on Way~ ana Mean~ or agamst Treasury Bills for short period s of t ime, but some provision should exist by which th~ _ lo ans, if uncovered, should be covered by securities which the Bank can dispose of in t he market at need . In addit1011 to the general powers confe~r ed by Section 8 (c) to deal in Common wealth and State securities and the power to make' loans and a_dvances agamst the Stock or Debentures of the Commonwealt h, State and subsidiary authorities conferred by Section 8 (h), the Bank is empower ed by Section 9 of t he Bill to give unsecured advances without limit of time or amount, not only to the

Commonwealth, or a State, but also " to any authority constit~ted nuder the law of the Commonw~alth ~r ?I any State ". Tl1is is surely carrying liberality to the extreme, especially when the very narrow non-officia l ma3ority on the Board is taken into consideration.

(5) Th · · · t to which attention should be direct ed are the Reserve regulations. The Bank

t 1 t e r e_m?'mmg pom esrati·o of 25 per ce~t a <1ainst notes a minimum of 25 per cent. on the first £20,000,000 con emp a es a llllmmum reserv " · o · ' · o b t t of deposits, and a reserve of 50 per c.eJ1t. on deposits exce~ding £~0:000,000. Of thi; :rese:";e, 5 l;:ntBill u ~ih more ma be held in London either in gold coin or bullion, Bnt1sh Governrn~nt e?urit1 ~s an . e 11_1

' · y f · th 1'20 d ys '!'he remainder must be held in Australia entirely m gold com ,md bullion a maturity o not more an a . (Section 50 (1) an

The reserve position is thus as follo~s. Let N . notes outstanding, D = deposits not exceeding £20,000,000 and D.' aggregate deposits. Then the required reserve will be R tN + t D + t (D' - D),

· d ·11 b half this amount whatever that amount is. The net re ult of

and the minimum amount of gold r eqmre T;v-1 e osition will v~ry not only wi th the growth of the li abilitie , this r~gulation may ~e st~ted as fol~owt:r ~;-~~s:~:t!. If the growth\n the liabili ties takes the form of addition~! but with the form which tne growth mt e ia 1.1 Id e .11 ow faster than the growth in the liabilities as a whole ; if d ·t th b l t o mt of r eserve r eqmre w1 gr . d will epos1 s, _ e a so~ e .8:~ l f rm of additional notes. the absolute amount of reserve reqwre grow _ no the growth m the hab1hties t ak~s theh O It .11 d pend on the relative movement in the notes and the depo its. faster ; if bot h notes and d eposits, t e resu b wi e ded as . satisfactory. Even if the n'otes and the depo its, These varying conse_q1;1-ences can hardly . ~ tftr(on the assumption that 25 per cent. were held against the fir t were assimilated, a shdmg scale r~servt agams . J ) would·raise the minimum r eserve ratio nearer to 50 per cent., £40,000,000 and 50_ per cent. agamst _t ~ rr::-:at: t: the total liabilities; although the minimum res erve, under the the greater the ratio of the excess ha b~l ~ent It must be obvious that t he regulations actuall y contempl~ted are circumstances, would n ever r ea?h 50 l?e d . tha;t a t he liabilities increase the aggrP-gate reserve should mcrea e, extremely defective. ~11 that is. r eqmre . 1~.11 le;s t~at the reserve ratio sho~ild increase differently according as the not that the reserve ratio should mcrease . s i

X XlV

increase in the liabilities takes the form of notes or of deposits. The danger of a drain of gold abroad does not necessarily grow fa ter than the growth of liabilities o-en erally, and the main function of a reserve in these days is to safeguard t he exchange position. The amount of reserve required varies with change of circumstance , and it should be t he duty of the Board of the Bank to see that the reserve is adequate to meet the exigencies of the situation.

A further objectionable feature is the limitation of the amount of interest earning reserve to 50 per cent. of t he total, and the location of the physical port ion of the reser ve in Australia . If it is intended thereby to secure the encashment of Australian notes in gold coin, it conflicts with the spirit of the remaining reserve provisions, which, by fixin g a higher ratio against deposits than against notes, regards the former as the more sensitive form of liability. But, in fact, all that is necessar y is that notes and depo its alike should be encasha ble either in foreign exchange (i.e., Drafts or TjTransfers on London) or in gold bar. If this is accepted as a rational solution of the problem of securing convertibility, no gold need be held in vau]t at all ; still less need a purely mechanical division be made between gold held in Australia and earning assets held in London. If gold is wanted at all, it will be wanted in London and not in Australia ; unless indeed an utterly wasteful use of gold is to be encouraged . Since Australia is profoundly interested in the future of world prices, she should not adopt a form of Central reserve and currency regulation which is antiquated in conception and inimical to her own interests, as well as t hose of the world as a whole.

APPENDIX TO MEMORANDUM.

VARYING EFFECT OF RESERVE REGULATIONS ACCORDING AS THE GROWTH OF LIABILITIES TAKES THE FORM OF NOTES OR DEPOSITS.

(A) AN I NCREASE Uf THE LIABILITIES F'ROM £60,000,000 TO £90,000,000 ON THE ASSUMPTION 1;lIAT ONLY DEPOSITS INCREASE.

Notes 40 40 40 40

Deposits up to £20,000,000 20 20 20 20

Deposits over £20,000,000 nil 10 20 30

Total Liabilit ies

per cent.

60 70 80 90 growth = 50

R eser ve against otes 10 10 10 10

R eserve against Deposits 5 5 5 5

R eserve against E xcess Deposits nil 5 10 15

Total required R eserve 15 20 25

per cent.

30 growth = 100

per ceut. p er cent . per cent. per cent.

Reserve Ratio 25 28f 31 33}

(B). GROWTH ON ASSUMPTION THAT LIABILITIES RISE FROM £60,000,000 TO £90,000,000 ENTIRELY 'l'HROUGH ADDITIONAL NOTES.

Notes Deposits up to £20,0QO,OOO Deposits over £20,000,000

R eser ve against Notes R eserve against Deposits R eserve against E xcess Deposits

Total required R eserve

Reserve Ratio

40 20 nil

60

10 5

nil

15

per cent. 25

50 20 nil

70

12t 5

nil

60 20 nil

80

15 5

nil

20

70 20 nil

per cent.

90 growth = 50

per cent.

22f growth = 50

per cent. per cent. per cent.

25 25 25

APPENDIX B.

Summary showing relationship between Cent ral R eserve Banks and Government in the t hirty co untries r egarding which information is available. Compil ed from Central Banks (Kisch and Elkin), 1930 edition, pages 16 -406.

Name of Bank . Own~rshlp.

Austrian Bank National Shareholders

National Bank of Shareholders Belgium

National Bank of Government Bulgaria

Central Bank of Chile

Bank of the Republic of Colombia

National Bank of

Czecho-Slovakia

Governmenttwo-fifteenths, ba.nks chartered under laws of Chile and owned by citizens of Chile, foreign banks conducting

business in Chile and other shareholders Government (without voting power), trading banks, foreign

banks and other shareholders

Two-thirds shareholders, one­ third Government

The Bank of Danzig Shareholders

Management.

Directors elected by ballot at meeting of share­ holders. Chairman appointed by Federal President on nomination of F ederal Government

Directors elected by shareholders. Governor nominated by Crown. Regents elected by general meeting of shareholders

Governor, Deputy Governors, and Directors nominated by Royal decree. Can be dismissed only by decision of Sobranie on recommendation Minister of Finance

Ten Directors: Three appointed by Government, two by trading banks, one by foreign banks, one by other shareholders, one by agriculturalists and manufacturers jointly, one by nitrate producers

and Chamber of Commerce, one by labour unions. Board elects President and General Manager. Ten Directors : Three appointed by Government, four by trading banks (two bankers and two

business men), two by foreign banks, one by shareholders. Elect Governor and Deputy­ Governor

Powers relating to Loans to Governments and Other PuLlic Securities.

Ban ks may not grant loans or Credit to State but may discount F ederal Treasury Bills up to

75,000,000 schillings if tendered by solvent persons other than federation, provinces or under­ takings of these May discount treasury bonds not exceeding

100,000,000 francs. Make advances current account or for short term against State or State­ guaranteed securities, with maximum term of four months and at four-fifths market value Discount State or State-guaranteed bonds maturing

within three months. Discount for temporary requirements of State authorized by budget bills of not more than three months and totalling not more than 400 m. levas. Cannot make

advances to other public bodies May not purchase, discount or make advances on obligations of Government of Chile, municipalities, government enterprises to amount exceeding 20

per cent. of Bank's paid up capital and surplu s, on affirmative vote of six directors, 30 per cent. for maximum of six months on vote of eight directors May purchase no tes or other obligations of the

National Government Departments and Muni­ cipalities to a total amount in excess of 30 per cent. of Bank's paid up capital and surplus. Requires approval of seven members of Board of Directors May not grant directly m· indirectly any credit to

the State except that half of reserve funds must be invested in State Bonds of the Republic. With Board's consent may discount customs and tax bills and hills for certifi ed t obacco, salt and mineral

products presented by State Administration

~oard consisting of Governor and nine or ten members. An Audit Committee of five members, Governor appointed by President of Republi c fo r five years. Must not hold any other paid post or

official position. Six Directors elected by shareholders for six years and three Directors appointed by Government for six years. Board can elect a teuth member. Governor and t hree ' 13oard member form executive committee.

Um·ernment and members of the Board must be native-born citizens except tho tenth member elected by Board Board of Direction : One or more members elected

by Bank Committee. Bank Committee three ropr Hentati\'CS, including Chairman of Council of shareholders nominated by Council of Control, two representatives of bank noteholders and

borrowers nominated by Senate. Council of Control con isting of at least nine but not more than nineteen members. late supervision by , enate

May not buy on its own account, discount or lend on bonds of the Free City of Danzig or its local authorities

Minimum Gold Reserve to Note Issue.

20 per cent. for first fi ve years to be increased each five years to 33! per cent.

Total issue. covered by values easily realizable in gold or claims payable a broad in gold

33! per cent.

50 per cent. of notes outstanding and deposits combined

60 per cent. of outstanding notes and deposits, two­ fifths of which may be as demand deposits in banks of high standing abroad

Metalli c reserve of 20 per cent. of notes in circulation and obligations payable at sight. Reserve to be increased 1 per cent. annually for fifteen years. Three-quarters of reserve must be gold

One-third of circulation lo be cov red by go ld oin, .Bank of England not or by daily balan £

English £1 with Bank of En land. Tw nly-fiv gulden to £1 English

llame of Bank.

National Bank Copenhagen

Bank of England

Bank of Estonia

Bank of Finland

Bank of France

The Reichsbank

Bank nf Greece

of

Ownership.

Shareholders

Shareholders

Approximately two-thirds Gov­ . ernment; one-third share-holders

Government

Shareholders

Shareholders

Shareholders and Government. Government may not hold more than one-tenth of

nominal issued capital

APPENDIX B.-continued.

Management.

Seventeen Directors and four or five Managers. Directors elected by shareholders at general meeting. 'l'wo Managers appointed by King and others by Directors

Governor, Deputy Governor, twenty-four Directors elected by shareholders President, two members of management nominated by President, and seven other members selected

at general meeting. Elected members to repre­ sent industry, commerce, agricultural, co-opera­ tive and organized workers. Officials of Govern­ ment, municipalities and other public bodies, Members of Parliament and foreigners ineligible Board of Management, Chairman and four mem­

bers appointed by P resident of the Republic

Governor and two Deputy Governors appointed by President, fifte en Regents and three Auditors elected by General Assembly. Three of the Regents chosen from Treasury disbursing agents, five others and three Auditors from commercial

and industrial members among stockholders, and one Regent from the agricultural members. General Assembly consists of 200 shareholders

( French citizens) Managing Board.-Presiden t, elected by General Council and unspecified number of members approved by General Council and appointed

by President (must be German). General Council.-Fourteen members, seven German and seven foreign. German members elected by the German shar eholders. Foreign members by foreign shareholders. Offi cial of Reich and any German State or officials who receive any payment from Reich or any German State are ineligible Governor, Deputy Governor, and nine Directors

elected by shareholders. Three Directors to be actively engaged in industrial or commercial matters and three experienced in agriculture. Members or official s of Government, Members of Parliament, Directors or employees of other

banks are ineligible

Powers relating to Loans to Governments and Other Public Secmities .

The main object of the Bank is to establish and maintain sound finances in the country, and through loans and disco unts to improve the circu­ lation of money for the facilitation of production,

trade and exchange, and by receiving deposits to keep funds liquid. No order from the Govern­ ment shall either directly or indirectly interfere with the Bank's management, nor shall a ny encroachment on t he means or money held by the

Bank be committed May not advance to Government without express authority of Parliament May make temporary advances to Government for

expenditure authorized by budget. Advances not to exceed one-sixth of estimated r evenue for year and to be repaid within three months after close of financial year. May pay interest on

Government foreign balances. May not make advances to local authorities or public bodies Not definitelv stated. The Boa.rd shall act in its dealings in· such a. way that the currency shall

maintain its value established by law. The Bank must redeem its notes on demand in Finnish gold coin, gold ingots, or cheques ma.de out in foreign gold currency payable a.t sight at the current rate of exchange, but not exceeding parity by more than one per cent Bank will grant the Stat_;e a loan of 3,000,000,000

francs against treasury bond maturity 1945. It has made advances to State with sanction of the law

May allow credit to Reich up to three months and not exceeding RM. 100,000,000 at end of

financial year. Reich must not be indebted to Bank in any way. Credits may be allowed to Reich Post and Railway Services up to RM. 200,000,000. No other credits to be granted to

Reich

May not make advances to Government except for expenditure authorized by Budget. Advance outstanding not to exceed 400,000,000 drachmas to be repaid within three months after close of

fiscal year. Aggregate treasury-bills discounted and accepted as collateral, and advance may not exceed one-tenth of estimated receipts for current financial year

Minimum Gold Reserve to Note I ssue.

Metallic reserve consisting of gold and Bank's non-interest bearing demand balances wi t h Bank of Norway and Swedish Rik.~-bank and German Reichsbank to 50 per cent. of notes in circulation. Gold must not be less than three-fift hs of the

total reserve

May issue notes up to value of gold bullion in I sue Department, plus £260,000,000 in excess of such 40 per cent. of circulation and demand liabili t ies to include gold or foreign exchange freely con

vertible t o exportable gold

Issue may be 1, 200,000,000 marks in exces o aggreg!te gold reserve and undisputed balances ,vith foreign correspondents. Gold reser ve not to fall below 300,000,000 marks.

35 per cent. of note issue and cunent accounts The Bank is obliged to ensure the gold con vertibility of its notes

40 per cent. of gold or bills of exchange of not

more than fourteen days to run. Three-quarters of total to be gold

Forty per cent. of issue plus other demand

liabilities

Name of Bank.

National Bank Hungary of

Ownership.

Shareholders

Banca d'Italia Shareholders

Bank of Japan Shareholders. Government may hold half of shares

Bank of Latvia Government

Bank of Lithuania . . Shareholders and Government ..

Netherl ands Ba nk . .

Norges Bank (Nor­ way)

Shareholders

Shareholders

:Management.

Board of Direc tors.-Governor and thirteen members a nd four supernumerary members. Dir­ ect ors elec ted by General Assembly . Governor elect ed by Head of St at e. Board of Manage­

ment-General Manager and three to five managers

Board of Directors.-'l'wo members elec t ed by the Councils of the chief offi ces, fi ve elect ed by by sha reholders. Governor elected by Board and must be a pproved by.Government. Super­

vision of Bank of iss ue by Treasury . Government has power to suspend execution of decisions deemed contrary to laws. Members of either House of P a rliament may not hold office in Bank Governor appointed by Government, also Vice­

Governor ; four Directors appointed by Finance Minister. Controlled by Government

President, his Deputy and eleven members. E xecutive consist s of Director-General, his Deputy, and three Directors chosen by Ministry

Governor appointed by President of Republic. Four Directors elect ed by sha1-eholders, also six members elected by shareholders t o an Advisory Board which supervises Board of Directors

P resident and Secretary appointed by Cro,vn, not less t han two Direc t ors by shareholders ; also Advisory Committ ee of five elected by share­ holders which meet s with management at fixed

periods. Royal Commissioner appointed by Crown supervises transactions on behalf of Government

Reserve Bank of Peru Shareholders (Banks and Public)

Supervisory Coun cil. - Fifteen members appointed by the Storting President and Vice-President of Board of Direc tors nominated by King. Three Directors elected by Starting Ten Directors : Three nominated by Government,

six elected by shareholder hanks' Executive Committee of two Direc tors and General Manager, one to be appointed by fi scal agency abroad. Dopu tie and enators, Government

Official s, excepting Cn toms, in eligible

Powers r elating to Loans to Governments and Other Public Securities.

Neit her State nor local bodies may avail t hemselves of Bank's resources. Bank not t o enter into

business relations with State which involve gra nt ing of loans or credit

May make advances to P rovinces in respect of taxes to be collected to be repaid within six months. May grant advances to Treasury not exceeding 450 million lire

Shall make advance to Government of 22,000,000 yen t o redeem Government paper money. May discount or purchase bills issued by Government

Capital of bank or sums deposited with it cannot be used t o cover t he expenditure of t he State

May acquire public funds or Stat e-guara nteed securities to amount not exceeding one-third of its capital st ock. But t here a re rest rictions

against operations wit b the State (see K. & E . page 325, Ar ticle 17 (5) )

Is bound, when :Finance Minister deems necessary, to advance to Treasury, but advance not to exceed 15,000,000 guil ders. If metallic surplus of t he Bank falls below 10,000,000 guilders or if the State

resolves to iss ue notes this obligation ceases

May receive revenue a nd t a ke charge of payments of the State and Treasury and effect all movements of fund s of Treasury wi tbout having to make Joans

Not specifi cally laid down. May discount State se­ curities and Trea ury Notes up to 90 per cent. of their market value

Minimum Gold Reserve to Note Issue.

First fi ve years, 20 per cent. ; next fi ve years, 24 per cent. ; next five years, 28 per cent. ; there­ after , 33} per cent.

40 per cent. of issue plus demand liabilities

100 per cent. of iss ue in gold and silver

coin or bullion. Silver coin and bullion not to exceed one-quarter of total amount of reserve. May iss ue in excess of reserve 120,000,000 yen -agains t Government Loan Bonds. May make additional iss ues with approval of l\1Iinister against Government Bonds, Treasury-bills or other commercial bills, such iss ues to be subject t o tax at rate to be fix ed on each occasion by Minister, but not less than 5 per cent . 50 per cent. of first 100,000,000 lats, 75 per ce nt.

of excess of 100,000,000 lats up to 150,000,000 lats. 100 per cent. of any excess over

150,000,000 lats One-t hird of circulation by gold and balance by easily realizable securit ies

Not fixed. Decided by Royal Decree on recom­ mendation of management from time to ti me

May issue notes 25 0,000,000 kr ner in xces of gold reserve which consists of a ll gold held by Bank

7 gr. 323 mg. of 6n gold per £ p., and realisable funds in dollars on w York o.nd pounds

terling in London valu ed as equival nt to Id in Lima according to the curr nt quotation f r gold money, fr xport of whi h is a ll ow d by tbe Gov mm nt concerned. old nd for iJ~n values n t tO be Jess than 60 per r:ent. r, i t he

valu of no tn circuJ ion

Name of Bank .

Bank of Poland

National Bank of

Roumania

State Bank of the

Russian Socialist Federal Soviet

R epublic

South African Re­ serve Bank

Bank of Spain

Sverges Riksbank (Sweden)

Swiss Nationai'Bank

Federal R eserve

System of America

Ownership.

Shareholders and Government. Shares held by Government carry no voting rights

Shareholders and Government. Government holding may not exceed 10 per cent. of capital

Government

Shareholders (Banks and Public)

Shareholders

Government

har eholders

Share holders

APPENDIX B.-continued.

Management.

Council.-President and Vice-President appointed by rresident of Republic and twelve members elected by general meeting. BoardofDirectors.­ General Manager and Directors appointed by

Council. Senators, Deputies and civil servants ineligible. Number of Directors determined by Council Governor and Vice-Governor nominated by Royal

Decree. Ten Directors, seven elected by share­ holders, three nominated by Government. Executive Committee of Governor and · four Directors, including one of those nominated by Government. Board of Censors.-Four elected

by shareholders, three elec ted by Government. Supervises all operations of Banlr. Commissioner appointed by Government also supervises Board of Directors.-Chairman appointed by

Council of Peoples Commissionaries. General supervision by People's Commissionary of Finances

E leven Directors, six of whom must be or have been engaged :-three in commerce, one in agriculture, two in other industry ; elected by stockholders. Three appointed by Governor­

General, two (Governor and Deputy Governor) by Governor-General Governor nominated by Government and repre­ sents the State. Two Assistant Governors

nominated by Royal Decree. Twenty Coun­ cillors, fifteen elected from shareholders, three elected by banl

Agricult ural Corporations. King's approval required. Eighteen associates take part in sittings of Council Seven Directors, one appointed by K.ing to be

President, six appointed by Riksdag. Directors are responsible to Riksdag. Members of

Ministerial Council and Directors of National Debt Office are ineligible Council.-Forty members; fif teen chosen by general meeting, 25 by Federal Council. President

and Vice-President elected by F ederal Council. Committee of seven nominated for administrative period of four years eontrols conduct of Bank. General d.irection of three members nominated

by F ederal Council is supreme executive Board of Directors.-Nine members ; t hree chosen by and representative of stockholding Banks, three actively engaged in commerce, agricult ure,

et c.; three designated by F ederal Reserve Board, one to be Chairman and Federal Reser ve Agent. F ederal Reserve Board.-Eight members ; Secre­ r etary of Treasury and Comptroller of currency

(ex officio), and ix member s a ppointed by

Pres ident

Powers relating to Loans to Governments and Other Public Securities.

May discount State and municipal securities. Government has undertaken not to raise further loans from Bank other than t he existing debt of 25,000,000 Zloty

May d.is co unt Treasury Bill s up to 20 per cent. of its capital. May grant Treasury temporary advances up to Lei 2,000,000,000, to be repaid in second half of financial year

Grants credits to such Government undertakings as are not financed by Budget grants. Loans in bank notes made to the Commissariat of Finance ar e to be secured by precious metals as to a

minimum of 50 per cent. of the face value and as to t he remainder by interest bearing bonds of t he Commissariat of l!'inance May buy, sell or red.iscount Union Government or

local authorit ies Bills of not more than six months currency

May d.is count Bonds of State and Treasury Debt. State in the past has received credits from bank

National Debt Office may be gran ted a credit not exceeding 1,500,000 kroner without security

Excluded from taking up Government and cantonal loans

Banks may deal in bonds and notes of United

States and bills, notes, revenue bonds and warrants up to six months maturity issued in anticipation of collection of taxes or in anticipation of receipt of assured revenues of any State or Local Govern­

ment Authority

Minimum Gold Reserve to Note lssue.

30 per cent. of issue phis demand obligations with further gold value securities bringing total to 40 p er cent.

35 per cent. of sight obligations in gold or foreign drafts payable in expOl"table gold. 25 per cent. of these obligations must be covered by gold in Bank's reserve or deposited abroad

25 per cent. of issue in gold; precious metals

or stabl e foreign currency

40 per cent. of iss ue subject to Government

consent. Reserve may be su pended for not more than 30 days renewing such suspension for not more than fifteen days at a time

40 per cent. gold, 5 per cent. silver up to i sue

of 4,000,000,000 pesetas. On issue in excess of 4,000,000,000, 50 per cent. gold, 10 per cent. silver

May iss ue 124,000,000 kroner together with an amoun t double the metalli c reserve which may not be less than 75,000,000 kroner

40 per cent. of circulation

Federal Reserve Banks to hold not less than 40 per cent. of notes issued to them

Name.

Armitage, Hugh Traill

Bond, Allred Ed ward

Colman, George Stanley

nopland, Douglas Berry, M.A., D.Sc.

Davidson, Alfred Charles

Duffy, Maurice Boyce

Haymen, Marmaduke Granville

Healy, George Daniel

Lemmon, Robert Bennet

Parker, Le lie Angwyn

Riddle, Ernest Cooper

Shann, Edwin Owen Gibun, M.A.

Tranter, Charles!H erbert

Watts, Arthur Spencer

Wreford, Ernest H enry

LIST OF WITNESSES.

]7

28

32

3

34

16

27

35

10

1, 19

29

23

20

24

OF EVlDE

(Talcen at Sydney.) FRIDAY, 18th JULY, 1930_ Present: Senator 1·1 W G . I LLIAM LASGOi= Ch . '•, airman· S nator ir Hal I S enator C . 11'

ol batch S airo

S t enator Sampson ena or ox S T . cnator hompson. Erne t Cooper Riddle overnor of th C 1 h ' e omrnonwea t ank, sworn and examin ed, T_o the_ hairman.-A centr a l reserve bank is

desirabl e m any cou nti-y At the pre t t' f h f · · sen 1me most o t e un ction of such a n institution are bein dis-charg cl by the 0~1m nwealth Bank. By concentfatin reserve and malnng them mobile a central ba nk dl strength t~ t~ banking fabric as a whole. Pro/erl; cond.ucte

~vi th other financial in . . . .

mvestment for surplus /t1~ut10¥h reqmrmg temporar to be r endered by th un .s. e form of the return

?ank should be prescribe~nbat~ batk~ to ~he. central lo the act, any minor alter 1 I egu at1on . if rncluded r equire amending legislatii!1on i~und _nece ary would ~ government altering the r ·

1 /re i~ no danger of

mcreased accommodatio f ~gu a h10nsbrn order to get t th. k h n l om t e ank fo I d

no · m t at a mere alterat" f h f ' r 0

would facilitate that Th 0100 0 t e orms of returns

tarily publishes a ,~eekl e om1;11onwealth Bank voh_rn-might be followed by th~ ;:!~1~:l t~\for!· of which ~~so fu~lish a yearly ret~rn. I sugge; th:t :~~ fs~fi~~

P 1r ohm of krleturn? which the Commonwealth Bank u is es wee Y, might be adopted:-COMMONWEALTH BANK OF A TR.A.LIA. ABRIDGED GSTATEMENT OF AccouNT OF THE OTE IssuE AND ENERAL BANKING DEPARTMENTS AT THE

CLOSE OF BUSINESS ON MONDA y THE 19 '

NOTE IssuE DE.P-~RTMENT. Liabilities. Assets.

Notes Issued. Gold Coin and Bullion.

Other Items. Debenture and oth r ec-

urities. Other Absct .

. GENERAL BANKING DEPABnIENT.

Cap1t~l and Reserve Fund. Coin, Bullion and ash

D~pos1ts. Balances.

Bills, Payable and other Australian ote .

Liabilities. Money at hort all in

London.

. . . . . .. . ... . ... .. .. ... 19

Short Term Loans in

Australia. Government and other

Securities. Discounts, Advances, &c. Bills Receivable and other Asset .

overnor.

The Bank of England publishes a return each week. The trading banks should supply to the central bank particulars of their balances overseas, but the informa­ tion should be treated as confidential. The present adverse exchange po~ition was foreseen to some degree but the extent to which it has developed wa not antici­ pated. The discontinuance of Commonwealth borrow­ ing overseas, and the tremendous r eduction in price levels were not foreseen. The trading bank have done all that they could do to meet the position. They

could not have given their customers more a si tance because they had not the funds available. They have to buy funds from some source before they an ell them. As a r esult of conferences of bankers a cheme is practically completed which will get over th di..ffi-

ulties of the Government obtaining London

£25,000,~0 i always in the hands of' th~ public; In no cucum tanc hould the public holding fall

bel ow £15,0 0,000-and to that amount the bank might accept long-dat d curi ties. The balance of the reserve should b h Id in gold or liquid securities, having a durat100 to maturity not exceeding six months. I would in Jud th securities of metropolitan, municipal and lo al g v ming bodie , and, within limits, those of some of th smaller municipalities. The Central

Reserve Bank should not be permitted to purchase or hold its own shares; no banking concern should do so, been.us thereby it loses its capital. The bank should have power to accept money on deposit on current account and ollect for public corporations and others . It is not the generally accepted practice of central banks in other countries to allow interest on government accounts· but that has been done in Aus­

tralia, and as we h a;e not here, as there is in London and ew York, a call market in which a government ;11ay temporarily invest idle money and get some 1~terest on it, the practice might reasonably be c?n­

tmued. ustralian governments a r e often holdmg money borrowed abroad, and they sh?uld have ~n opportunity to invest it until it is reqmred. The bill should impose a limitation on the advan~es to ~e made to a government. In times of financial strmgency considerable pressure mi"'ht be exerted on the bank directorate to grant large "'overdrafts. I am not awar e of any bank having called up a government overdraft and being unable to get its money. Usually central banks do not make unsecured advances to govern­ ments. The security usually accepted by the Bdank of England is in the form of treasury-bills. .A. va1;ces might be made by the Central R eserve Bank agatst treasury-bills, which the bank could, if necessary, P ace

exchange, but the difficulties of the public will b over­ come only by an adjustment of the trade balance. The trouble could not have been obviated b the exi -tence of a central reserve bank. Th board of the

proposed bank should be free of poli tical control as far as possible. If there were private hareholders in the bank some of the directors should be elec ed by them and the Government would appoint others. Io the absence of private shareholders, bodies r epr enting commerce banking and agriculture might ubmit a panel fror:i_ which the Govern_ment could s l ct d_irector . Indirectly the men representmg commerce agri ulture, &c., would also r epresent the trading bank . sually

one deputy-governor is sufficient. The Commonwealth Bank has a greater number of branches than the central bank would have and it has not experienced any need for more than one deputy-governor. It is no.t desirable

that the Deputy-Governor should be a member of the board; otherwise the executive head of the bank would have no greater power at meetings than his junior; and if two deputies were on the directorate they would have greater authority than their chief. The bill

pI·ovides for a reserve of not less than 25 · per -cent. of the notes i ss11ed ; usually we ,operate on a reserve of 37i per cent. I consider 25 per cent. sufficient as

a legal reserve, though, in practice,, a much higher :figure must be maintained. Whatever legal reserve may be :fixed, the bank must hold something con­ siderably higher to allow for unforseen fluctuations, which are continually taking place. The bill makes it compulsory to hold a reserve against deposits, in addition to the reserve held against notes. I ·think this is unnecessary; a compulsory reserve against the note .

circulation would be sufficient, although, in that case, I would increase the legal reserve to 30 or 33i per cent. The reserve should consist o:f gold, or gbld exchange of a country on a gold standard; the directors would

use t'b.ei r discretion as to the proportion of each which sh,ould be held. If the bank held _ securities or trading bills in 'London or New Y 9rk, they coutd be converted to gola at any time, and the gold,could }e ei ther shipped to Australia or held abroad. Thi( statutory limit of

the duration of such bills should be six months, but in practice it should be kept as short as possible-­ probab}y three months. Branches of the Central Re­ serve Bank should be confined to the capital cities and

a few of the larger provincial centres, such as Rock­ hampton and Townsville. These branches would function for the distribution and collection of notes. In the smaller to·wi:is the bank would arrange

agencies. The head office should not be 'in Canberra. The v1olume of business transacted in Melbourne and Sydney would be much greater than that in Canberra, and for convenience.and expedition the central adminis­ tration of the reserve bank should be in the same

centre as the head' offices of the principal trading banks. T):ia't is desirablfl also in connexion with gold shipments; if the • head office were in Canberra the transport of gold to the seaboard would be costly. Because ' bf Australia's close association with London

a 1>ranch may lre desirable there, but, generally, agencies would suffice. ' To Senator Sir H aLColebatch.-Under ·clause 8 the loans iand advance to governments and local governing

bodies are left to the discretion of ,the bank, and pro­ vided that the boaird is free of political control, the sa£e­ guards are ample. A ,board subject to political pressu:ne might be influenced to lend more than. was desirable. C1'ause 10, .which specifies 1the reserves ,to be lodged with the 1central bank would not hamper .the ordinary 1:rading openaitions of the trading ban.ks. The reserves

to ibe deposited would ammmi to approximately fourteen :ind a ·haH, million pounds Until recent years they have been ·cin the habit , of..holding up to £40,000,000 ih cash, including · till money, and at least £30,000,000 0£ that sum has been regarded as .reserves. They held in gold, which was .r egarded as ,dead reserves, well above· £20,000,000. In regard to the proposed consti­ tution1 of the board, the private shareholders in the Bank of England elect di.rectors. J In the United States of .America the Federal Reserve ,Board which has generalr control, is appointed by the Gov~rnment, but in res.pect of the twelve Federal 'reserve ban.ksi eac'h board -consists of three gover.nment nominees and six

directors elected by the stock-holding banks.· 'lJhe danger of allowing the trading ban.ks to nominate directors is that such nominees may regard themselves as primarily representatives of those interests and view everything from tha't point of view. I can~ot call- to

2

mind any directorate of a central reserve bank that is wholly nominated by the Government. The Deputy Governor is, as his title implies, the deputy of the

Governor, and. should n.ot act independently of him. The Commonwealth Bank Act provides that the Deputy Governor shall carry out such duties as the board directs, and in the absence of the Governor his duties

are discharged by the deputy. I see nothing exceptionable in clause 50, sub-clause 5. It provides that half of the total r eserve may be held in Australia 1and half abroa,d; the half, or more, held in Australia must be 'in gold. The est'ablishment of a central reserve bank would not in itself affect the exchange position. Already tb ~ Commonwealth Bank is doing practically all the wor,k that a central reserve

bank would do. The trading banks are voluntarily depositing with it balances in the aggregate nearly equal to wnat they would have to provide under the bill. The only difference is that those balances may be withdrawn from the Commonwealth Bank at any time,

whereas they would be deposited permanently with the Central Reserve Bank. The banks w._ere allowed to retain , one0third of their gold, but most of it has left :Australia;

in the Commonwealth, is held in tlie Note Issue De­ partment. ·ffhe proceeds of- the.Lgold taken over are large}y,repTesented by balances which the tnading banks oa:re volunlarily holding in. the Commonwealth Bank.

A central, bank operating dnJ unsound lines might make ·the fi.nancial position worse instead of better, bu,t .there is nothing · n (the ibill to justify apprehension on that score, unless political control be , exercised. The board

is ,to be appointed in the, same way as the board of the Commonwealth Bank. 1

T o Senator· Thompson.-;-The alteration of the exist­ ing sys;tJem night create a little confusion for a tim,e; otherwise it ,is i immaterial whether the central bank be establishei:l now or later. Central ba:nks are not generally controlled by ,governments. If the Common­ -wealth Bank is tb function 'KS a central reserve bank, it crnust (1gradb.ally divest itself of its ondinary trading

business. It is desirable that a central bank should have power to • trade, as a correchve of the private Jianks, if they are unduly contracting credit. I t;bink that the central banking funCJtions could he sufficiently divorced from the Commonwealth Bank to satisfy the

other .trading banks; but the Commonwealth Bank .could :not be a ce;n,nral bank and• at the same time ac­ tively compete with the •other institutions in ordinary trading. iin order to ' become a central bank it would

have gradually to divest itself of other business and give up trading, b1fo it is doubtful whether the sur­ r ender oi such profitable activities would be approved by any Federal Government. It would not be desirable to..,reduce the reserves to be lodged by the trading bank~ below the proportions men,hioned in , the bill, namely, 10 per cent. of demand deposits .and 3 per cent &£ •time

deposits. This obligation would not embarrass the t11adi1;1g ban.ks, because- the cash ilhey normally b.old now 1s , much more than they would be required to deposit with the central· baink. I'll the public interest building and banking societies should be brought under the scheme. Some of these smaller societies would be more likely to r equire assistance fr.om a central bank than would the larger tradi'Ilg banks ; and if they are

to share the bene:fi.ts conferred by a central bank they shouJd ·contribute to it. A proportion of the pro:fi.ts of the bank should be retained to build up its reserves. Lo..ng dated loans redeemable in 30 @r 40 . yeaa,s are

not suitable for a central b ank, the savings ban.ks are lb.an dling I that class of business. Advances against treasury t bills is a desirable method , of :financing governments. We place thBm with other banks

in exchange for balances not needei:l by them

at I the time JJ.nd un.dentake to .rediscount them

when required. The bill proposes that the ban.ks should

3

make monthly returns to the ce~tral bank, and publish quarterly returns; they are dorng the latter now in every State of the Commonwealth. If t h e bill becomes law they will r equire to make only one r eturn for the

whole Commonwealth; that should be less exacting than the present system. In regard to the constitution of the board, the bill should provide that no director or officer of a trading bank or member of Parliament

or of the Commonwealth Public Service shall be eligible to become a director of the Central Reserve Bank. The provisions relating to the appointment of a

Governor and two Deputy Governors are not based on the practice of the Bank of England. The Governor of the Bank of England is Chairman of the Board of Direc­ tors, he is not an administrator. In r ecent years his

v. ork has increased so much as to occupy his w'hole time. I do not think that the Central Reserve Bank should have as its execu tive h ead a general manager, without a seat on t h e board and answerable to the

dir€ctcrs as in the case of private banks. I prefer

control by a Governor with a seat on the board and full voting power. The circulation of extra notes to :&nance the wool clip and wheat crop is justified; that is

not inflation. The notes are a temporary advance

against a definite and r ealizable asset. 1'·o Senator Oarroll.-In regard t o clause 9 para­ graph D, the power to purchase municipal securities or debentures of a capital city having a currency of up

to two years to date of maturity is not ~angerous.

Portion of the rf)serves of the central bank ,v1ll be of a permanent nature. The v11lue of notes in the hands of the public is never likely to fal_l below £~5,~00,000 unless busiuess comes to a standstill, a ud w1tlun that limit municipal securities having a_ currency to

matur:ity of not more than two years might form por­ tion of the permanent r eserves of the bank._ T.h.ese transactions may r easonably be left to the d~scr et1on of the directors. Paragraph G of clause 9 provides. tpat

the bank may not "make unsecured loans or advances except to the Governme1:t of, the. Commonwealth or a State, or to any authority constituted und~r the law of the Commonwealth or of any State, or to _any cor­

poration carrying on the business of bankmg." I

assume that that is to permit the central ba~ to make advances to municipalities, princip~l and rnterest to be repaid ove:r a period of years, as 1s done now by the savings banks. I wouJd prefer that all_ loans should

be secured. The Government could . give T r easur~ Bills which are a marketable security. At the presenL · time' there is practicaly no restriction as to who s~all engage in banking business. A p erson or co~~orati_on

with a cap:tal of £100 may set up a bank. Ihe bill'.

however contains a definition of . " ba_ nk" and o~l.Y those in~titutions which deposit the r eqmr~d propo~tt~ of their balances with the central bank, will behentldit eb · Tl h · f the board s ou e to assistance. ie c auman °. · il-

not necessa.rily the Governor, but the be~t man ava . able for. the position. A good gov.em or . m 1g:1t be a 6oor chairman of directors. There is nothmg 111 the f om­ moiiwealth Bank Act. to. prevent the Gover;o~ ; 0-:e

being ·cliairman, but 1t 1s generally accepte t a should not be. · . . th

To Senator Cox.-Nothing in ~~e bill_ empowe:sd.n e c0 ntral bank to enter into compet1t10n wi t~ the tia ~n~ b~nks to any extent. It could accept deposits obn c_ kurrd .. -. d " . d l but a central an is

account from 111 ivi ua s,. The Bank of Eng-

courages that class of bus~ness. . · terest on

land accepts private deposits, but pays fno in . . m

. h . tenance o a min1mu

-Jl:iem and reqm~e~ t e ma111 made attractive for

balance. Conditions . are not private depositors. b k b

S If the centr al an e To Senator ampson.- B k ·11 be divested .established the Comm?nwrltht" an anr\,m b.ecome a of all its c~ntral ~ankmg unc ions G'overnment. simple tradmg bank backed by the ,

F.3395.- 3 .

501

To Senator Carroll.-The 'entral H en Bank ma , be able to rent premises from the Commonwealth Baul· that would not interfere with the separate identitie' of the two institutions. The Commonwealth Bank iu

~ydney is now extending its premises into Pitt-street 111 such a way that the Central Bank could be accom­ modated there. 'J.'o" Senator Sir Hal Colebatch.-The establi hment

of a Central Reserve Bank will involve con iderablc cost, but I do not think there is any doubt that it will be a profitable institution. To S enator Carroll.-The Central Reserve Bank will

take from the Commonwealth Bank a good deal ,>f profitable business without which the existing in titu­ tion will be less profitable than it i to-day. lt, will

still have to carry the same overhead expen es, but. its earning capacity will be reduced. To tlie Chairman.-I do not think that a bank en­ gaged in competitive trading could become au effectiv central reserve bank. The Commonwealth Bank already discharges a considerable proportion of the functions of a central bank; to take over all of them it would have to cease i ts trading activites. The Chair­ man of the Centrnl Reserve Bank should be chosen by

the Director s. The Bank of France, which is very closely associated with the Government of that country, at one time increased the currency, but did not show the increase in its balance-sheets for several years. The

ultimate disclosure .of what had happened caused a scandal and temporary inflation and diminished public confidence in the bank. Ultimately it stabilized the franc at about .one-fifth of its previous value. Th

accommodation given by Australian banks to meet seasonal requi'rements does not mean inflation, because i t i~ backed by paper which is secured by the value of . the crop. ·

·To Senator Thompson.-You suggest that instead of creati~g a new Central Reserve Bank tlie present Co~­ monwealth Bank should be made a central bank and its ti:ading operations lopped off and t:ansferre~ to a se'parate institution. 'l'~at process n:1ght be srmpler,. ~ but it is a politic3:l quest10n upon which I do not care

to express an opi~ion. The Commonwealth Bank_ could become a central bank except that it. can exercise' no compulsion over· the t;ading banks, and it could still carry on ordinary trading. . .

To the Chairman.-! see no danger to the tradmg banks in the creation of a central bank and the con­ tinuance of the Common wealth Bank of the la ttcr being given prefer ential pri_ vileges. The 1:i,tter, as

a trading bank, would contnbute the prescnbed pro­ portion. of . its J?.alance to the central ~ank, and would have· only the same benefits as the pnvate banks. It would not Ji.ave advantages denieq to other banks. The Central and Commonwealth Banks would ~e separ?-te institutions and the former would have no :ight to giye the latter info1·mation that was not available to its

tr ading competitors. Of course a good dea~ woul,l depend on the management and that emphasizes the need for keeping the ce11tral bank free from govern-ment control.

The witness withdrew.

Alfred Charles Davidson, General Manager ?f the Bank of New South Wales, sworn and exammed. To the Chairman.- ! submit to the committee a general statement in connexion with c?ntral reserv.i

banking and ~he .principles thereof, copies of Central Banks by Sir Ernest Harvey, K.B.E.; the secon

June, 1928; the South African Currenc'!! and Banlcing 1 t 1920 which provided for the establishment of the iiu'th Af;·ican Reserve Bank; and lastly an annotated copy of the bill · -for the establishment of 11 centr11l

reserve bank for Australia, as passed by the House of Representatives. Central Banks, by Kisch and Elkin, is regarded as the leading authority on the subject. I am in favour of the establishment of a central reserve bank for Australia, but I think that the wisest policy is to allow such a system to evolve out of the present banking position and banking institutions al;eady established. I question whether it is advisable to create

a new central reserve bank in Australia at a time such as the present. The establishment of such an institution is a matter of such fundamental importance to the whole of the financial, business, trading, industrial and commercial c?mmunities of Australia that it is necessary to give time for a thorough investigation of the whole position and to consult experienced and recognized experts in central r eserve banking throughout the }\'Orld before the final step is taken. The Commonwealth Bank, in co-operatio.n with the trading banks, has been developing towards fulfilling the function of a central reserve bank. This evolution should be allowed to continue. To enable the Commonwealth Bank to become a proper ceRtral reserve bank certain amendments to the Com­ monwealth Bank Act are necessary to bring its con­ stitution into conformity with the principles of central .. res~rve banking. It is now providing considerable

assistance to the trading banks in meeting the difficulties of the-present situation. As probably two or three years will be required to establish a new central reserve bank, an attempt to transfer the quasi-central-reserve­ bank functions of the Commonwealth Bank to a new institution would probably act to the detriment of Aus­ tralia at the present time. The main aspects in which the present bill fails to meet the requirements for the establis~ment of a central reserve bank may be shortly summarized as follows :-

( 1) (2)

(3)

The management is unsound. Interest should not be. allowed on deposits by governments. Unsecured advances should not be allowed

even to governments. The Central Reserve Bank should not be allowed to make any unsecured advances either to government.s or to banks, although those who drafted the act may consider that clause 59 gives the Central Reserve Bank a sort of debenture over the whole of the assets of the borrowing banks. ( 4) Advances on or dealings in local government

securities should not be allowed. ( 5) The drawing or accepting of bills payable should be limited to thos.e drawn on demand. (6) Currency of permissible securities should be

limited to short terms. (7) Reserve ratios require consideration iu' view of the effect upon Australian finances of the extraordinary vicissitudes of climate. (8) No provision is made for secrecy. (9) It should be expressly stated in the act that

no person who is dependent on or connected wit~ politics should be capable of acting as a director, and further that officers of the Public Service who are dependent on

Government for their positions and emolu­ ments should similarly be excluded. . The fundamental principles applying to the estab­ lishm ent of a _ central reserve bank are la id down shor tly and clearly m Harvey's Central Banks in thirteen

points. It is necessary that these points should he strictly adhered to in designing the constitution for a central reserve bank for Australia. Objection is taken to th~ bill in tha~ in runs counter to the following

more important pomts :-Na. 2.-A Central Reserve Bank in its management and policy should be free from Government control and the in­ fluence of politics.

4

No. 5.-A Central Reserve Bank should not ordinarily compete with the Trading Banks for general banking business. No. 7.-A Central Reserve Bank should not take moneys at interest on its own accotmt.

No. 9.- The assets of a Central Reserve Bank should be of the most liquid character possjble. No. 10 .-A Centi-al Reserve Bank should not draw or accept bills payable otherwise than on dema nd.

No. 11.- A Central Reserve Bank should not en"a"e in

gener a l exchange business on its own account for the 1m~·posc of earning profits. 13.-A Central Reserve Bank should have no branch ·outside its own country, but may have agencies abroad.

In my published commentary on the bill, I have tried to set out simply and clearly for those who sought my advice the opinions of r ecognized authorities on central reserve banking, to call attention to the features of the bill which do not confoTm thereto and.in some cases to make suggestions which should l~ad to further inquiry and discussion. In approaching a subject such as t?a! of central r ese rv_e banking, which is highly speciahzed, and upon which it could not be expected

tha! the public would . be informed it was thought desira.ble to draw attention to the need for considering what should be the . relationship between the Central Reserve Bank, and governments on the one hand and

the trading banks on the other . In view of this it

seems desirable that sonie detailed reference should be· mad~ to . the c?ntents of the commentary to place such pornts m their proper perspective before the com­ mittee, and, in addition, to place on record the result of . further investigations into the authorities· since the ?ommentary was published. Certain suggestions made rn the commentary were accepted by the Federal Trea­ surer _and ~11corporated in the bill by amendments in comm1t;ee 111 t~e Ho1;1se of_ Representatives. On pages

2 and ". there 1s a dis~uss10n- of the pros and cons of the tradrng banks holdrng shares in the capital of the Central Reserve Bank, and having representation on the board. It is not considered to be in the best

interests of central reserve banking that the trading banks should hold shares or be represented directly upon th~ board. . On pag_ e 3 ~ suggestion was put for~ard as a basis for discussion, namely, that the ?apital of the Central R eserve Bank should be divided rnto three . equal parts . to be held respectively by the State, the gene!·al public, and the trading banks. This was advanced rn order to induce inquirers to find out for ~hemselves what the relationship of each of the parties _n~med should be to the Central Reserve Bank.

The opimon of the best authorities is that neither the Sta!e nor the trading banks should hold shares in the capital of the Central R ese rye Bank. The trading banks further should not· elect directors to the board although the State may have a minority representatio~ on that body.

The capital of a central r eserve bank for Australia wo1;1ld probably not req_uire to be more than £61,000,000. This should be subs?n?ed by the general public. To ensure a full subs?nption, · the .flotation of the capital · could be underwritten by the trading banks or the

State and the trading banks in conjunction, provided that the whole of the shares should be sold to the

p~~lic a~ applications were made therefor. A con­ d~t10n might b_e t_hat the whole of the shares should be disposed of withrn, say, three years of the establish­ ment of the bank.

. On page 4, paragraph 5, the suggested allocation of d1rectors woul~ be altered in view of the opinion stated above that neither the State nor the trading banks should be stock-holders. My comments here will also have some reference to those made under clause 13 of the bill, so that I need only say generally that the bill should provide that directors whether elected by the stoc~-holders or appointed . by the State, should be r~qm~·ed to have. as a qualification a wide and dis­

trn~ms~ed expen~nce _in business affairs generally. This might be gamed rn either primary or secondary

industry, finance, tra de, or commerce. It is most

important that no director should be on the boa rd as a direct represent ative of a section of the community . I t is also n ecessary, in order to a dhere closely to Sir

Er~es~ Harvey's s_ econ

government should be elected or appointed a director, nor should the emoluments of the Governor or any other officer be fixed by any other authority than the Boa ·d.

The constitution of a central reserve bank which would serve as the best basis upon which to model su ch an institution for Australia i s that of the South

African R eserve Bank as amended. The a ct was

passe d in 1920, and the bank was established in 19 21. In 1925 two exp erts, Dr. Kemmerer, Professor of

Economics a nd- Finance at Princeton University, United Stat es of Amer ica, and Dr. Vissering, Presi­ dent of tbe Nether lands Bank, visited Sou th Africa as a commission to inquire into certain matters, in­

cluding the positJon of the South African Reserve Bank syntem. Certain improvements suggested by th em wer e adopted. I am strongly of opinion that the Central Reserve Bank for A ustralia should be a public institution -with capital subscribed by the public; certain qualifications

should be 1·equired of d 1r ectors, and restrictions should be pl a ce d on shareholdings, voting power, &c. If

thougl1 t d ,sirable, th e State might be represented on the board by a s mall minority of directors, e.g., two out of nine.

5

Th0 pstabljshment of a central r eserve bank is of

fundameut.a.l importm1ce t o every section of the corn­ rnunity. Its influence can make or mar the :fi~an:e and gen er a l prosperity and progress of A ustraha c~ sneh an ext ent that it cannot be too strongly urgea

that the establishment of such an institution should have car eful consideration over a sufficient per_iod of tirne. It sh ould not be dealt with hastily or m any

narrow or partisan spirit, and, in my opinion, it is of p ar amount importance that ex12erts from abroad who have had d irect and close experience of eentral reserve hm1king should be brought t? . Australia as a c?m­

rnission to inquire into the pos1t1on he.re an1 sub~~t a rec ommendation as to 'i,vhat would be, 111 thmr op1111on, the bes t form of bank to be establishe~ to m eet the

sp ecial conditions obtaining here. While t~1e funda­ niental principles of central . reserve bankrng apply g::merally, t h e condition~ ,recu_h ar. to each co_ untry and peo ple n eed special conswerat10n rn the details.

Turning now to the specific provisions of the bill, I . offer this comment: Ola u se 1 O (. 1) .-The opinion is held by some

.1 b l · oner whom

authorities on central reserve an nn~, am o . er

i~ included Professor Gregory, who 1s a cco_mpanyi~:' S ir Otto Niemeyer on his mission to Australia, that ll1 a n ew and comparatively undeveloped country such as Australia which has no bill market and no mo1:ey market, the ratio of cash reserves which the trad_ m~

banks should · k eep with the Centr~l Reservr ~ank should be placed so. high that even m _ :norma ti~~s: with only normal r equirements for credit, the tral~ h~ b,rnlrn should be compelled to l ean...__ to Tsohme ~ ig '· ,. B k ere 1s no exten t upon the Central Res~rv_ e an · .· - . h _

doubt m u ch to be said for t.h1s 1n cou.ntnfes w_it t com Paratively equable climates such as,. ord ins ance h, ~ · 1 own sue England or New Zealand; but rn aymg . d th t 1 · · t t be r ecogmze a per centages for Austra i~ ~ mus 1·ti. n of Australia11 +h e paramount and overndmg cone 1 0 . t· ~ . b . . the climate. The vana ions imance and us1ness is . d + d ' arth are so from p eri ods of plenty to peno s 0.1. ~, " h, h . r

upon th

. Part 3, dealin g with th Bank, is treated on page 1 3 to 1' of th omm

Suffice it to say h er e t h at the manag m n

posed in the bill i fundamentally un und .

already stated my opinion that th ecr tar t

Treasury should not be a men ber f the b ar

holder of such au impor tan t po ition mu t n s ari1,

be a very bu y man, and u nable to give n ni ntl '

of his time to this responsibility . On the other harnl it is not advisable that a member of the J: ubli \vho owes his p osition and emolu ment t th ment should be eligible for a eat on th b

directors of this insti t ution . I t is difficul to r g a r d

as sound administration the independ nt app iutmen of the D eputy Governors, and the provi ion for th ir having seats on the board of director . uch an

arra ngement ,vould tend to friction and a lack f g J

t eam ,vork among t h e execu tive offic r and th aff

generally . Clause 16 .should be struck out. Th sary provisions for vacation of offic . .

clause 22 . It is difficult, th r efore, to v1 w tln

vvit h out f eeling that it might be apable f b in

for poli ti.cal purposes on occa ion. 1:y mm n

clause 19 will bear emphasiz ing. Th b ard h ould

fix the salar~es and emoluments of th aff in ludi11 the chief executive officers . The pro vi i 11 in th .

clause in the bill savours of political int rf r nc .

In r egard to cl ause 38, 11? r ea 011 i d i closed in

bill for givina- the Australian note the new name '' Commonwealth secur ity." I n fact, in sev ral pla in that cEvision of the bill Au str alian .r ote ar r -

forred to as Au stralian N ote , which t rm :\' uld b

clearer and obvi ate the po sibilit. of onfu 1011.

In /egarcl to clause 50, it might be to add in

the last line of the note in th comm af r

per cent. " or 12} p er cent." With a und ruanc1 -

rnent it is probable that th 1entral R rv

Australia would :/;ind it necessary to. hold 1., rg fs ld a11 1 g old exchange funds _iu. Lo1~don for ..lu tr.ahan p1;1r­ poses. In view of tlns 1 t might b f und m pra ti

that it would not be uecessary to. h?ld mor . :ian 1 2

p er cent. in gold i n .Austra1i_a if th1 1. , hat 1 rnt nd d

to be provided for rn the bill. In r egard to clause 54. W ~uld n_o ~

in the commentary be met by Inv rtrncr 11'. lau the words " acquire aud " b for r. ma~ n th

&c."? It i doubtful whether the bill 0-1

acquire l and and buil

nommonwealth Bank. In regard to cla:,1sc s _51 (1 ), (~)

1 . n ccns arv to brrng rn the autbont I, '" " 2 I h Treasurer in the e matter . n a a . h ou1d be left to th e B oard. Th au h n '

approval of the Treasurer . f

fe r ence. I t is of th utmo t imp

1

rt~11

gar d should be given ~o that r o.ut1 n f h

confer 11 cc which tatecl, "Ba11k b 1l

politi cal pre sure and should b ~du t d

lines of prucl nt :fin ance." Thi apph for the new ommomvealth Ba~1k, and : made to u h a propos~11 b.Y u Erne t

bottom of page 1 of h is pampbl t i n

In regard to clause 61 ( 1), in view of the serious

po ition of Australian national finances it seem neces­ sary that provi ion should be. made for a considerable proportion of the profits of the Central R eserve Bank to go in reduction of the national debt rather than that the federal Treasurer ho uld have the spending of the whole of the profits of the note issue as r evenue.

In regard to clause 65 (2), in a large, undeveloped, and thinly populated continent such as .Australia this provision would be likely to press harshly in many instances. In their endeavour to assist i n the develop­ ment of .Australia the banks maintain branches in far distant and out of the way places, and in many small

villages, where expenses and costs are a serious con­ sideration . It would be much more equitable to have such provision limited to zones based on the capi tal cities where the central bank is likely to have branches. Under the system of book-keeping adopted by the .Aus­ tralian trading banks the elimination of exchange will raise the important question of interest and the cost of maintaining branches in these country centr es. .At present the banks give cr edit for cheques i ncluded in a deposit immediately on receipt of the deposit. If no exchange is chargeable to cover interest fo r the period of time which must elapse between r eceipt of the cheque and receipt of proceeds at the branch where the deposit is made, the alteratiq_n would probably nece sitate the adoption of the English system of bank book-keeping where credi t is not given for chequ es r eceived in a deposit until the cheques have been paid and proceeds received at the branch of deposi t.

The question raised in r egard to penal ties is one of interpretation and i t is probable that the legal inter­ pretation of the penalties provided would apply in the manner suggested in the commentary.

Outstanding omissions in the drafting of the bill are :-(1) That no obligation to secr ecy is r equired by the staff or the director s, and

(2) That there are no schedules in the act giving specimens of the forms of r eturns r equired to be r endered by the trading banks or by the Central Reserve Bank. The bill r equir es that the consent or ap­

proval of the Federal Treasurer be obtained

m r espect of sever al matter s and provides for

investigations and audit by the .Auditor-General of the Commonwealth. These provisions should be deleted . The board should be left free to exercise its judgment and take full responsibility. The .Auditor­ General, being an officer of the Public Service, comes within the objections I have r aised on that account.

Clause 59 is unwise as it gives the Central Reserve Bank what is tantamount to a debentme over the whole of the assets of a borrowing bank, and so may lead to loose administration. Banks wishing to borrow should be compelled to r ecliscount approved bills 01: pro,ide approved security for the amounts required. In division 4 of part 4 of the bill the draughtsmanship

seems to have been very loose. While for some in­ conceivably r ea on an .Au tralian note is defined as a ". ommonwealth curity" we find the term ".Aus­ tralian note" used in everal clauses of the division instead of a uniform adherence to the term " Common­

,,ealth security." .A central r eserve bank would be of o-reat a sistance • b as a copmg stone to the -financial system, but I do not know that it is wise to intr oduce it at the present time.

Two or three years would be r equired to get the new institution going, and the hiatus between the disturb­ ance of the present sy tern and the effective working of the new one would be to the detriment of the trading banks. Profit-making should be the last consideration of a central bank. I do not agree that the p rofit of

6

the note issue should be sep arated from the general profits of the bank; the profits from all operation. should be pooled, and portion of them should be applied to the reduction of the national debt. The burden of indebtedness at the present time· i very hea,y, and it would be wise to all ocate a co nsiderable portion of the

bank's profits to the :National Debt Sinking Fund, in addition to the statu tory contributions. 1.lthough it may be desirable, under particularly good conditions, to cr edit the surplus profits to Consolidated R evenue, it

would be better to devote them to a special purpose until the institu tion and the country are in a

ver y much ounder position. One of the great

tr oubles of .Australia at the present time is the amount of capital tr ausferred from industry and commerce to meet the requirements of government. Our objective should be gradually to transfer that money back from government channels to private industry. If we could swell the Sinking Fund by cr editing to i t a portion of

the profits of the Central Bank, a considerable sum would be transferred from the Commonwealth debt to private funds and made ava,ilable to commerce and in­ dustry in the usual way.

In the ordinary course the securities which a central bank accepts are limited to a currency of three to six months; but because of the big gaps between the dates of maturity of various Commonwealth loans, very little stock would be available to the Central Bank if the period of currency were made too short. It may be necessary to provide that Government loans with a cur­

rency of up to two or thr ee years should be available to the Central Bank, but in that case only to a

limited amount. This question again emphasizes the need for time to consider all the implications of this legislation. .An examination of the complete roster of .Australian loans is necessary to ascertain their cur­ rencies . There may possibly be a time when no loan will be maturing for five years, and at the beginning of that period the Central Bank would not have access to any government securities. I suggest that the government securities with which the bank may deal should have a currency of not more than two years, and should not exceed a specifi ed proportion of the bank's reserve. That would mean that in 1930 the bank could not invest in any secmity maturing later than 1932. Securities maturing in, say, 1935 would fluc t uate much more than

those falling due in only two years. From the point of view of a central bank the best form of liquid

securities are trading bills, excepting accommodation bills . .A system of advanci ng on bills to a ljmited extent, instead of on mortgage, might be advantageous. .A merchant wanting six months accommodation would give to his bank a six mon tbs' bill. The bank, if it

desired to r ediscount the bill would endorse it, and the Oen tral Bank would then have the protection of the drawer's signature and the bank's endorement. If stamp duties were r educ cl to a reasonable amount, the

banks could start a scheme of this ort, and within five years create a con iderable body of trade bills. One r eason why trade bills are not used to a greater extent is the heavy stamp duty imposed by the tates. The secur itie of municipalities and other local governmen t

authorities should not be included amongst tho e in which the Central Bank might deal.

The Central Bank should not purchase or hold , it own shares. I see no objection to it accepting money on deposit on current account and collecting mone for public corpor ation and others. In general practice

a central bank accepts deposit , but impo e conditions which disco urage thi clas of bu i:ne . A central

bank should not allow intere t on ommonwcalth and tate Government ac.counts. It should not aim to make profits, but if it has to pay intere t on Government accounts, it must make pr ofits. .At a time of cri i

it might have to r ealize i ts securities as fa t a po sible,

8.ud it might be left with no revenue-providin"' secun­ t~es . ~f the bank h ::>.d to pay inter est, its fi~· st con­

~1derat10n wou~d. be to make profits. The bill should rnclude a prov1s1on limiting the advances t o be m ade to. ?overnmen.ts, and no such a dv an ces should be made w.1 tnou t secunty, such as tr easul'y bills or other r ecoo·-mzed Govel'nment securities. "'

The form of the r eturns r equired from the t rading banks should be ~efinitely fixed by statute. That would ~reserv.e t o P arliamen t the right to decl ar e wh at i n­ format10n should be supplied, a nd would p reven t an y

person o:· government making a r egulati o11 r equ i ring mformat10n t o . be supJ:>lied for i ts own . pur­

poses. I admit th at 1f a form 1s fi xed bv

statu te, . an y al t~ration that might be r equired

from time t o time will be difficult. But the

quarterly r ety rns and av~rages which trading banks l:avc to fu:·msh arc presen ted by statute, and no need for amen dm g them has yet arisen. For insta nce, the retu rns of adv ~nces an cl deposits are n ever likely to be altered; 1hcy will probably be sep arated for all time into

two classes, fi xed a nd call. I will let the c ommittee have a draft of a form of r eturn which I think would suffice. Tho co nstitutio11s of several of the cen tral bank s in Europe prescribe wh a t infor mation shall be supplied by

the banks. I see no grave objection to the tra ding banks being r equired t o supply particulars of their balances over seas and their dealings. As a matter of fact, that information can be ob t ained with r eason able accuracy from the qu arterly r eturns and bal ance-sheets of

the banks. Ther e has ' been some objection t o

supplying this informa t ion m t he p ast, because

the Oommonewal t h Bank 1s by statute and

poli tical pressure, , a competitor with the trading

banks. If it were a central reserve bank only and not a trading competitor, there would be no objection to disclosing the information.

• \ ll bankers fores:i w the preseD t ad verse exchange position, but nobody anti cipated the complete closing of t he London ma rket aud the severity of the fall of t he prices of our exportable product s. Those are the t.:10.

principal con t ributin g factor s. "\Ve expected a fall rn price levels, but not to the exteDt t hat it h as occurred. I do not know of any p reventive m easures ~hat could have beeD taken other than thOR{) which have been

taken.

In regard to the control ~Dd m an agem en t. of the bank, probably the best board would be one of n m e to eleven directors of whom two might be selected by the

Governm'ent from a specified cl ass of men- those who have had experience of bankiIJ O' and commerce, and ar e r ecognized as· capable m en i; their own i ndustr:y or profession. One deputy-governor would be sufficient,

and he should not be a m ember of t h e board. !rom

an administr ative p oin t of v iew, i t would be UI1~1se t.o give a su bordinate officer equal v oting power w1~h his chief. The Governor and t h e D eputy-Governor. will .Dot always vote together; wh en ~hey t ake opposit~ .s1~es

friction may arise to the det~·1ment of the adm1msh a­ tion. The daDger would b~ mcre:1sed by the fact th~t the deputy would be appointed rndep endently of his senior officer .

A wise admin istration will learn froJ:?- exper ience what would be a safe r eserve to hold agamst t h e n?te i ssue. It may be 50 per cent. or 40 p er cen t. W:1t~

a mar "'in of only one-t hird above the statutory m ~n~­ mum if a run started it would be n ecessary to wit -draw' four not es for ever y sover eign paid out, and the pressure on credit woul d be ver y gi:eat. In my pap.er on Central R eser ve B anking, I p om ted .ou t . th e di f ­

ference bet ween the E nglish aDd Amen can systems, flfl cl said th ~t I di d not thipk that a free gold mar ket,

7

such as tLa t of Londo 11. could be maintain d. cxc pl ~n a £1 for £ 1 ba i , aboYe a limited fiduciarv i~sut.

Th at pas age r ead - ·

The co'.1trol <;>f the note issue in a financially independent country 1s 111arnly affected by the di count rate. Thi i

used. to protect the hacking to the note is ue and to check

t he increase of the i~stie by the rai ing of he rate o a, to

ind uce a flow of o-o]cl into the country, while the greater

ex pen . e of ucco1111nodation reclureH the lemand internally. .l n t his conncx1on there a re two chool of thouaht. ne i

t he fix~ cl fi d uciar~- C'hool, which require £1 fo:' £l or unit fo r urnt a.born a fixed issue of note not backed for "'Old­

the English system, \\'hich it is propo ed to continue" when ~'.1 the near fu.t ure the Bank of England takes o\'er he

l r eas11 ry note I ue. The second is the minimum ratio or

propor tion a l . fi duciary school, which fixes a minimum per· centa.ge holchng of gold, the balance being fiduciary. The backm g to_ t l1e fi duciar y i sue is generally limi d 'to

a pproYecl bills and government securities. ~' he cla nger of this per centage system lies i n the cumu­

lat, rn effect of t he withdrawal of o-olcl . In America the

minimum r a tio is 40 per cent., and ,~e will assu me that the commer ci a l bank~ usua~ly . ]! old a propor tion of 20 per cent. ?f cash to dep<;>s1ts. L1 m1t rng ourselves to this assumption, m order _ to avoid a cha r ge of specia l pleading, let us consider

t he po~s1ble e /Tect of the application of the minimu m ratio rn 11 11 important commercial community that aims at being a world cent r e fo r fin ance and a free gold market.

If t he pr oporti on s ment ioned above were actually reached a wit~dra\\' a l of £40 in gold wou ld r equ ire a witliclr awal of £100 m notes by t he Central ReserYe Ban k wh ile a r educ­ t ion of t hat amount in t he cash h oldings of t he commercial

ba nks, should the full effects of t he withdr awal of notes

fall upon t hem, wou ld en tail a contraction of credit well

on t he way t owards £500.

I n other wor ds, for ever y £4 .of gold paid ou t, credit would be contr acted by £50. I n regard to the

accep tability, limitations of securities or trade bills to be acquired by the cen tral bank, are usually placed at 90 or 120 days ; a further limitation is th at they

shall be "good t r ade bills," and that must depend on the central bank's knowledge of the dr awers and

endor sers. I n some cases it would demand two names on the bill, and i t would have· the endorsement of

the trading bank in addition to the n ame of the drawer .

A centr al bank would not requir e branches outside the capital ci ties. If .A ustr alia's population trehled or quadrupled, branches might be necessary in big provin cial cen t r es ; but the United States of America, with a populati on of abou t 120,000,000 people, has only twelve r eserve bauks wi t h about 24 branches. It is not considered proper for a central reserve bank to have

any bran ches outside i ts own territo ry ; it may have ag~ncies, and it may be advisable for a domi nion

cen tral bank to h ave a br anch in London. In big

provincial towns the trading banks can p r ovide aU faciliti es, including the issue of notes. In my opinion, i n its dealings with the trading ban ks the

central bank would not r equire to have branche

ou tside Sydney, M elbou rne, Brisbane, and Adelaide, wh er e t he head offi ces of the tr ading banks are situated. The central bank would deal primarily with the trading banks, and only with their head offices, bu t for con­ venience a br anch of tl1e cen tr al bank hould be e tab­ li shed at' P erth and at Ilobart, because there it would be dealiDg wi th State Governments. One would be

nece~sary a t anberra, also, to deal with the ommon­ wealth Government. ,\ head offi ce in anberr a would be most inconvenient; the functions of the bank 1·elate to the . o·eneral business dealings of the community, and less i mpor tant than its t r ansactions wi~h the Gove.rn ­ ment offices in the large centres and with the tradrng banks. Ther efor e, in p r actice, the head office would

be most conveniently placed in the most important trading centre, Sydney. An article by Kiscl1, pu~lishe~ in the B anker in 1929 points out that t he difficulties of cen t r al banks

have' almost always arisen from government int~r~er­ ence. Kisch and Elkin, in Central Banlcs, J 930 edition sa,v, at page ~1, 11 But it is not on ly in America that the

e gornrnmental influ ence ha b en Develo pm nt in Franc

betn·e en 19:u and 1925 al o offer a triking example

of the same p h.e n omena. ' Following on r efer ence are made t . th increa e in fh e note i ue a the pm­

cha iug I ower of the frar1c fell and th e exigencie of

the "overnnwnt in r ease d. The ,, riter continued­ " But even t he enhanced po,ver to borrow from th"

bank \ra in . uffi ie1it to ab fv the need of the Go,,crn­

m e11t. ~\.cting u nder govcrn~e11t compul ion, the bank PYe1 tually exc ded the legal limit for advanc to the

Trrn ury, and published balanc - 1 eet devi ed to hide tbe fact." F urther 011 :figures are given to h ow that

the legal maximum is ne WR exceeded, Rnd concealed from public h1ov,1ledge until the situation wa made public in ,' pril. 19%. Then, to quote again-" Ther e ran be no qu estion that the p o"ve r of the Government to fo r c:e in 1·ea. ed loan from th e B an l- of France

in tensifi. ed the depreciation of the franc, and contri­ buted to the financial cri i ' that culminated in J 926. Sucl1 extr eme abuse: :; of government power ar e, of ro urse, on]y pos. iblc when a country has cea ed to be on a gold basis." It should be noted here that Aus­

trB lia i at present not on a gold basis. The closing

paragra.1~·h r ead~-" N everth l es , if the control of the oper ations of the centra1 bank lies directly or indirectly '>vith the Government, i t bec omes fatally easy for the Governn1 ent to fi nance itself for a time by m ea ns of

book entries and short loans from the bank, ·a course which is the first step to,vard currency depreciation and inco nvertibility." The next p.aragraph is also ,.,·orthy of stud.r, and opens with the sentence, "Everi apart from such risks, there arc other seriou dangers

frorn a governme11t-contr oll ed bank."

The Hon . George P eel, in his book, The Financial Crisis of France, 1926, in th e chapter bearing the title "The ri ..., i" in Full BJast, 1925," says-The Bri t ish public . . . could only accept the s ombre

forecast an d conclus ion of The Times that "French finance js gra.dna ll y but sur ely m oving towa rds a n unhappy climax" · confe, s ion on behalf of the Bank of France wa,

now issued in the enate, that it had been in· the pra ctice of

presenting deceptive ba l ance-sheet under the stress of Go­ vernm ~nt compulsion . This tatement was accompanied by a. cor rrctecl b:il ance-sheet, "vhich showed that, wher eas the a uthorized st a tutory maximum of ba nk notes issued to the public ,,·a 41 milliards, the numb r issued in r eality was

43 milliards. T o a crit ical eye even this eemed to savour of

under - tatement. · A t any rate, it was eviden t that the Go­

,·e rnment in it ·ear ch fo r r eady money had been queezing

mere funds from the bank than the l aw allowed . . .

The onl y practicable measure to be taken now was to ' intro ­ duce and pa a la w rai ing the total legal limit of issue from

41 to 45 milliards and co rrespondingly the limit of advance to the Trea ury from 22 to 26 milliard "with the sole

object of r egulari zing the actu a l fact of the situ ation "

or failin g uch mor a l consider ations, mu. t we

' !lppose that the a u t h oritie of the Bank of France conceiv­ ing t h a t a climax of Stat e ba nkruptcy was imminent and

alDxmed for the ~ecurity of their extr a-l ea-al advances "ble, the gaff ?"

In ~xoidan~e of o dra tic a n inquiry into the foibles of

finn,n c1e r s or rnto t he bl uff of balance- lPet let us a k our­

seh- e whether the Bank of Fra nce ,va not more .., inned

again t than sinnin o·, a nd was not in ub ta.nee the victim of

un sound fina nci a l method which were not i ts own .

So, a 192.- proceeded t h bank \\·a in rea in o-1 involY d in

a complicate I po· ition. Producti n and trade l~o-itimately de­ manded mor note . Tbe Treasury al ay in cl fl.cit, and un ­

a.ule to borrow otherwi e, demanded more note a l o. Rath r tJw,n ch~cl~ trade by a rigid in i tenc on the legal maximum of 41 !u 1 '.l 1.a r d . rather than brin rr t h Trea ury to bankrnptc b r ern;img note aboYe the lea-al maximum of 22 milliards, the ? a n k ga,·e wa:'. The un 1111d r quirement of a tate in

deficit, the ,· cnmd r equirement- of a n ation in bu ine s

acti,it. , cm 1bined to i nduce he Bank of France to violate

the u n ournl y te1~1 of a . li mited cmT n y · impo ed u pon i

by Ia ,Y. re i mbroo-ho rul y for a n ld itan f un-

tarni , hed repute!

Loo k ing at the ma ter in another light, t h e French

Trea~ury, i t ma be ajp. had b ome by gl' dual deg r ee the

b11 . in , rompe i r f th Ba1j k of ; ran . ''The Trea ur

8

acL . in fac , a an en ormou depo i bank ab orbing the

saxing" of the p11blic a they are made ' (The E conomist,

s\ pri l l l, 1925, p. 710). And thi bad ban1 er wa actin o- on

un 0 1111d lin .

po ib lc the clangerou

per a tion , let u u m­

ix month of 1924.

. H ere i an apparent deficit of 7 million £ran add

the ba la n ce of former d efi cit and a small nmou nt for working expen . s, and the total deficit wa 1,250 million fr a ncs . Thi

s unnnarizecl stat ement may en abl u to gauo-e plainly the

fu ll danger of the normal Trca ury itua t ion. The Trea ury,

" ·i U1o ut any r ·e n e fund or wor k ing capital of it · o wn, i ti

Yu lner a ble at five points. If the budget i in arrear s or in

deficit the Trea ury ha to find the money. If ther e are

extra-budgetar y s pecial account the same applies. If the

r a ilway h ave to call u pon the tate for its g ua r antee, the

s t ory r epeats itself. Payments to the credit national in

r es pect of it advances on behalf of the devastated depart­

ment rn ust be met omehow. If the bond of t he hort -term

or fl oating debt, as they fall due, exceed the new bonds s ub­ . cri bed, t he Treasury mus t def.ray the di ffe r ence.

Let u beli.e-.' e that it ma de its avowal and went t0 t li e confes ional not mer ely in order to save its own immedia t e interest , but also in order to draw the attention of the entire 1rnblic once for a ll to the absolute n ecessity of a new finance .

'l'o enafor Sanipson.-If a . central bank be

establish d the Commonwealth B ank will presu mably be ·ome merely another competitor in the trading field. T his must j11crease the expe11Ses. to the 1-ustralian com­ muuj ty, because the margin between the price we have

to pay for money and the ·price we receive, i.e., the

average interest we pny over the whole of ou r deposits a11d th e aver age interest we r eceive on advances, plus profits arising from the margins in exchange, &c., is the fund out of which we pay expenses, pro­

vide for loss es and depreciation, and make pro­

fi t . Another comp0 titor, cl aiming a share of

those carniugs, must make :finance dearer to the com­ munity. ·On the other hand, unless the Commonwealt h Bank is conducted on lines of prudent finance in ac­ co rdance with the experience gained by the trading banks- the Bank of N ew South Wales has been in

operation for 113 years-it will get into difficulti es, create doubt of Au stralia's :fina nces gen erally, and diminish public ·onfid nee.

The bill makes no p rovision for secrecy on the part of the staff and directors of the proposed Central

R serve Bank . S ecr ecy i s essential; otherwise every r e pon ible memb r of the staff will b~ open to

appr oach b, anybody. Provision is made for an

appeal board for the offic ers. The central bank will be an insti tution of limited size. It will hold very im­ portant national secr et , and, therefore, i ts staff should be "pe ially s lected men. It is highly important that bot.h directors and taff shoul d be bound to ecrecy, and that th r e should be no possi bili ty of xt"'rnal int er­

fercnc between the managem nt and the staff. What-r argurn nt may be advanc d in favour of an appeal board in onnexion w:i th su h an in titution a the

Dank of N e1 South W ales, which ha approximatel, ' 600 branche and a staff of 3 000, cannot apply t a

entral bank with 1 tha11 a doz n bran h and a

limit d ta:ff .

'I' o

w al h

omp

n 11' um-

ppor . central

qualified board h re hould be

no sectional r epresentation. Kisch and Elkin state at page 61-As the d eali ngs _of _the central bank will be largely with co111 n1encal banks· It Is desirable to provide that the latter should no~ obtain con~ro) ?f cen tral banking policy . . .

The. ap1:0111tment of mdividual member s of t he -board by special m t erests, s uch as commercial banks, and manufac­ turing or agricultu r a l a.ssociations, carries the risk of in·

t ruclin g secti.:mal influences ·on t h e board.

It would be qi1 i te r easonable for the trading banks to do Government business free of exchange, h aving r egard t~ the fact th_a t the Cent1:al R eser ve Bank would p.ro­ vid~ t~e tradmg banks with notes in any centre, thus obviatrng the need for their sending notes to their

branch es. It would be r easonable to charge th e Go­ vernment exchange only outside certain zones around cities in which central r eserve banks are established. The Canadian and English systems are similar; i .e. a customer does not get credit for a ch eque r eceived in

deposit until i t has been cleared and the proceeds

received at the bank of deposit. Thus if a cheque

on a branch in N ormanton, Queensland, were

paid . in to a Syd ney bank the d eposit.or ,vo uld not .get credit for the proceeds for three or four weeks. There is much to be said for · the use of commercial bills

instead of the p resent overdraf t syst em in connexion with ordinary commer cial transactions. As the goods agai11st which bills wer e drawn in to use, the liability would be wiped . off wi thin a certain and corresponding

period. In transactions of that kind the bill system would be excellei;i.t . On the other hand a p eculiar feature of Australian banking is t,he r ecognition by the banks that they should take a direct part in the development of

the country. The Bank of N ew South Wales has ad­ vanced say £60,000,000, of which about £30,000,000 ~s in long-dated investments with farmers and other pri­ mar y producers. Dills of t hat sor t would not be accept­

able to a central bank. Approved trade bills with a currency of 90 to 120 days would be preferabl e, and the bank would not be risking the accumulation of_ a large volume of long-dated bills, which were not r eadily saleable.

In r egard to the position of combined building a~d banking societies, any institution that accepts depos~ts from the community should be compelled t o run i ts business in accordan~e with the principles that the regu­ lar trading banks have found n ecessary . One of the causes of the slump in New Zealand was that the

farmers' companies, with only a limited knowledge of banking, accepted deposits and let far too _much out. on mortgage. When t he d epositors were hit by falling prices and wanted their money from the ~ompany they could not get it. However, . I do not thrnk t_here_ are

any banking or building soci eti es whose banki~g is_ at present of sufficient importance to _warrant their bemg brought within the scope of the bill. We sh all have, however to consider the savings banks. They hold approxi~rntely £220,000,000 worth of deposits, whereas the trading banks hold only £310,000,000. Th~s tJ:ie

savings bank's hold £2 for every £3 we hold. I~ it wise therefore to allow the savings banks, upo,~ which falls the first shock of any crisi s, particularly wh en ther e is serious unemployment, to be treated. merely as customer s of the trading banks, and, with a large

volume of deposits, to lean upon the cas~ r eser ves that the tr;:i.din g ba.nks alone have placed_ wi th the centr al bank ? As to the allocation of portion of th~ profits of t he central bank to building up the capi_tal and

r eserves,· my views are indicated by the suggestion. ~hat the South African R eserve Bank Act should be utilized · · 1 .

as a basis for Commonwealth legi s.at10n.

To Senator· Colebatch.-The South African act did not operate well at first, but it has been amended,_ an~, I ~hin~1 i t is now wQrEJ sati!?factory. South Africa i~

9 50 7

not experi encing a depres ion a evere a that in Aus­ tralia, for it ha maintained an enormou production of gold and precious stone . I do not think that the

central bank could pos ibly work on the tatutor

minimum of a 25 per cent. depo it of gold again t the note issue ; i t would probably require a re er,,e of 40 or 50 per cent. Ther e are no circum lance p culiar

to Australia, which would justify it in fixing a lower gold r eserve than other countries ha,e thought nece -sary. The establishment of a new central bank will eutail considerable expenditure. The succes · of uch an institution will d ep end very largely upon its freedom from political control. I r ealize the difficulty of main­

taining that freedom in view of the fact that all legi la­ t ion i s subject to amendment by future parliamen t elected on an adult franchise. Only one strona defence is possi1le; that is tradition, which time alone will provide. The bill as drnfted breaks away from tradi­

tion. I know of nothing that a cen tral bank, if in

existence n0w, could do to the advantage of Australia that is not being done. Therefore, existing circum­ stances do nut suggest any need for hastening the establishment of such an institution. It would b

more dangerous to establish a bank hurriedly on line that might be found unsound than to delay action until a comp~ete investigation of the subject has taken place. Sir Ernest Harvey in his address before the Vi ctorian Branch of the Economic Society: said-

·rhe only other possible object of s uch a bank, so far as I

can see, is that it shall provide extraordinary facilities which, whether r equired to foster some purely political object or not, do not possess that sound fin a ncial basis which would recom­ mend the bus iuess as attractive to other banks, with this

a lrno8t inevitable result tl,at in course of t ime such a bank will find that its princi pal fu 11ction will be t o do business

which is 11 ot attr active to other banks. In other words, the i11ferior bns in ess will all tend to drift towards s uch a bank, in which case if I am rio-h t, sue], a ba11k might in course of t ime beco111e ~ grave peril to t he community. In supporting t his view I may cite one of the r esol utions at the Genoa

confer ence, whicl, was to t h e fo ll owing effect, "Banks should be free from political p r essure a nd sh ould be conducted solely on lines of prudent finance."

As those words wer e uttered after he had studied the conditions in A ustralia they may be construed as suggesting conditions that might arise if a_ central bank were established on other than sound hues. If the

Commonwealth Bank Act were amended to enable the existing institution to function more fully a~ a ~ent~·al r eserve bank t he · establishment of a new rnst1tu~1011 would not be necessary. T he amendments reqru~ed

would be those r estricting its activities and . altermg the control in accordance with the principles observed in connexion with central reserve banks. . That _ con­ version could take place without any sen?us d1sor­ g~nization. The Commonwealth Bank pays rnterest on fixed deposits. If it quoted a rate t per cent. lower

than the tr ading banks it would soon lose ~ome of those deposits; if i t con tinued to reduce ;ate~, it would lose the whole of them without expenencrng any severe upset. A central.' bank is an i nstitution for foul

weather. It should be able to trade, but should not do so excep t when conditions were abnormal. The O?m­ monwealth Bank has greater powers than are r eqmred by a central reserve bank. It is in a position to do all

the work of a central -bank, but to make it a true centr~l bank, r estrictions must be placed_ upon it._ All that _ is required to enable it to be recogmzed outside ustraha as a cen tral r eserve bank is to alter the methods of

appointing the board. Provided the manage1;11ent wern sound, and enjoyed the confidence of the tradmg b~nks no further amendme11 t of the act would be reqmred . A sound management would v.oluntarily place _1·estri c­ tions 011 its business in the same way as t.he director

r estrict the business of the Bank of England.

The witness retired:

(Taken at Sydney.)

SATURDAY, 19TH JULY, 1930.

Present:

Senator Sir WILLIAM GLASGOW, Chairman; Srrnator Sir Hal Cole-1 Senator Carroll batch Senator Sampson

Senator Cox Senator Thompson.

Leslie Arigwyn Parker, Acting General Manager, Com­ mercial Banking Company of Sydney, sworn and examined. 'l'o the Chairman.-! am sorry that, owing to

serious illness, the general manager is not able to appear before the committee. Om· views are sub­ stantially in agreement with those expressed by Mr. Davidson. The principle of a central reserve bank

is no t opposed. On the contrary, we believe that such a bank, well constituted and well managed, would be capable of performing useful work in Australia. The Common wealth Bank of Australia has efficie~1tly per­ formed many of the functions of a reserve bank, and i t is pref erable that it be allowed to develop into

a true central r eserve bank, rather than that a new in­ stitution should be created, with the risk of adding to the difficulties of the present situation. The provisions of section 10 of the bill are regarded with the greatest concern, and the need for them has not been demon­ strated. The result, so far as the t r ading banks are

concerned, would be to freeze a large proportion of their most liquid assets into rigidity. To avoid the risk of penalty they would have to maintain deposits materially in excess of the statutory minimum. The proportion of deposits demanded (10 per cent. of demand deposits, and 3 per cent. of time deposits) is ver y large, and the proposed restric.tions would cer tainly hamper the ·banks

in their endeavours to assist the Commonwealth and S tate Governments and the public in time of stress. Allowance should certainly be made for the fact that the Australian banks with their numerous branches are obliged to hold very large amounts of Australian notes as till money. The intention appears to be that the

trading banks, having been compelled to make large deposits with the Central Bank, for which they would r eceive no interest; should, in case of need, apply to that bank for accommodation, for which, if granted, they wonld have to pay interest at the rate demanded. This is most unjust. A considerable period would have to be allowed to prepare for compliance with these pro­ visions .. It would probably be necessary in some cases for !endings to be restricted, and even for advances to be called up. The prohibition against loans or advances during a shortage would disorganize the whole of a bank's overdraft business if the contingency were .to occur. There should not be any n eed for compulsion, ·

The trading banks would, as a matter of convenience, deposit their cash reserves with a central r eserve bank, if it were so constituted and managed as to hold the confidence of the banks and the public. The Bank of England supplies an illustration, and the experience of

the Commonwealth Bank would probably bear out this statement. I t would probably be found that, except for seasonal changes which could be foreseen and pro­ vided for, the total of bank balances with the Central Bank would not greatly vary.

Following the compulsory removal of their coin holdings from the banks, these further proposals for taking control of their business out of the hands of the trading banks are viewed with grave concern. The proposals are made at a time when the ba:nks are using

their best endeavours to give special h elp to Common­ wealth and State Governments, as well as to assist to the utmost of their power those customers who have suffered and still ar~ suffering .so severely as a result of ,frought, low prices, ~n.g 9~):}~i· ~grious disabilities.

10

The provisions of Part III. of the bill would give the proposed bank a markedly political complexion. 1t would be preferable that the Governor should not be Chairman, and that he and the Deputy Governor-one should be sufficient-should be appointed by the board.

The Deputy Governor should not be a member of the board. The provisions of clause 50 would permit the gold holding against J1otes and deposits to fall. too low, e.g.-

I ,iabi!ities- £

Capital 2,000,000

:\Cotes i11 circulatio11 45,000,000

Deposits 20,000,000

Total

Assets-Gold (in Australia) Rritis h Treasury and Trade Bills i n

Londo11 · ..

Other a ssets

Total

67,000,000

8,125,000

8, 125,000 50,750,000

67,000,000

tlJe preseu t 1egal minimum against a note issue of £45,000,000 being. £11,250,000. , The proposals for a re-constitution of the Common­ wealth Bank would vest the control of it virtually in one man, politically appointed. In the hands of other than a highly able and honorable man such power would be a source of much mischief .and danger, both to the other banks and to the community.

As evidence of the need for the utmost care and consideration in framing proposals for central reserve banking, I call the attention of the committee to the following extracts :-LEA GUE 01? NATIONS. MEMORANDUM ON CURRE :rcy

AND ClrnTRAL BANKS, 1913-1925. 'l'HE CEN1'1UL BANKS AND THE GOVERNM.l<,'NTS.

In ne,trly a ll cases, the increase in the note circulation dur­ ing the war a nd tl1e post-wa r inflational"y period was due, primarily, to Government borrowings with the centr,al banks. This is true, 11ot only of the ex-belligerent, but also of most of t he ex-11e utral countries, where extraordinary expenditure aris­ ing from the war was covered by advances from the banks

of issue. .As a r esult of the artificial-interest policy generally pursued in this period, and of the Government interference in the money market, t he prima,ry pre-war function of the central ba nks- namely, that of acting as bankers' banks­

bccaJ11e in most countries, of secondary importa nce, as com­ pared with their functions as Government bankers. l<'in:rncial assistance was generally given by the central banks directly to the Governments by discounting Treasury i)iils, or by ;,_ dvances or loans secured by interest -bearing l::ltate bonds. But the central ba nks frequently supported the Governments indirectly uy granting loans and advances at fayor a b le rates to commercial hanks, &c., on security of various forllls of government paper.

T he ratio of the claims on the State ari i:lg from direct

loans and aclvauceti, and from securities held by the central banks to the total of t he "earuing assets" con titutes a

rough 1i1easure of t h e de facto interdependence of these banks a nd the governments, FROM BANKERS' MAGAZINE (NEW YORK), JANUARY, 1930,

THE FEDERAL RESERVE SYS1'El<1 AND INFLATION. That the Federal Reserve Banking System is largely r espon­ s ible for the two periods of inflation and collapse experienced by this country in 1020 and 1929, must be the considered , erdict of history. This is true despite the fact that each of these disaster s was world-wide in its origin. For it should

he the part of a properly managed central bank to envisage ,,ol'ld condi tions, particuiarly a s to how they may affect our own s ituation. and to act according ly. In the first place, the linking up of banking to the Govern­

ment through the Federal Reserve Board, appointed by the President of the United , !,ates, establis hes a condition almoRt sure to be i11flat1onary, a has been experienred more tha n o nce in our recent financial history. The cles ire of the Go­ ,·ern me11 t tu borrow at a low rate has, on e,·eral occasions. conJHcted with a true banking policy looking toward a hig her

rate of discount. But this is not all. In a political campai"n, when it is thought desirable to keep tJ1e car of pro' perity r ~n­ n! ng at hig h s_pee~. although a, sound credit policy may

~1ctnte the appltcat1on of tl!e brnkes, the_ vi~ws of the party 111 power are apt to pre,·a1l as t!iey d1d 111 the c:.i.mpa ign

of 1928.

11

That tlii . I . . tl C ~ c ose co nn exion bet . 1e ountry's bankiu o- s ~tern . ''." e.eu t!1e Government an d Jong re.cognized in theoyi·y. 'I~s havtrc~o~ m pr_inciple has been have his vot.e on the b d been 1 1t 1 D eputy G oar neutralized by that of the T' au~p,y c emonstrated in 1920 d l i so 111 practice has overnor and "f th t D .,e li ederal Re se n ·e· Board ·t 8:n . 29. . were on the board th e 1 . he wo eputy_ Governor be aboiis li ed- not for want ~/1 t111$" :ctt Washington , should The min1"mi:1m Id y illlg t outvote their uperior. lJ Lcause the IJri nciIJle 1 . adi_mmstrative capacity but go r eserve t b h ld · - b l . upon w llch its c - t· ' issue should not b l o e e aaam t the note a1 e asec 1s wrong. 1 ea ion and function s e ess tha 25 • maintain a m1·n1·mum n . per cent. We hould iNTERNATIONAL ACCEPTANCE ·, BANK gold holdmg l t 2 'l ' L ~ - REPORT 1998 o_ f the notes and depo~1·ts -F. l equa ~ 5 p_er cent. 11E 03s 0 1,· CoN·rRoL . ·. . ' :. · L u ir t-c a t d b n h l . 'l'F[E A~~~R:C~ ~{DOENREAYLl\lR'[ ES_ ERYE SYS'r'F. M OVER l n on don should not b~ 11 d rka mg 1 e cl Tl I' l . ' ' ARKET gold in the r eserve Th a owe to ~a e th plac of 1c 'ec era! Rese r ve 1::1 ste . · · ey could be l fa r-sighted poli cy ro se Yto 1 . 11 ' pm:s'.ung a well-conceived and gold in London-th . ea 1 Y c~n,·erted into Yet withi11 t he sl:or t span 0t : 0 ~;!~ 011 of _ worl d leadersh ~p . when it was w t.e~ gold might not be 111 u t1·alia ow 1!1g to i tti fa ilure promptly ) cl ff1t I_o_~ t that leadership, : equire branchet~u ts1:de Tthheecacp en1·ttarlalc1·~a enk_- bwotufld nhot eng1ues. at tlie criti cal .moment an, e ectively to reve rse the ., the hands of stock exc ha no· . . lhe rudder then passed into 1.ssu e of notes provincial d t - h , u or t e That tlie country's ba 111'~1 :Pe' a ~rs. . . . : No branches should be tet~-\ ~1g t ~e convenient. without its helm bein o- m:cl e~· ~}s em i~ tossmg a~ont to-day monwealth. , . es a 1S e outside the Olll­ cause fo r

have to carry a large sum of note as till money. We feel that the control of our business has been taken out of our hands to a considerable extent by the com­ mandeei·ing of our gold, and that is accentuated bj the proposal to deprive us of a large proportion of our liquid assets. In those circumstances it seems ha rd that, if we hould apply to the central bank for accom­ modation, we should have to pay interes t on money

which we depo ited with it. Moreover, it is not

cer tain that the. bank would give us accommodation when we asked for ·it. The ommonwealth Bank, to function as a true re erve bank, should not compete wi th the trading banks for ordinary business. While that competition continued there would be justification for the criticism that i t was using the deposits of the trading banks to compete with them . I r ecognize that it will go against the grain of any government to

surrender the very fine tr ading business that the Com­ monwealth Bauk now has. It does not necessarily follow that the trading banks would be suspicious tha t the central bank would give prefer ential treatment to its sister institution, the Commonwealth Bank. The fact that the two were government institutions would not in itself warrant such suspicion. The feelin gs of the trading banks would be governed by their experi­ ence of the operations of the central bank. It is

desirable that the capital of the central bank -should be proportioned to its operations, and therefore portion of its profits should be allocated to the building up of its o ,vn reserves. A monthly r eturn by the trading banks should meet all the r equireme nts of the central bank, and would not cause them any inconvenience. I would prefer that the position of Governor should correspond to that of the general marniger of a private bank, and that the directors shonld choose their own chairman. It. is worthy of consideration whether thP

title of the chief executive officer shoul d 1 1ot be altered to that of general manager. The use of the term

"Governor" causes confusion, because the Governor of the Bank of England is the Chairman of Directors, and is not an executive office r. I cannot see that any great advantage would accrue from the iss ue of short­ dated tr ading bills as a substitute for the present over­ draft system. I cannot suggest any additional powers that are necessary to enable the Commonwealth Bank to help the country through i ts diffic ulties. The mere pooling of r esou rces would n ot incr ease them .

Most of the banks are making substantial deposits with the Commonwealth Bank, and I clo not

see that much more could be done by a central bank than is done by the existing institution . P ossibly a well-founded central bank would have a benefi cial influence in some directions; on the other had, such a bank, .es tablished on an unsound basis, might make conditions worse.

To Senator Ga1Toll.-There is no need for the issue of 5s. notes at the present time. The witness retired.

(Taken at Sydney.) MONDAY, 2lsT JULY, 1930. Present : Senator Sir WrLLIA.l\f Senator ... ir Hal Cole­

batch Senator ox Senator Thompson

GLASGOW, Chairman;

Senator Carroll Senator Lawson Senator Sampson

Hugh Traill Armitage, Deputy-Governor of the Com­ monwealth Bank, sworn and examined. To the Ghairman.- Modern economists and :finan­ ciers ao-ree that a central reserve bank is au indispen­ sable part of the banking tructur e of any up-to-date

12

nation. I con ider the present time opportune for the establishment of a central bank in the Commonwealth. When the nations of E urope, after the Great War, were in the throes of a financial upset, many of them, acting on the advice of the Bank of England exper ts and other s, established central banks to help them out of

their diffic ulty. A cen tral bank is not established for the purpose of making profi t, _but primarily to keep the fo1a ncial vessel on an even keel. The practice in Australia is to keep the profits of the note i sue separate from the general profits of the Commonwealth Bank. That is not done in other countr ies. The profit on thr Jtote issue, which is money borrowed from th e people free of interest, should go back to them through the Government. I t could be more effectively used in the reduction of the national debt than as a contribution to the ·consolidated R evenue. The securities dealt with by a central reserve bank should be such that i ts funds will always be in a liquid state. It should not invest in h ouses, land, or other :fixed assets, but should hold only short-dated securities that are r eadily saleable on the market. These will include the stocks of a few of the leading local governing bodies such as city councils, and metropolitan boards of works, not those of the smaller municipalitirs. These need not necessarily be

very short-dated, because a central bank, in per­ fo rming i ts function of keeping the money market even, might frequently have to buy government and municipal securities, and if it were r e­

stricted to very short-dated municipal bonds, it would be impeded in that process. It should not purchase or hold its own shares. It should have power to accept money 011 deposit on current account, and collect money for public corporations and othe-.:s, but should not pay inter est on deposits . It should be allowed to accept deposits from other banks, large fin ancial houses, in­ sm·attco companies, members of the stock exchange, and all people or i11sti tutions who constitu te what is known as "the money market." As a general rule, the central bank does not pay interest ou any accounts. · In Aus­ tr alia the practic_ e has been to pay i11terest on govern­ men t accoun ts . Whilst that practice is proper fo r

trading banks, it is not wise for a central bank. A provision limiting advances to a government would 11ot h ave very much effect, because the bank would still have power to purchase government stock, and

that could defeat th e limitation. A provision that ad vances could not be made to governments without security would have only a nominal value, because a government can create bonds to give a security for the ar~va:1 ces it needs. Overdrafts to gover nments, w1th111 r easonable limits, would not be unsound. If provision were made that an overdraft should be given only against security, the Government would need only

to _ cr eate ~ts o_w1? bonds as security. From a practical pomt of view 1t 1s much easier for governments and go­ vernmental bodies, city councils, metropolitan boards of works, &c., to get overdrafts .from the bank, and when

~he overdraft becomes large, float a public loan to pay 1t off. 1:hat would comply with my idea of liquidity. In pract1.ce, the bank would al way have an under­ standing with the borrower that a loan would be placed on the market whenever the bank r equired. :No in­ .stance has occurred in Australia of a government or

goverhmental body having been unable to r epay a loan or overdraft. On many occasions the Commonwealth Bank h as lent money to local bodies ~uch as citv

councils, on the under tanding that wh~n the bank s~ r equired they would issue a public loan . Mon~y has been lent to South Australia and other o-overnments on the condition that it would be r epaid f1~om the first loan money made available to it by the Loan Council.

It would be much better to pre cribe by regulation the returns to be made by the trading bank to the

central bank, because cir cumstance alter from timr

to time. For many years we hav b .

quarterly returns to th G e een rendermg

W 1 e overnment of New South a es and other governments on ·11 1 f 1 . . an I ega orm The exp anat1_on is that the form prescribed by th . t . not apphcable to existing circumstances The 7 IS of retur n to be supplied bv the banks shou· ld b e o:md f t" . · .. J e vane ~om ime. to time as circumstances dictate. I will let t e comm1t.te~ have a d~aft o~ a form which I think would be suitable for mclusion 1 ·n th 1 t" Tl . · e regu. a Ions. . 1eie is no reason why the trading bank h ld b · · 1 · s s ou o Ject to s~pp Y particulars of their overseas balances . and dealmgs to a central reserve bank b · ld b . . . , ecause it wou not e in competltion with them. I believe that the trend towards the present adverse exchange· position w~uld have been foreseen much sooner had there been in ex1ste~ce a central authority collecting regularly and studyrng the aggregate figures relating to overseas balances. 'Yhatever action is being taken now to con­trol_ or rectify the position could have been taken ear her. In r egard to the c~ntrol and manag~ment of the pro­posed ~ank, mu?h _will dep end on its constitution. Of the thuteen prrnciples of central banking laid down by th_ e Governor of the B_ank ?f England, and quoted by Sir Ernest Harvey m his address before the ~conomic Society, the second is, "A central bank, in its management and policy, should be free from govern­ment C?ntrol and the influence of politics". With that I certamly agree, but what system of management will best comply with that principle is debatable. I do not know whether the act governing the Bank of England makes any reference of the method of appointing the board. In some coun­tries the directorates of the central banks are arpoi_nted directly by the governments; yet those in­~tltut10ns are presumably conducted free of government mfluence or control in their policy and management. The board should be representative of all sections of the community, because a central bank, by its policy and management, can do much for the good or ill of the community. A. body of shareholders should not be allowed to appoint to the board whom· they choose. The bill originally introduced into the House of Repre­sentatives provided that the board sho1,1.ld include one representative each of banking, commerce, mai:mfac­tures, primary production, and organized labour. It , is not altogether wise to leave the selection of these representatives entirely to the Government. I suggest that the bill might be amended to provide that r epre­sentatives of these interests should submit to the Go­vernment panels of thr ee or four names from each of which the Government would select one director. Thus the nomination would be made by representative bodies and the · final appointment by the Government. A central reserve bank consists of different sections or departments which are, to a l arge extent, self-con­tained. For instance, the handling of the note issue is one department; the control of the money market and exchange is another. The Bank of France has two deputy governors; the Federal Reserve Bank in New York five. At the inception of the Commonwealth Central Reserve Bank one deputy might be sufficient, and as the work increased another could be appointed. The governor and two deputy-governots, of the Bank of France have seats on the board, but I can understa~d that a governor who had not sufficien~ confid ence m himself might object to his deputy havmg that status. Almost since the passing of the Australian Notes Act in 1910 we have had a statutory 25 per cent. gold reserve against the issue, and that h as been found suf-. ficient. Actually the reserve has nev_er bef_n. allo':ed to fall below 37f per cent. That is a w1s~ po,icy, whic~ should be continued. Owing to Australw.'s geograp~i­cal isolation the reserve should include readily realiz­able assets in London. · Such securities should have a 13 511

?urrency of not more than three or ix months ~o tha m the even~ of an exchange cri i the could be r adil ' co?yerted mto cash in London. uch ca h could be

uAtihzed_ there instead of tran ferring gold from

ustraha As tt f · . . · a ma er o geogroph1cal n .

sbity the_ Central Reserve Bank should hav ra1Jcb rn each ·t 1 . , cap1 a city. ountr br11nchc

t~e 1 Gio t necessary. The 13th point laid down by

e overnor of the Bank of England- ' cen-

tral bank should have no branch ou id its own

cou1;try, but may have agencies abroad '. If the u -trahan Cei:tral Bank bas not a branch in London it would reqm_re at least. a very intimat agent who could carr;y- out its work Just as effectively a a branch.

H_avrng : egard to the modern trend of finance, a brancl1 or effective agency may be necessary in ;r ew y ork at so~e future date. The head office of the bank should be ~n one of t_he co~mercial capitals, not the political capital: . It is ordmary banking practice to req uire both directors and officers to sign a declaration of secrecy. No harm would be done in making provi ion for that in the bill.

To ~enator T_hompson.-At· least a dozen European countnes ·established central banks after the war and Czecho-Slovakia, Esthonia and Austria were amongst them. I do not think that the central bank should

accept municipal securities tliat are issued subject to the repayment of principal and interest over 35 or 40 years. One of the primary functions of such a

bank is to keep the money market level. When the market is ~h_ort of funds the central bank buys first class securities and thus supplies the market with money with which to continue trading. Those securitie should be as liquid as possible, because later when the market has a surplus of money the bank may want to resell them in order to take money off the market.

Ther efore it must confine its operations to securities which are r eadily saleable. In regard to sectional representations on the direc­ torate, the responsibility would rest on the nominating body to include in its panels only persons thoroughly qualified to·. assist in controlling the destinies of the bank. Men with banking · experience but not actively connected with a bank, would be qualified except that they would not represent sectional interests. For i nstance, Mr. K ell, formerly Governor of the

Oomm_onwealth Bank, is very well qualined a a banker, but he may not possess special knowledge of manufacturing, grazing; or any other industry. It is mos.t des irable that the directors, as well as having s·ome knowledge of finance, should know thoroughly the interests they represent.

I believe that a central bank brought into being now and handled efficiently would help Australia out llf its present difficulties. The Commonwealth Bank is functioning now to a large extent as a reserve bank;

the extent to which it shall function in future rest with the Board of Directors, for no additional powers are necessary to enable it to operate fully as a central bank. It has wider powers under its act than th

Central Reserve Bank would have. It can pay inter t on deposits, and do many other things that a central bank could not do. One of its limitations is that th deposits made with it by the trading bank are lodged voluntarily and can be withdrawn at any time. The deposits with the central bank co uld not be withdrawn

and to that extent it would be stronger than the Com­ monwealth Bank. One of the obstacles to the Common­ wealth bank functioning as a central bank i

that it engages in ordinary trading. ompetitive

bank can never be a true central reserve bank. If the Commonwealth Bank and the Central Reserve Bank were properly managed there would be no ground for suspicion that they were working in collusion to th detriment of the private trading banks. The Common­ wealth Bank would be on exactly the same footing in

relation to the Central Bank as would the Bank of New South Wales or any other trading bank. If asked to do so by the other banks, the Commonwealth Bank would r eadily re-discount trading bills against bills of lading for wool, wheat and other primary products. It

has never been asked by the other banks to do that class of business. Portion · of the profits of a central bank should · be carried to reserve. It should have large internal

reserves because in times of stress it may have to

trade without making a profit. The private banks objec ted to the original provision that they should he r equired to furnish weekly returns. Perhaps weekly r eturns would be better, but if the trading banks feel

that they would be inconvenienced by them, monthl;; r eturns should prove sufficient as they have proved in South Africa. The almost invariable practice of central banks is to style the chief executive officer the Governor. Precedent is the only reason for adopt­ ing that title. I cannot conceive of any Government consenting to abandon the :fine trading business which

the Commonwealth Bank already has. From a bank­ ing point of view, the system of advancing against bills is more liquid than the overdraft system, but· the client :finds it frequently cheaper to trade as an overdraft. The

Commonwealth Bank was created by a Labour Govern­ ment to be a competitor with the joint stock banks. I believe that those banks have a feeling that if the

Co=onwealth Bank is deprived of its reserve bank­ ing functions, it will become a more active competi­ tor with them. Even without the central banking business.it should b.e as well able to make a reasonable profit as the other banks are. Pro:fit-making depends

entirely on the management. To Senator Sir Hal Colebatch.-The only thing I can suggest that central bank might do, that is not being done at the present time, is to advance more freely to other banks. The Commonwealth Bank ia prep ared to advance to them to a reasonable extent,

and, generally speaking, the Commonwealth Bank is ready to do anything that a central reserve bank can do. To be successful a reserve bank must be established and administered on t horoughly sound lines. I agree

that there is nothing in the present circumstances of Australia to warrant haste in the establishment of such a bank. I do not anticipate that the cost of it

would be considerable. At its outset it would simply take over some of the functions performed now by the Commonwealth Bank, and the costs at present borne by one institution would be distributed over two. I q.o not t hink that the creation of a second institution would substantially increase administrative costs.

The policy of compelling the banks to pay interest on advances obtained from the central bank is world­ wide. Every bank must hold certain r eserves and show them in its balance-sheet. It is immaterial to them whether they are h eld in its own vaults or in a

central r eserve bank. They must still be maintained. If a bank's trading brings it to the point when it has either to draw upon its r eserves or borrow from a

third party, it should borrow from the third party and pay interest on the loan. The pooling of reserves will not incr ease their total, but it will increase their

efficiency. If each bank is holding its own reserve, when depression sets in each will jealousy conserve those r eserves in order to safeguard its own position,

and it will be apt to call in advances, thus aggravating the position when the wiser policy would probably be to r elieve the tension by nursing its customers. I do not apprehcnd that all banks will be r equiring assist­ ance from the Central Bank at th·e same time. Of

course the management of a central bank would take care that no trading bank made conditions so easy fo r its clien ts that it had to lean unduly upon the strength

of t he CentJ·al Bank.

14

I am not aware whether the majority of the directors of the South African Central R eserve Bank are not ap­ pointed independently of the Government. To the best of my knowledge the amendment of the original clause 13 which prescribes how the Board of Directors shall be constituted, was made at the suggestion of either Mr. Latham or Dr. Earle Page. The clause now p rovides for the nomination of ":five other persons who are, or have been, actively engaged in agriculture, commer ce,

finance, industry, or labour." The original, and in my opinion better, wording was ":five other persons repre­ senting respectively the following interests : (1) B ank­ ing, (2) co=erce, (3) labour, ( 4) manufactur ing, and

(5) production." Under t he cl ause as amended the whole :five might represent agriculture or any other inter est. The bill does not contemplate government control of the management; clause 13 is on all fours with the correspo"nding secti on of the Commonwealth Bank Act, and I do not think anybody will asser t that

the Commonwealth Bank D irectors are under Govern­ ment control. Of course, it is possible that under the provisions of the bill the Government might get control of the management. The purpose of a gold r eserve against a note issue is to provide a guarantee that the notes may be converted into gold on presentation. Au·s­

tralia is not, at the present t ime, on an effective gold basis. I agree that if the convertibility of the note and the r ight to export gold were restored, the reserves would very soon fall oelow the statutory 25 per cent. So far

the reserve has been maintained only through the note being in eff ect inconvertible. To that extent the pur­ pose of the r eserve has been defeated. In regard to the limitation of advance to governments

it is interesting to note that t he Bank of England Act provides tha·t the bank may not make advances on curr ent account to the· Government, but there is nothing to preven t the bank from pu rchasing government securities. In answer to the chairman, ·I con­

tended that advancing to a government without

security, and advancing to a gove1·nment' on the

security of i ts own bo nds ar e practically ident ical. I t might 'be desirable to limit also the extent to which the bank could purchase Treasury bills or other Govern­ ment securities, but that is not the practice in other countries. A conjunction of political control, if that were proposed, and unres•tricted power to advance to govemments wou ld be dangerous. Part 4 of the bill, r elating to t he issue of Australian notes, is identical • with the correspond• ing portions of the existing legis­ lation. That legislation has not been suspended by law, although it is suspended in practice. The profits now made by the Commonweal th B ank out of its ceil'tral banking functions would be enjoyed by the new i nstitution. The Commonwealth B ank has between 90 and 100 branches, and a big organization. · It is already :firmly established, and should be able to carry on without the profits now earned from central banking

operations. It cannot be considered in the same way as a bank starting de nova. Although its profi ts for a time would be smaller than they are at presen t, it

would still be i n a sou nd position. .

The dominant factor in the presen t exch ange

situation is the fact that the ba nks have not suffici en t money in London to meet the full r equir ements of their customers. That is clue to the heavy excess of imports over exports . . The development could have been fore­ seen by a central authority getting the aggregate :figures week by week. Under present conditions each bank knows the state of its own balances over seas, but does not know the position of the other banks, and

the crisi s was on us before we fully r ealized what was coming. I believe a central bank would h ave

foreseen that

we we.re importing too much, mid expor ting too little, and .that the diff ereIJ ce was made good by governmen

1.5

loall8. Now oversea loan money has been shu t off, and that has aggravated the position. That development ?ould not _ha ve been foreseen, nor could the heavy drop m the prices of wool and wh eat. But we could have seen that the bank balances in London were diminish­

ing. That was no t generally known.

The provision that the D eputy Governors should have seats on the board is based on the practice in other countries. I have already mentioned France and South Africa, and I think the practice obtains in several

other countries. As to the danger of the deputies

voting against the Governor, I assume that if he is on sound ground th ey will vote with him; if he is not,

they should vote againS't him. Theoretically that

might be p1·ejudicial to the discipline of the bank, but the experience of other countries shows that the system does not work out · in that way. I agree that in the

main a D eputy Governor is the deputy of the Governor, but if a deputy is n0t allowed to attend the board

meetings h e is not as well qualified to carry out his

executive du ti es. He r eceives all decis,ions of the board without learning the ,re asons for them. It is most

desirable that the deputy, a s well as the Governor,

should be well acquainted with the reasons for the

polmy of the bank. Ther efore, ·the Deputy Govern~rs of the central bank should attend the board meetmgs; whether they vote or not is immaterial. The function of the D eputy Governor of the Commonwealth Bank is to assist the Governor, an·d in the absence of the

Governor to act for him. I submit that he cannot act effectively for him unless h e knows the mind of the Governor and of the board. My contention t h a t a cen_tral _bank should h~ve l~rge

internal r eserves, because m times of stress 1t m1&ht have to trade without a profit, is based on the advice of Sir Ernes t Harvey, who said that often a central bank has t o follow a policy dictated by the good of the

country reaardless of whether the bank loses or makes a profit b; that policy. You ask m e what stren~th

would be possessed by a central r eserve bank, start~ng de nova a t a time of financial stress, except t~at wh1c!1 i t took from th e oth er banks. My answer 1s that it

would have the note issu e and larg~ . government

deposits. I admit that these are not additional factors of strength; they would be merely. transferred from the existing institution. T o S enator Carroll.-I •am of opinion that paragraph

(h) of clause 8 empowering the bank to make ~dvances d b f " any authonty con- against stock or e entures o f stituted under the Law of the Commonweali~ or B an~ 8 tate," relates to bodies like _th e M etr7o t~nh . ~~es

of Works and the BTisbane City Counci , wh lC 18 k t securities' which are r ead·i~y sa~eable 0~,,; eeai::,rc:r~ The debentures of such bodies with say ffi . ytl r uid rency WQ.Uld be r eadily saleable, ttd ~ cie;h: c~1use for the purposes of the ce.ntra . an . l re roduced

relating to the .issu e of 5s. nokteAs i: me; eh~t p~wer has from the Commonwealth B an c · nev er been exercised. G t are able to get in- At present S t ate overnmen 8 h · own h . l money from t ell' terest on t e1_r surp us desirable - that the central banker s. It 1s most k" but govern­bank should do gff~' ernment !~~sr!f thei r business ments are hardly hkely to than they are to it on less ~dvantageous ttros If the Central getting from ~hell' pr~sent ban ~r8~monwe alth Bank Reserve Bank is est ablish ed, the .o mpetitor with bl b more active co will pr_oba y e?ome a k It wi ll be, in fact, an the private tra d1?-g ban s.. b k attached. I do ordinary bank with a savrngs t ~ould think it neces­not anticipate t:J.\·a gJv~;:ie~ion in order to place sary t o pass a l 1h10Bn k on more advantageous t erms the Commonwea t an

5 3

than i ts trading competitors. If the ce ntral hank i prope:r ly managed, as a cpar ate in titu tion the om­ monwealth B ank will haY c no adrnn taa over the

private tr ading banks. I have already said that the fall in the prices of our exportable commod i tie could no t h ave been fo r esee n. '\\That could hav been

seen earlier was the steady depletion of the banks balances in E ngland. T hat depletion h ad ta r ted b -for t he substan ti al decline in the price of ,vool.

To Senator Cox.-Ever y bank offi cer signs a declara­ tion of secrecy, and I assume that if he breaks that

pledge he is liable to dismissal. J othing in the bill

empower s the central bank to enter into competition with the private t r ading banks. On the con trary, the bill aims to prevent that, because an institution can­ not be · a n eff ec tive centr al bank and a competitive

bank at the same ti:m e. The central bank will have power to accept dep osi ts on curr ent account from private individuals, but not to pay iuter e t thcr on. It should not attract to itself that cl ass of busin ess

by payiug inter est; i t should hold only surplus money.

To Senator S ampson.- ! am not aware th a t the Bauk of France is la.r gely under politi cal control. I have always understood th at the Bank of France and the Bank of England work cl osely together, and that the

latter does not favour institutions that are politically controlled. Of course t h e position of the Bank of

France is somewh a t umisual. There is no fixed r eserve against the no tes, and th e amoun t' of the issue ia

altered· from time to . time by legislation. Apparently the fin ancial crisis in 1926 arose ou t of the bank

anticipating the l egal sancti on to i nc r e_ase the note issue from 41 milliard francs to 43 m11l ard francs. I agree with K isch and Elkin th a t a gold backing is the greates t security for a note issue . .

A central bank would not incr ease the aggr egate r eserves of the banks ; it would merely mobilize a~d concentrate them for use at any point of weakness, m the same way as the r eserves of the allies du ring the

war wer e pooled and placed under the control of

one generaliss imo. The ~xistin_g ~ o~monwealth Ba~k is prepared to do cveryth mg ,71tb111 i ts power t_o assist t he other banks, but the obj ectio~ to the contu~uance of its present activiti es as a q1;1as 1-central bank 1s that

that is not a permauent solut1011 of the p r?blem. lt can be solved permanently only by the estabhshment of a se parate institution. The Commonwealth_ ~ ank was established by t he L abour party as a competitive ba_nk;

a central bank cannot disch~rge i ts proper f?nct1ons and compete in ordinary t r adrn g at the same trme.

T o the Chairman.-The Commonwea lth Bank is doing everything t h at a ce ntral ban k cou ld d? at the . t time Practically all r eserve functions are

pbi ~sen form. ed by i t I do not think i t wo uld be

erng per · · 1

racticable to allow it to gradu ally evolve mto a centra ~eserve bank; th at would be on ly a. patched up arran~e­ ment. A competitive S ta te ban k is par t of the _poh_ cy of th e Labour par ty, a nd at the fi rst oppo1tumty

. Labour would, r estore th~. Co~monwealth . Bank to a com etitive basis. S tab1h ty . ll1 om: fin ancial org,~n­ . t · p . essential and con ti nual rnterference with

1za 1011 1s , b · th · te rests of

h bankina system would not e rn e m . .

~h: countr y~ No h ar m wo ul d acc rue from con~1Dmng, f t ·me the pr esen t ar rangcmen.t by which t he or a 1 , · h th t d · g 1th Bank in aoTccment wi t e ra m ~~::0; ~;!\s a cent;·al baik. ?ut tha t w?t ld}\;nt ! deferrin the permanent solu t ion . I w1s .

1 r l ~nder stood that _ when I said that possi bly a

c ea yl bank migh t adv ance mo re freely to

centra r eserve . h h C mmon

d . . b ks I was not su o-gcs trng t a t t e o - t r a 111 0- an , 0 h" th t ·t has been 0 B · k · t doing evc ryt rng a 1 wirlt up~: t~s :co to assist the banki ng interb es t and ca e . What I bad in mind was t at at a

the commumty .

time such as this a full e tablished entral Bank would, as a matter of definite policy, set out to make cr edit available to other banks, . o that they would not have to call up advances at a bad time. Many banks in

order to def end their own reserves r educe the accom­ modation to their customers to a minimum and ther ebv accentuate the diffic ulties. Under a full centr;l

banking system, the central institution would enable the other banks to judiciously help their customers and so prevent the general financia l condition from

becoming worse. When the private banks held gold the note issue was not fortifi ed by the gold reserves of the private banks. If t.he Commonwealth Bank h ad not obtained and shipped abroad the gold held by the banks, probably by now, because of the exchange position, the

bank themselvc would have exported it. The closing of the London lo an market and the decline in the

\' alue of our exports were tl1 e two factors th at con ­ tributed to the diminution of the credit balances in London. The third factor was the excess of imports, and I r epeat that had some authority been watching

the aggregate figures from week to week, the decline in the banks' balances overseas would have been noticed earlier. Everybody could see that Australia was im­ porting to excess, and the effect must have been dis­

closed in the figures of the banks.

To Senator 'J'hompson.- If · the Brisbane P ermanent Building and Banking Society is only a building society it will not come within the defin ition of a bank; if

i t is engaged i11 banking business i t should be

su bj ect to the same obligation s as other banks. To the best of my knowledge, that co11cern is primarily a building society, and probably if the wo rd "banking" from the r eqquirements of the Central R eserve Bank Bill.

To Sena/or Sir IIal Colcbatch.- I believe that the majority of the directors i n the. South African R eserve Bank ar c elected by the sto ck-hold er s. In r ega rd to the political contr ol of central banks, Kisch and Elkin say-

Ther e can be no question that t he power of the Government t.o force increased lo::tns from the Ba nk of Fra nce intensifi ed t he depreciation of the franc and contributed to the financial crisis t hat culminated in 1926. Such extr eme abuses of

government power a r e, of co urse, only possible when a country has ceased to be on a gold basis. As Jong as convertibility

is mai11 tained the worst evils resulting from governmen t intervention in banking a nd curren cy control are avoided. Doubtless t he go,·ernrnents which have laboriously dragged

thcmsel ves out of the morass uf inflation will not r eadily slip back; nevert heless, if t he control of t he operations of

the central bank lies directly or indirect ly wit h the Govern­ men t, i t becomes fat ally easy fo r tlie Government to finan ce itself for a t ime by means uf book en tries and short loans

from a bank, a course which is the first step towards currency depr eciation and inconver tibili ty.

With those sentiments I entirely agree. I have already said that, i n r espect of i ts p olicy and management, a central bank should not be subject to political control.

To the Clwirrnan.-I believe th at i n one of the South American republics a state tr ading bank similar to the Commonweallh Bank is in operation, bu t ther e is no similar institution in the leading European

countries. If the central banking functions wer e taken from the Commomrealth Bank, it would r ever t to i ts or iginal status as a tr ading bank, except that the

management would be altered from a governor with supreme contr ol to a board of control.

'l'o Senator Sampson.- The Central R eserve Bank would hold the main government. accounts in the capital ci ties, but the Commonwealth Bank would probably retain the other government accounts at its various country branches.

16

To S enator Thoinpson.-The bill provide that the private banks shall not charge exchange on government tran actions. That clause is taken from the Canadian act.

To the Chairman.-The disallowance of exchange on government transactions is fair. Origiually, the rates of exchange were based on the cost of moving

gold from on e place to another. When Aus­

tralian notes were introduced, the banks merely moved notes i nstead of gold. Later, the Com­

monweal th Bank arranged that a trading bank

cou ld deposit notes at one centre and get a correspond­ ing value of notes from the Commonwealth Bank at another centre withou t cost. In this way the private banks ar e being saved the cost of transferring notes.

It is only fair that the banks should r eciprocate by doing government business free of exchange.

To Senator Lawson.-Potentially, the bill may 11 ot give sufficient protection to the managemen t of the central bank, but the Common\Tcalth Bank is on the same footing, and I do not think there has ever been

a suggestion tliat it is subject to political control or i nflu ence. I belie,1e that would be the experiellce of the central bank also. The witness withdrew.

Marmaduke Granville Haymen, General Manager Queensland National Bank, sworn and examined. To the Chairrnan.- I am of the opiI)ion that a

central r eserve bank would be a useful addition to the :finan cial institutions of Australia, but I am very doubtful whether the present time is opportune for disturbing existing arrangements. Conditions are not normal and it is questionable whether radical changes should be introduced at this stage. I think it would be better to carry on as we are for the time being. The Commonwealth Bank is gradually evolving a very :fine system of central banking. A central bank should not

aim to make profits and it should only d al in short­ dated securities of the most liquid charact er, with a currency not exceeding three or four months. Ver y few municipal securities are quoted on the exch a nge; ·and, therefore, the bank would r equire to discriminate

between the securities of ci ty municipalities and local governing authorities like the Metropolitan Board of Works, and those of smaller mun icipalities. A central r eserve bank should n ot be permitted to pur­ chase or hold i ts own shar es, and the best known

authorities agree that it should not accept money on deposit on cmrent accou nt and collect for public cor­ poration and others. Nor should i t allow interest on Commonweal th and State Government accounts. Un­ doubtedly advances to governments should be limited. I do not know what securities other than a debenture

a government could give to the bank, and after all, a government's liability is equal to its debent urns. The r etums to be fumished by the trading banks to the central bank should be prescribed by regulati on ; that · would facilitate al terations of the forms as r equired

from time to time. At present the banks furnish

quar terly returns to the State and Federal Govern­ ment , and a special one is r endered to the Oommon-1rcalth monthly. If the deposits made by the trading banks with the cell tral bank were fixed, a quarterly

return would be prefer able to a monthly r eturn; often fluctuations extend over a month, and the r eturns for the three months v;,ould be nearer to the normal or average. The present returns made by the bank do no t

include trea ury-bills. They ar e undoubtedly a liquid asset and a r etum fo r the purposes of the ce ntral bank should incl ude them. If the central bank wer e so con­ stitu ted as to enjoy the confidence of the tr ading banks,

the latter would not· object to supplying par ticulars of

t~eir balances ov~rseas and their dealings. The prin­ c1Jal factorh·s which ?-~Ve contributed to the existing . ~ verse exc ange position are the cessation of borrow­ mg overseas and_ the drop in the value of our exports;

the volume of imports also was responsible. The

drought, of course, affected the wool clip, and thereby reduced the volume of exports. The bankers were not sufficiently in the confidence of the Government to know that the London loan market was likely to be

closed against Australia. Therefore I do not think that either of the two principal fadtors whi ch have been r esponsible for the crisis, could ha~e been fore­ seen by a central bank or any other au thority.

lT·

The proposed c?1;1stitution of th~ board of manage­ ment suggests political control which would be highly ~angerous. The Government should have some say m the management, but its representatives should be in the minority. My view is that the board should

consist of nine members-the Governor, the secretary of the Commonwealth Treasury, two members to be appointed by the Governor-General, and :five other members to be nominated by the bank. Except the

Governor, no person engaged in politics or in banking, either as an officer or a director, should be eligible for a seat on the board. If the board were constituted in that way the trouble that occured in connexion with

the South African Central Bank would be obviated. On e D eputy-Gove~nor should be sufficient, and he should not be a member of the board . . If, as a member of the board, h e had equal voting power with his chief

the internal discipline of the bank might suffer. The minimum r eserve to . be held against the note issue should be about 35 p er cent. to 40 per cent.; it should not be allowed to get down to the statutory minimum

of 25 per cent., except in very special circumstances. The r eserve should consist wholly of gold. The head office of the central bank should be in the busiest com­ mercial and banking centre; branches would be u n­

necessary.

To Senator Carroll.-The South African trouble to which I referred, arose from the banks nominating directors of the central bank. Naturally such

nominees were likely to be biased in f~vour of the

institutions with which they were associated. The secr etary to the Commonwealth Treasury has been a very useful member of the Board of the Common­ wealth Bank and should have a seat on the directorate

of the central bank. It is debateable whether the

Governor of the bank should be chairman of the board. I would prefer that the trading banks should make voluntary deposits with the central ban~. I ~ad t~e pleasure of spending a good deal of time with Su

Ernest Harvey when he was in Austral~a, and h~ was strongly in favour of voluntar_y deposits. I ~aid to

him "Suppose my bank deposits £1,000,000 with the ' · · hd ·ti" H central bank, and then wants to ;y1t raw i · . e replied "There is no reason why 1t should not with­ draw tbe money, but when it _had. occ3:sion to ask t~e

central bank for .accommodation it might not be ie­ garded with a very kindly eye." I am opposed to. an arbitrary deposit of a fixed per_ centage of the time and demand deposits of the tradmg banks.

To Senator Thompson.-Building societies should not be included under. the provisions of the ~entral Bank Bill but the Brisbane Building and Bankrng Comp3:ny Lim'ited engages in ordinary banking, accepts depo~its,

and i ss ues cheques. So far as I am a ware, ~he soci~ty is very well conducted, b_ ut ~ am . not acquamtedh with its actual position. The increasrng of the exc ange

r~te by the trading bapks was having a good effectkon the trade balance, but that system would have ta en some time to reduce the imports to the extent that they

515

hav~ been reduc~d by the recent embargoe ru,d special duties. Immediately the bank put up, their elling

rates thos~ connected with industry a. umed that they were. makmg huge profits, but the margin of profit was Just the same as if the rate were 1 per cent. The banks would not make more money from a higher

exchange rate; on the contrary, they would make Jes , bec~use the volume of business would be reduced. ~h11e they _are to _some e.,"{tent restricting imports, they are also. stimulatmg exports. The condition of ex­

change 1s refl ected ~:i:i · the price which the primary producE:r gets for his exported commodities although he may not know it. When the Commonw:alth Bank was :fir~t. establis~ed by Mr. Fisher, it was primarily

compet1t1ve, but m the last two years it has not been so . By that I mean that it has not been reaching out after new business ; in fact, if it is offered business belonging to another bank, it often lets that other bank know. Apparently, it has been aiming to function in much the same way as the Bank of England. The

Commonwealth Bank is quite all right as it is. It

has opened more branches in Queensland than in any other State, but it does not worry the private trading banks; it is not an aggressive competitor. The Central Reserve Bank under the constitution proposed in the

bill would be under government control, and the om­ monwealth Bank would be without · a board of direc­ tors. I am inclined to think, that both being govern­ ment institutions, the Commonwealth Bank would get

"favoured nation" treatment. It is preferable that the Governor of the central bank should have a seat on the board; it would give him more sta~ding. The general manager of an ordinary bank has practically a seat on the board. Short-dated trading bills woud be useful in conju·nction with the overdraft system, but such a system would be difficult to introduce. Their

introduction would have to be gradual, because the bills would be rediscountable, and people would

have to get used to the idea of their paper pasing

into the hands of a third party. One of the

difficulties of banks now is that they. cannot employ funds that are surplus for three or four months.

Instead of putting the money aside, it could be utilized, and the bank could get from the Central Reserve Bank the additional money r equired for seasonal operations. I have never asked the Commonwealth Bank to re­

discount bills against shipments of wheat, wool, and sugar, but that i s a fi eld that might be developed at some future time. To the Ohairman.-Undoubtedly, the central bank

should have power to deal in securities outside its

immediate functiqns as a rese rve bank, but is should not accept deposits on interest.

The wdness retired.

(Taken at Sydney.)

TUESDAY, 22ND JULY, 1930.

Present:

Senator Sir WILLIAM GLASGOW, Chairman;

Senator Sir Hal Col e­ batch Senator Cox· Senator Carroll

Senator Lawson Senator Sampson Senator Thompso n.

Alfr; d Edward Bond, Gener~l Manager of the us­ tralian Mercantile L an d and Finance Company Limited, sworn and examined. To the Chairman.- ! appear before the committee as a representative of the Sydney Wool Selling

18

Broker A 0 ociation, 111 who e behalf l u\Jmit the fol­ lowing statement:-" A consideration of the proposed legislation to provide for the establishment of a reserve bank raises fou r question which,

thou"h closely r elated in the whole scheme, invite attention unde7- their respective hcading,s ,·iz:

J. \\· ould the establi shment of s uch a bank be in the

interests of the community a s a whole, a nd of the tradi ng community in particular Y 2. If, on general grounds, it is desirable, does the

present offer an oppor t u ne time for t he establ ishment of it ?

3. If it be so considered opportune, does the bill, as

proposed, commend itself from the point of view of cont r ol of t he functions with which t he bank is to be cha r ged? 4. Are the functio11 s a nd powe1·s of the ba nk, as set out in the bill, i n the best interests of the con11n1111i ty?

The Sydney Wool Brokern' Association desires to phtce on record its views on these questions, the justification for which is the fact that its member s play a part second o nly to that of the banks so far as the staple industry of grazing and

wool-growing is co11cerned . The association accordingly submits its views as follo\\·s :-l. · The association. has grave doubt as to the a dva n ­ tages, if any, accruing to the t rading community by

the establishment of a r esen ·e bank, bu t if su ch a n

institution is to be created, t hen furt her questions a rise which are dealt with hereafter. 2. The pr esent financia l and econom ic conditions

throughout Australia are so stri ngent and abnorma l that grave doubts arise as to this being an opportune time

to di st urb existing credit faci li ties u nder the prov ision s of the bill. These pr ovisions are s u ch that t he Joint

stock banks wi ll be r equired to lodge with the reserve bank cer tain percentnges or their call deposits a11d

their fi xed deposits, a nd to maintain those percentages so lodged. H aving r egar d to t h e nume rous and widely separated branches of most of the joint stock banks i t follo,rn t hat these banks, to avoid r isk of penalty, will 1•cquire to keep at thei r cr edit with t he Reserve Ba nk substan t ially more t ha n the minimum percentages of de­ posits r equ ired.

The proposal remo,·es from t he absolute con trnl of each joint stock bank and places in the control of t he reserve

bank a considerable portion of the existing r eserves of the former. As r ecourse could only be had to these r eser rns

by the consent of the reser\'e bank i t foll ows that t he joint

stock ba nks lose what t hey now lmve, viz: Unrestricted access to a s ubstall tial proporti on of their existing l'eserves. Further , t he resel' l'e so withdraw 11 from t he t r ading bnnks, if made available to them by co nsent of the J'eserve bank, would be s ubject to a ch arge by way of di scount of interest.

The fo r egoing conditions would, it is r ecognized, apply in any scheme l' eqn iring fi xed pe rcentages of deposits to be lodged with the rese!'ve bank, but the point now sought to be em­ phasized is that any course which has t he effect of r estricti ng

t he credit facilitie granted by the trading banks to t hei r

customer s, whether "·ool-broker s or pastor a li sts o r trader s generally, might " ·ell be deferred till the r e is less need than nt pl'esent for all section s of the community to seek accom­ modation from thei r bankers.

It is well known that pastornl ists are looking to their

wool-brokers for ad,·a11 ces to a g r eater exten t than in former year s, and, in t urn, the published balance-sheets of many

wool-broking companies show t hat they arc lean ing on t heir banker s to a much g r eater extent than in normal times, in order to finance wool-growers whose bu ' ine s, in many case , is not attracti\'e to the t!'acling bank - in other words, the

wool-broker i s, in some cases, an intel'nwdiary bet\l'ee n the banker and the wool-grower.

The restriction of credit whi ch. it is submitted, must follow from the withdrawal of fund from the trading ba nks for

lodgment with the Resel'\'e Bani(, mu t re ult ill r etard in g

de,·elopment of the postoral indu tr)", with the certain ty of increasing the a lready al~rming amoun t of unemployme nt t hrough out the countr y. The inevitable resul t mu t be to

postpone, rather than to accelernte, t he recovery from the present period of depression .

For these r easons, faili ng abandonment of t h is leg is lation, this association requests t he postpone ment of the Re en ·e Bank Bill till a more oppor tu ne t i me.

:i. As to the n,ethod of control of the Resen-e Bank

this associ a tion is of opin ion that the Board o f Directors of the bank should be entirely independent of pol itical or go,·erllm ental influence or control, either as to tenure of office. or election to the board.

4. The functions and powers of the bank are more o r lc~s techn ical from the point of ,·icw of the hanker , but ill lJ r oad outline, th is association consider. it most de ira b! e that, if, and \\·hen a resen·e bank is estrtbl is heel, the

funds it controls should he kept as liquid as possible,

to meet the needs or the gener al community, and, there­ fore, its powers should not include the lending of money to quasi-governme n t or municipal or local gornrnmcnt bodies, except on s hort-dated securities readily reali zable."

Past experience shows that the trading banks are quite capable of keeping industry going. In r egard to the constitu tion of the directorate, my opinion is that the chairman should be absolutely independent. I am aware that ther e a re som e disadvantages in th e sectional appointment of directors but, I think, that

the associated banks, the commercial community as represented by the F ederated Chamber of Commerce, secondary industries as r epresented by the Federated Cham hers of Manufacturers, primary producers as r epr esented by the F ederal Graziers' A sociation and Farmers and Settlers' J'i. ssociation, the shipping i n­

terests and l abour, should each be allowed to submit to the Government a panel of three persons, and from each panel the Government would select one p er son for appointment to the board. The Govomoi· of the bank should be en titled to a seat on the board, bu t

not as chairman. The chairman sh ould nqt be a go­ ve rnm nt em ployee or appointee. In the absence of the Govemor the D eputy Governor should ac t as a substitute director. The trading banks should n ot. nominate an official or director of any bank. It ·wo uld be reasonable to allow the Secretary of the Common­ wealth Treasury a s at on the board. The pur pose of a ce n tral bank would be to facilitate the business of the

tr ading banks in assisting the commer cial communi ty generally, and its funds must be kept in such a state th a t i t could re-discount bills tendered to i t by the

trading banks, thus making the funds that the banks contributed to the central bank available to carry on the business of the community . If that is to be one of its main functions the central bank should not deal in Government secur ities having a longer currency than

two years. A primary essential is that the bank shall have money r eadily available; lo ng-dated securities may not be easi ly convertible into cash. So far as I am aware, ample accommodation has always been available to finance the wool clip and the wheat harvest.

To Senator Thompson.- My association is not in favour of thee tablishment of a central bank. :M:y own opinion is that if any change is made, the best policy would be to develop the existing Oo=onwealth Bank into a central reser ve bank only. It might with advan­

tage be shorn of its t r ading activities . I t should not continue in c mpetiton 11ith the joint stock trading banks on conditions easier than they have to meet. If the present Oornmomrnalth Bank is continued, it should contribute to the Consolidated R evenue a sum equiva­

lent to th taxes, and duties that are levied upon its

competi tor . Tlie views of my association may be sum­ marized in thi order-(1.) Let things conti nue as they arc; (2.) Io tpone any change; (3) When conditions arc more ett cl and there i le s finan cial str ingency, a ?hange may be considered. I ee no r ea on why the

Deputy Governor should not attend board meetings, but h e should vote only in the ab en e of the Governor. Tlie central bank might deal in any government or quasi-govemmen t secu ri tics, which are readily realiz­ able, and haYe not a longer currency than two year .

19

1'o . Senator Sampson.-! am not aware of anythiug th~t a reserve bank wou~d, or could do, that is no't

bemg d?ne no"'.' ~o cope with the_ existing :financial and economic condit10ns.

Ernest Cooper Riddle, Governor of th e ommonwealth Bank, recalled and further examined. To the Chairma.n.-I submit for the information of the committee a statement of the 1egal re erve requir The witness withdrew.

ments of foreign centra1 banks- ·

:FOREIGN CENTRAL BANKS.-LEGAL RESERVE REQUIRE fENT ·.

(PAR'.rICULARS OTHER '£HAN '£HE UNITED 8TA'l'ES OF AMERICA TAKEN FROM PAGE 563 OF THE l

Country.

Albania Austria

Be1gium

Bulgaria

Chile

Colombia

Czecho-Slovakia

Danzig

Denmark ..

Ecuador

Egypt

England

Estonia

Finfand

France

Germany

Greece

Hungary ..

Italy

Japan

Java

Latvia

Lithuania

Netherlands

Liabilities agai nst which Reserves must be held.

Notes Notes plus other demand liabilities minus a mount represented by

Federal loan debt

Notes and deposits

Notes and other demand liabilities

Notes and deposits

Notes and deposits

Notes plus other demand liabilities minus amount represent ed by debt in ~espect of State notes outstanding

Notes

Notes

Notes and deposits

Notes

Notes in excess o~ fiduciary isslle of £260,000,000

Notes and other demand liabilities

Notes and other demand liabilities in excess of 1,200,000,000 markka

Notes and other demand liabilities

Notes

Notes and deposits

Notes plus other demand liabilities minus amount represented by State debt of Notes and deposits exclusive

Treasury fixed deposit '."ccou_nt Notes in excess of fiduciary 1Ssne of 120,000,000 yen

Notes and other demand liabilities

Notes

Notes

Reserve Requirements.

Gold.

%

t36

30

100

Markka , 300,000

% 35 % t30

poo

t20

33}.

Gold and Foreign Exchange.

% *33t t24

40

*33!

t50

t60

*t22

33!

50

t50

50

40

100

% t40

40

t20

40

50

Qualifying Provisions, &c.

Foreign exchange may not exceed two-thirds Reserve ratio to be increased at five-year intervals ending 2nd January, 1938, the suece ive ratios being 20 per cent., 24 per cent., 28 per cent.,

and 33! per cent.

The bank will take steps to r11;ise the reserve ratio to 40 per cent. Foreign exchange may consist only of demand deposits payable in New York or London Foreign exchange may consist only of demand

d eposits Silver in reserve may not exceed one-fourth. Beginniug 1st April, 1926, with re erve ratio

of 20 per cent. , the bank will increase it by

1 per cent. each year over a period of fifteen years 100 per cent. reserve must be held against

circulation in excess of 100 gulden per capita. Foreign exchange may consist only of demand claims on the Bank of England Foreign exchange may consist only of the ba nk's

non-interest-bearing demand balances with Bank of Norway and Swedish Riksbank, less indebtedness to these two banks, and non­ interest-bearing demand balances in special account with German Reichsbank. . The bank,

when authorized by royal proclamation and subject to payment of a tax, may permit the reserve ratio to fall below the legal minimum Foreign exchange may consist only of deposits

payable in gold on demand or on three days' notice in New York or London The original requirement was a gold reserve ra.to of 50 per cent., but on 30th October, 1016, the

bank was authorized to substitute British Treasury Bills for gold Fiduciary issue may be increased by authorization of T reasury

Power to suspend requirement is vested in the Government

Foreign exchange may consist only of undisputed ba lances with forei gn correspondents

Power to suspend req uircmen t is vested in the Government

Reserve ratio to be increased a t five-year intervals ending 24th June, 1939, the snccessive ratios being 20 per cent., 24 per cent., 28 per cent., and 33! per cent.

Silver in reserve may not exceed one-fo~th. Fiduciary issue ma.y be increased by authoriza­ tion of Minister of Finance Previous to emergency legislation in 1914 the

reserve requirement was 40 per cen~. Additional requi rements for notes 111 excess of 100,000,000 la t s

Previous to -emergency leg islation in 1914 the

Notes and ·other demand lia bilities. t 2o reserve requirement was 40 per cent.

_ _J_ __ __:::~~__'.:.'.'.'.'.~===~~---

. • M lega lly include silver as well as 11otd ani\, foreign ~f~titx, to permit the reserve ratio to fall below the lega l t T:r bank is specUlcal/y a~ty~~~f~~e ~\'~:,ct,.;°wezf ft::iJ. minimum. t Metallic reserve may ega . .

F.3395.-4

17

20

l~OREIGN CE~TRAL BANKS-LEGAL RESERVE REQUIREM"ENTS.-<:ontinued.

(PARTTCULARS OTHER TILL>f THE UNITED STATES OE' AMERIOA TAKE N E'R0:11 PAGE 563 OF 'l'HE FEDERAL RESERVE B ULLETIN DATED AUGUST, 1928.-<;onlinued.

Reserve Requirements.

Country.

Norway .. ..

Peru .. ..

Poland .. ..

Russia .. ..

South Africa ..

Spain .. ..

Sweden . . . .

Switzerland ..

Uruguay .. . .

Liabilities against which n.eserves must be held.

Notes in excess of fiduciary issue of 250,000,000 kroner Notes and other demand liabilities ..

Notes and d_ eposits .. . .

Notes .. .. . . . .

Notes, deposits and bills payable . .

Notes .. .. .. . .

Notes in excess of fidueiary issue of 125,000,000 kronor

Notes .. .. . . ..

Notes in denominations of 10 pesos or more and deposits

United States of Notes

America

• May legally Include silver as well as gold and foreign exchange. i Metallic reserve may legally include silver as well as gold.

Although the existing statutory reserve in Austr alia is 25 per cent., it has never been allowed to get below 37! per cent. The bill provides for a reserve to be held against deposits, as well as against the note issue. In other central banks the r eserve is held against the note issue only.

To Senator Sir Hal Golebatch.-The gold r eserve is intended to insur e the conver tibility of the note.· In England convertibility has been withdrawn. If the Austr alian note had r emained convertible and the free export of gold h ad con tinued, the r eserve would have broken down. I produce a copy of the amended South African Central Bank Act. sually this class of legis­ lation provides that a central bank may only issue drafts payable on demand. That h as been deleted from the South African act, and the bank may now issue bills at usance. I am not aware of the r eason

for this depar ture from the general practice of centr al banks. The witness withdrew.

Arthur Speucer Watts, merchant, sworn and examined. To the Chairman.-In behalf of the Sydney Cham­ ber of Commerce, I submit the following statement :­ (a) Centr al r eserve banking, wi t h its coroll ary, an open bill market, if estal.Jl ished on sound princip le with pr oper safegu a rds, is capable of being o f g reat n lluc to Australia.

( b) If a cen tral r eserve banking system be established

the u t most care s hould be taken t o avoi d overlapping or

dislocating the exi ting very efficient a n d s t able banking

syRtem a t present operating in Austra.lia., which HS al pre ent con stituted with big C:l])ita l a nd reserves, centra l head offices ,111 d numerouR branrhe to S<'rve ernry bAnki ng req u irement,

Gold.

% 100

. .

t30

. .

+40

37, 47

50

+40 40

40

Gold and Foreign Exchange.

% ..

50

t40

*25

. .

*45, *60

..

-

. .

60

Qualifying Provisions, &c.

Fiduciary issue may be increased, s ubject to tax, by authority of King and Starting

Reserve may include platinum

Silver in r eserve may not exceed one-fifth. The bank, subject to tax and with consent of the Government, may suspend reserve requirements Note circulation limited to 6,000,000,000 pesetas

and may exceed 5,000,000,000 only wi th consent of the Government. Consent of the Govern­ ment required for any reduction of gold holdings and can not be given unless these holdings are in excess of the r equirement necessary for a circulation of 6,000,000,000 pesetas. First 4,000,000,000 pesetas r equire 45 per cent.

reserve ; at least 37 per cent. must be in gold ; 5 per cen t. may be silver and 3 per cent. foreign exchange. Circulation above 4,000,000,000 pesetas requires 60 per cent. reserve ; at least 47 per cen t . must be gold; 10 per cent. may be silver and 3 per cent. foreign exchange Gold reserve may not fall below 75,000,000 honor

In emergency the King and Riksdag acting together may extend the fid uciary issue by 125,000,000 k ronor Silver in reserve may not exceed one-fifth Note issue in t enominations of less than 10 pesos

may not exceed one-half paid-up capital of the bank. Note issue in denominations of 10 pesos or more is limited in relation to capital of the bank, gold deposited by commercial banks, and a war loan made to the French Government

togethe r with their conservative pol icy, exercise. many im­ portant .fu11 ctions and prol"ide the great benefits of sound banking. ( o ) .A !though a cent ral r eser ve bank establis hed on sound lines i capable to giving material and import:int benefits, s uch i, one as that proposed has hig hly dangerous possibilities, hccause i t could be ubject to press ure from varyi ng and

n ,ria ble political int erests, could abso1·b funds from other banks and withhold credit from banks and t he market in

fa ,·our of governments; it cou Id also be fo r ced to depart

from a so 11 nd policy. I11 t he aboYe con nexion the words of S ir Ernest Harvey, K .B.E., Controller of the Bank of England, should be borne in niind. Referring to the collapse of _ central banking ystems on the ontinent, Sir E r n est stated that-

" In every instance a n examination of the events which led to their collapse rernals that their failure in time

of cris is was largely due to the fact that political

pre s ure wAs put upon the central banks to abandon

t he fundame ntal principl es of sound cent ral banking and to s ubordinate financi al prndence to political

expediency." The Cha mber of ommer ce feels t hat a cen ra l r e en ·c

bank along the lines o f the bill which WR pas.eel by the

House of Representatn ·es wo uld have far- r eaching detri­ mental c/Iccts upon the fi nancial and commer cial inter ests, and directly and indirectly upon the whole community in Austral ia .

ft is a lso felt that, if a central r csen e b:mk were cstab·

lishe_d along the l_ine~ of_ the bill, i t would surely be im-

1 o 1ble for that 111 t 1tut1011 to be r ecognized by the great

ce ntral re en ·e banks of the world, and the res ult o f n on ­

recognit ion would be erio u damage to our credit abroad. (c~) . In t he bill LLndcr co_n idcration the provi ion fo r both ad r111_111 trative and exe<' ut,ve contr ol And the appointment of director and go,·crnor . a pJ ear · to be un ound and l !ll ·

b~sinessl ike. Jt is con i~er ecl that on ly a minority of the

directors s hould be appornted by the Gm·ernment and that none of the executive ofilrers hould be appointed hy the

Govci- nment, but . hould be appointed and re.movable by the l.,oa rd of d'ir eetor R. Th e ter m ' · go,·ern r," if u ed. should

be applied to the chairman of the board of direct .

1 not to an employee of the banl· i e an t' o1 sffion y, ", .. , execu 1ve o cer. To apply the term "o·overnor" to tl . 1

would be confusing and oinco:rrect ~n ~e ;getnerta mdanager crenera, l ld . ~ ss.s an or enuty

'?

1 . manager s 10u not be a member of the board a~d it

1s cons1.de1:ed that the Secre~ary of the ·Treasury sh~uld be an ex officio member, only, without a · vote.

21

1

( e) The . ban~ing proposa ls of the Governrn~nt a~ reaards t.ie alteration 111 the constitution and admi1.1istrat'.on of the Commonwealth Bank, are full of danger to the community. . (f) The Chamb~r o~ C?mmer~e consiclei·s it unnecessary to. maug ~1rat~ a new mstitut10n wluch would be a central reserve bank _m v1?w of the fact that th~ Commonwealth Bank exists, ~nd Is smted to be conve~ted mto a. central reserve bank.

r?e 9ommonwealth Bank 1s · already fulfilling many of the functions of a central reserve bank, and should be made a

true central reserve b ank· by aJ.1 alteration of its constitution to. cover the whole of Sir Ernest Harvey's thirteen essential pomts of central reserve banking. ·

~s a ce_ntral. reserve bank could not fu~ction ful1y and

sabsfactonly ~ithout an open bill marl

it is considered inevitable that the compulsory lodgment with the Central Reserve Bank of a large proportion of the reserves of the trading banks would result in much of it becoming.

frozen, the restriction of advances to the commercial com­ munity by the banks-and indeed cause a .serious but neces­ sary reduction by the banks of their present advances-with disastrous results to the commercial and industrial community. · The chamber holds the opinion that there should be ·no

compulsory lodgment of reserves by b a nks or other institutions. The funds voluntarily maintained by the t rading banks with the Commonwealth Bank, together with the uncovere.d propor-. tion of the Australian notes h,eld by the trading banks as pa rt

of their necessary cash r eserv'e, already affor~ the Common­ wealth Bank ample resources to ope_rat.e in a discount rn_arket, but at the same time the deposits of the banks funct10n as

casi1 resources :1ncl a;.e usable to ui.eet exceptional demands similar to tho~e now being experienced. The provisions of the bill for the cornpuls?ry lodgment- of reseTVeS by the tradin o- banks would result 111 OYer tyv1ce. as

large a percentage of their total liabilities being l.odged w1th the Central Reserve Bank, as is in fact the proport10~ of total liabilities which the English trading banks vo~1mtan1y car~y with the BanK of England. It is also cons1c~ered th~t rn

computing any compulsory or voluntary d.epos1t of reserv~s bv the banks their holdings of Commonwealth notes shou.d b~- taken int~ account, in. view of the. fact, . amongst other~, that the aaaregate holdings . of the tradmg banks of Commm,­

wealth notis for some years has been up~'arcls of . twelve. millions ( and as high as seventeen. millions)' of which the fiduciary percentage has been, dunng the last two years, round about 50 per cent.

. (g) The chaml:}er considers that an _i dea~ _centra.1 Jer~~e bank is a private institution with, a speci~c 0f J~t 0~~ cl e p~:c~ restrictions, fixed by statute. 'Ihe . Ban<: ? "no _an , , tical1y unfettered by statutes, carries 0i11 its bus~~~:sr a:n~ central reserve bank n.10re e!1iciently t rnn anyOO which is, holds bankers' deposits avera~m, ~~o~~ . ~¥l~t~~~·~f the Lpndoll however, only abou~ 3 per cent. o e ia 000

clearing banks, wluch exceed £2,00-0,000, · .

. · f ~ntral ba,nks being

The disastrous results ansrng rom cc . . . times of

subject. to, and the subjec~ of lo_liti~~~ Pf!~~~~e ~J Nati.ans' national stress, are mentwne m z B ks 1913-25;

memorandum on Currency and Gentrn an '

Volume 1 page 91 ( Geneva, 1926) · .

, ' . cl principles of central

( h) It is against all the recogrnze d to or allow

. t . '·' k secured a vances '

reserve banking . o ma e 1:1n f · 0 . ,ernments or others." interest em deposits or balances o oo, . r ' t • 1 · · · · t l stock of the

I do not think that all of tie capi a --" .. f ~t

central bank should_ be held by thle. Gdove~nmenetf~o1ur;h . t' t t' one t nr or on - were a private ms 1 u rnn, - h portion could be held by .th~ Government,l t e estmet?ertanking. by the geperal pubhc, and. ~he ba_anc.-1 { . minate a

institutiO]lS, Th~ Governmen\ wo;h~r ~iareholders minority of the directors, and t fie t~e Oo~monwealth the remainder; the Secretary o ffi . With such a

Treasury would be a member ex o ciod. . ld no+ be

· · · f tl boar wou u

constitution t'he maJority O 1.e · by the

rem,wable ~r subject to control or pressur.e ,·t d to

)'-' h d . If the banks were lllvl e

~::1~::,enin:f ~re n\~[.~ dir~ctors\h stip~i:j~nsch~~~~d ' hardly he . imposed as to w om . ey '

b?, t I imagine thR t they , ould 1 ct m n , ·i th fit u­

c~al experience but di o iated from their t~ons. The position of a c ntral bank i

~1cly; a statement of its balan i i., u

its rat~ is declared. But a bauk h ing one

own duectors or staff on the board of th

_bank might dirive so me benefit by 1 arning in • dv u · w~at the centr~l b~nk contemplat d, apar from th a~vanta~e of his vo1ce and ote at th oar tin .

1 he cho1e!: of the board on ound lines i ital t he

success of the bank. Public confidence in he b nk

is essential, and, rightly or wrongly, peopl have mor confidence in private institution than in thos trolled by government. No matt r , hat ta tut r ,

restrictions may be imposed, if the managem n i not sound and compo_ sed of men thoroughly qualifi , nn

dec1s10ns, the r esults must be disastrou . T he board should be free from political control, becau it , ill

control the currency of the country, and may t nd

or contract credit as it thinks desirable. If gov rn­

ments are press~d for money, and they have ·ontrol of the bank, it will be difficult for the director t

resist the p.i:.essure placed upon the~ to provide mon ' against their better judgment. I .do not know that the present tiriie is not as opportune as any oth r ti1 e

for · the establishment of a central bank; but without a bill market it will not be able to operate to a much

greater extent than the Commonwealth Bank is now operating. I£ the compulsory lodgment of re erv which the bill proposes were immediataely put int operation, the central bank would hav either to r 1 a.

the money to .the banks immediately or have it lyiug idle. Nothing is more dangerous than lendjng larg sums of money in a hurry; it may involve a eepting securities which ·would not be accepted if the lender had time to select his investments. If the trading

banks are compelled to deposit a large proportion of their reserves. with the central bank, which would' not be under any obligation to release mon'ey to any par­ ticular · bank or to discount its paper, but would have power to discriminate in its treatment of clj nt , ea h of' · the banks would have to set to work to build up

another reserve under i ts own control. For that pur­ pose it would have to draw from the commercial om­ munity a substantial proportion of its present advanc , arnl that would dislocate business. The re erv of th central bank should be built up gradually and 11-

currently with the development of a bill market. Mr. Theodore stated that the Government jnten

bank would have no mean of operatrng a a true

central reserve bank, a11d it is inconceivabl tha a bill market could be established in less than from v n

to ten years. If the · central b~1~k tri d to jum_p

immediately from on e set of cond1t10n to anoth r 1t would cause a fias co . The Commonwealth Bank i. already controlling the uote is ue and holding b

balances of the trading bank to the xt n of hr .e­

quarters of the compulsory lodgment provided for in the bill, but on tho ~e balanc tho ballk an lraw

whenever ·they have need to do o. To that xten he

Commonwealth Bank is fun tioning a a central r erv bank. It is not, however, diR ounting or r i onu ing

for the banks or declaring a bank rate. of di oun .

It ·is not able, as it \rnuld be with an op n bill marke to control the inter est rates. It caJrnot buy ecur1t1 on the market; it does not hold_ "e ur~tie in a form

uegotiable on the market, ~nd 1t anno prot t he

p ublic against a_ n unduly ~ig? money mark t or pr vpnt the disrupt10n of rre

made on an overdraft basis ; they ba uo fix at of

maturi'ty. 'If that money· ha_ ~een i1~ve ted in ~uil -ings, machinery, an

and the advance is incapable of being withdrawn or liquified. If the bauk has let out a lot of money on

such terms, it cannot get the cash in when required; it cannot function as a r eserve bank. The Bank of England discounts only paper which bears the sig­ nature of two first-class banks. It does not discount paper directly for the drawer. A wool. shipper may pass his bills through the Bank of New South Wales.

The bank endorses the paper and sends it on to its London agency, which endorses it and sells it on the market. The discount houses, if driven to do so,

re~discount the pape r at the bank, necessarily at a loss. When the Bank of England wan ts to make

more money available, it goes on the market and buys stock, offering a low rate of discount. Because dis­ count is cheap, paper comes freely on to the market; as money becomes more plentiful, the value of it is r educed. At times, the Bank of England holds huge quantities of securities for which it has paid cash. The sellers pay the receipts into their accounts at the trading

ban~s, and that money becomes available for use agam.

A central bank's dealings in municipal securities should be limited to those of a temporary character, with a currency of not more than three to six months to date of. maturity. If local governing bodies wanted long-dated money, the bank might issue or underwrite a loan for them. But securities with a currency of

more than six months would not be consider ed

sufficiently liquid.

To S enator Sampson.- I do uot think that a Central Reserve Bank could do more for the country than is being done now by the Commonwealth and associated banks. In Australia the trading banks exercise many of the functions of a central bank. They have their central r eserves, head offices, and branches, and money is made available wherever it is required. In the

Uni ted States of America where the federal r eserve system is in operation, there are between 20,000 and 30,000 one-office banks; they are not allowed to have branches outside their own cities. Therefore, they have no means of drawing on the surplus funds of btanches in other States or cities. The conditions in Australia are very different. The banks are big con­ cerns with branches throughout the country and they have a fluidity of reserves which the American bank~ have not. One defect in the bill is that it contains no provision for the depositing banks to have access to their rese rves with the central bank, unless the latter is prepared to lend money to them ; which it may or may not do. A central bank by helping to develop a

bill market, would enable more to be done for the benefit of the community than can be done now.

T o S enator Thompson.- The only r eason I can see for the compulsory lodgment of r eser ves is that the central bank may be able to operate the capital which rightly belongs to the trading banks. A bank could overdraw on what funds i t had lef t and if it did i t

would be in the same position as if it bad not a com­ pulsory re erve against which it could not draw. If a bank played fast and loo e with i t funds, depositor might have some protection in the existence of r e­ serves with the centr al bank, whi ch could be drawn upon in the event of liquidation. But a development of that kind is almo t conceivable, h aving r egard to the character and history of Australian banks.

If the Crntr al Bank were precluded from trading, it would not be in a position to r ectify excessive ra tes charged by other banks. By r etaining the right to trade, it could, i n the event of the t rading banks d9-clining to give to the community proper facilities, make money available a t ch eaper 'rates and the other bank would be bound to follow. If the Central R eserve Bank

22

were intent on aggressive competition with the trading banks, it would doubtless be able to utilize its reserve for that purpose, but it would cease to be a true

central reserve bank. Provided that it were primarily a central bank, i ts entry into the trading arena would not interfere very much with the other banks, because it would not advance money that it could not get back in two or three months. The Central Bank could

conceivably favour a separate government trading bank by discounting its paper and making advances, but it would not feed itself in that way. The central banks and discount houses do not handle documentary credits. If the Central Bank were to buy up en bloc bills against shipments of wheat or wool, instead of allowing them

to go to Europe, it would take business out of the hands of the trading banks and would require an institution on the other side to n egotiate them. The wheat might be left in the hands of the bank and it would have to market it. The acceptance house in London knows the importer, whose bill it accepts. But if Rothchi lds, Alexanders, Schroders, or Barings accept bills from my bank it is not concerned whether my position is sound or unsound. For the Central Reserve Bank to _ buy up bills in Australia it would have to know the

individual importers on the other side, or take the risk that when the bills matured they could not meet them, with the result that the wheat would be thrown back on the bands of the bank for marketing. That would not be banking. In regard to the suggestion that six months bills should take the place of the present over­ draft system, a bill of exchange should be against specific commodities which can be realized in a speci­ fied time to liquidate the bill they r epresent. Accom­ modation bills, banks will not and should not h andle, but a bill of exchange drawn against a parcel of

wheat or a parcel of merchandise is in a different cate­ gory. Within a short period the wheat passes on to the miller, and funds are forthcoming to retire the bill. If the miller in turn has drawn bills, they are

r etired when he sells his flour. The bill market is very generous, but it does not entirely supersede the over­ draft; he accepts a bill of exchange against the pecific the United Kingdom the overdraft system is in opera­

tion b_ ut an importer does not buy merchandise on over­ draft; he gives a bill of exchange against the specific goods; the bank knows that the advance is against a definite marketable asset and therefor e the merchant gets accommodation cheaper than be would by way of fixed overdraft. If a mer chant gives a man cr edit for 60 days ·who, when the time expires, cannot pay, be risks losing bis custom if he pre ses. But if the buyer has accep ted a bill, which the mercant bas discounted, and the discounter presses, the merchant does not lose his customer. A man :finances his business on an

overdraft and gives his customer s goods on cr edit. A promissory note at li>as t :fixe the amount of the deb t and the date when it is cl ue.

When Sir Dennison Miller was Governor of the Commonwealth Bank, he had absolute power s. Whe1: the board was appointed, instead of the chairman tak­ ing the name of o-overnor , that ti tle was given to the man performing the duties of gener al manager. After all i t is immaterial wh ether the chief executive officer be called the governor or the gener al manager, but .it is quite wrong to make that officer chair man of the board. It is uncle i r able that the Deputy Governors

hould have seats on the board and independent voting power. The gener al manager should attend board meet­ ings even if be is not a member of the board. To

allow hi ubor dinate officer s to vote for or against him would be quite wrong. When those officer s ar e not appointed by the board, i t has not the controi or i nflu nee i t should have.

The witness retired.

( Taken at Melbourne.) MONDAY, 28TH JULY, 1930. Present· Senator Sir WILLIAM ' G~ASGOW c~h . S , , anman · '- enator Carroll S '

S Senator SLir Hal Colebatch / s:~:~~~: itr::!spos:n enator awson · · Oha~es Her~ert Tranter, General Manager of the o~mercial Bank of Australia Limited and Chair~an of the Associated Banks was ~alled

sworn and examined. ' '

To the (jhairpian.-l have prepared th f 11 .

statement:- e o owrng

b I. consider that the bill as submitted would "f d t

e m the best interests of Australia for ' tlh pafsslel ' ~o

reasons :- , e o owmg

The conditions which the co t · · t ·

are full of difficult 11 : tn 1Y Is a present expenencing t d · b k Y, ca mg or a ll the assistance which the ~a !ngs a n s . are able to give to a ll the roducin" and ti admg enterpnses of the Commonwealth TPh. .bt would ·11 · • b ' · is ass1s ance . .·, 1 n~y op1mo11, e checked by the provisions for a 1 elatively high percentage of liabilities as a deposit to the propo_sed reserve bank, and such deposit requirino- to be of a ng1d nature. o The flu ctuation s iu t he business are frequently lai.-o-e and to meet these, !t i s nece~sary ~o k eep ample cash 0 ~ ~hort'. dated funds available for 1mmediate use, if required. Rigidity of_ the de~osi~ would n eces~itate, in addition to the deposit w1th the 1ese1 ve bank, further funds to be s·et aside to meet these movements! thus _ r educing the amounts available for the u~e of our m_dustne_ s . and increasing the stringency of the p1 e ent :financ1a.l pos1tion. I ln1 ow that the bi11 provides for the ban ks bei n"' able to borrow from the. reserve bank- practically paying° interest for the ~ e of then- own money. This, however, would reduce the earmng power of the banks, and not add to the strength of ~he finance of the community. S1~ E:nes~ Ha(·vey, when in Australia in 1927, was very defi!11 te m his oprnwn that the amount of any bank's deposit o! 1ts _reserves must be voluntary, and left entirely to the d1scr e_tion of the ba nk concerned, and that amount, so depos ited, was to be free to be drawn nt any time the depositing bank clrnse. The second objectio:1 is that there is no restriction of the :1flnne r in which the rescve bank mig ht u se the funds under its contr<;>l. It should be definitely l a id down that s uch funds must be m vested in rea dily-n eo-otiable securities of short date in or~er that they m ay be co;';vertccl quickly into cash if t h ~ occasion s hould arise for their u se . • The bill would leave i t possible for a. go,·crnment in urgent need of funds to obtain a dvances to tl1e full extent of the available resources of the r eserve ba nk, a nd leave that bank in a position of not being able to g ive assistance, should such be r equired by the ba nks whose res ources i t holds. In other words, the ba nk's reserves would cease to exist. Interest should not be a llowed o n any deposits. Payment of inter est would stimulate the desire of t h e bank to accept bus iness of a· more profitable kind to earn such inter est instead of keeping its investments in quickly negotiable form '"'hiclt , as a rule, earn a l ow rate. The boa.rd of the proposed bank should n ot, in any way, be under control of the Government, or subj ect to any form of political influence. This does not appear to me to be s uffi ­ ciently safeguarded by the proposal now under inquiry. It was made particularly manifest by some of the r ema rks made in the House of Representatives, when the bill was under discussion, what might h appen if the proposed bank were under political control, making further comment s uperflu<;>us. The directorn should be of a pproved probity and standrng-, ,me! should h ave full control, without interference of the Treasurer or of the Gol' ernment. The proposed reser ve bank can serve· no good I/ urpose which is not available under t h e exi s ting Commonwealth Bank. which, under its present management h as gained the confidence of the banks a nd the public. The es tablishme!lt o_f a separa~e ba nk would entail a good deal of expense ,ylnch rs not neces­ sar v and under t h e conditions of Austra lia, no unnecessary exp~~ditu;·e should be incurred. This proposal a l so includes the reconstruction of the_ pre­sent Commonwealth Bank to enable it to undertak~ ordm'.'-ry banking business. Experience of government tra dmg activ1- ties h as not been s uch as would lea d one t? expect s uc~ess. All legitimate r equirements of_ the commumty are provided for by the existing ba n ks. whwh are conducted on a. sound basis. It h as been found that State instituti?ns t end to attract business which i s not acceptable to t he ordmary banks ; t lt Rt i s . business of a.n inferior kind and . business u~der the influence of political consideration s . This may easily lead to losR 11.nd be a danger inst!lad of a benefit to the State, 23

l consider that it would b b te

Commonwealth Bank to I e et r t~ allow the pr ent

now fulfill in" the function:vo /e as :~ab1on requir . It is way that th~ Bank of "o a cen a. a~. lt was in thi

central bank I th En°land grew rnto its po ition of a

for compul ~ry ~ep~s~~:e bof thaJ.bank there are no pro\•i ion ever, keep accounts with ~t. ra b ,~g t~ank . 11 bank • how­ available whenever required b ~ . ~- a:mounts therein re deposits are always of a sub yt t~ lm 1v1dual banks. Th e

2 cl · s an ra amount For 1 · ta on n January 1999 ti ted · n nee, maximum in th~ fio~r~s b:r a moun 1 ·t10 £84,016,042-tho 1999 tl · · 0 ore me-w u e on 21st August

· · - ' le 1111111111 um was £55 850 949 Th fi '

from the Bankers' Almanac' amt y ;a,·-Bo:: gure are taken At present, all the bank k · .

ll' ealth Bank in which s eep . accounts with the Common-required for' till mone;re ~?osi~ed surplu~ cash. ab011e that ~-ariatio!1s of the r equir~men~~s, o/o;~:v~;ilrs ;u~Ject to tl)e ~~t~-!r:c1ally_ the c3:se i-11 Australia, where /e a~':;~r ;~~\~ s~1bsta;ti~~a~~1al ts~u~b~nces. They ar~, h?wever, always of

Pi 11 I doun ' u ~ve not the ?bJect10n of rigidity. . na Y, . o not ?~ns1der rt advisable, especially under r e:e·~! finan?ial cond1t10ns, to make any chan"e which may bis ufi1 tra dmg arrangements, and which C:n confer no ene ts on the community. I am not strongly opposed to the establishment of a central reserve bank; but I fail to see th!!J any good could result [rom its establishment. The Oom.mon­~ealth Bank 113 now performi~g all t~e necessary func- • tions of a central bank. If it were decided to set up such a bank, I assume that the appointment of the boar~ w_oul~ be left to Parliament, and to that extent the rnstitut10n would be subject to political influence. Men. of known standing in the financial world should be c~osen as members of the board, and, when once appornted, the b~a.rd s~ould have full power; there sho~ld be no political rnterference with it. Without a bill mark~t, a reserve bank would be of very limited · use. The difficulty would be to find short-dated securi­ties for the employment of the fu n.ds of a reserve bank. We have practically no bill market in Australia. In London this market is very large. Under some circum­stances it is possible that a reserve bank might give confidence in the financial resources of the country. I do not think that there is any necessity for the pro­vision in the bill requiring the tr~ding banks to lodge. 10 per cent. of their demand deposits and 3 per cent. of .their time deposits with the reserve bank. The making of these deposits should be voluntary. A statutory reserve would be too rigid. In the ordinary fluctuations of business, a bank might want that money quickly. Generally speaking, I assume that the reserves lodged voluntarily would be as large as those specified in the bill; but, if the proportion were rigidly fixed, a trading bank would need to have a larger amount deposited than that specified. At the present time, .our bank has with the Commonweaith Bank more money than would be necessary under the proposed bill; but a few weeks ago we had only half that amoun t. I think it advisable that there should be some statutory limitation of the amount of r eserves that could be held by the central bank; otherwise it might overlend. Such a bank should not have power to trade wi th the ordinary public. That would be contrary to the practice of all reserve banks. The Bank of England has that right; but it does not trade to any considerable extent. If the Com­monwealth Bank developed into a re.serve bank, the small amount of trading that it i now doing would not be objectionable to the trading banks. To S enator Sir Hal Golebatch.- l know of no good thin(}' that a r eserve bank could do at the present tim that°is not now being mie t at money or

purpo es which are not liquid. hen the notes are no

longer con ertible, the danger of governments :financing them elv in that way i increa ed. Germany, France, and the nited States of America furnish examples of that. The placing of the r serves of the trading banks in the hand of a r eserve bank would not increase their

total value, unless, by creating greater confidence in the reserve bank, the earning capacity of tho e reserve might be incr ased. We always keep a certain amount of absolute cash. We could allov,, that ca.sh to re'maill with the reserve bank and a proportion of it might

be earning ome inter est on short-dated securities . But there ·would have to be a limi tation. If any particular trading bank got into difficulties, and required assist­ ance from the r eserve bank, I as ume that it would

be possible for it to r eceive assistance exceeding the amount that that bank had deposited by way of

r ese rves, subject to the board of the r eserve bank being sa tisfi. ecl a to the position of the borrowing bank. It ·would merely be a transaction bebveen the customer and hi ba~ker. At present, the cash reserves of the private banks ar e lodged with the Cornmorrwealth Bank;

but if we all went to that bank this morning and asked for our balances the Commonwealth Bank co uld not pay them, and the proposed r ese rve bank would be in ·a similar position.

To Senator Thompson.-The big transaction in Nova Scotia, when the advances made by the Bank of

.England ran into millions, was somewhat of a national under taking. The butcher, the baker, and the candle­ stick-maker do not kee p accounts with the Bank of England. The Commonwealth Bank now requires no additional powers to enable it to develop as a reserve . bank. The Ban·k of England was not established as a reserve bank- it grew into such an institution. The Commonwealth Bank does comparatively little trade; i ts balances are no,v between £50,000,000 and

£60,000,000, and the total advances are about

£10,000,000, including advances to loca l bodies such as shires. · So the actual trading help that the bank gives to the community is very small. We have full con:fid­ ence in the present constitution o_f the Commonwealth Bank. We think that it do es nothing that is unfair.

The present board of the bank ha.s the full confidence of the trading banks. I take the view that there is no

necessity for a reserve bank, and therefore I have not given much con ideration to the best means of raising the necessary capital for such an institutio11. I think that our trade is too small at present to encourage a bill market or short-called currency in Australia . We are a comparatively small community, and our r ese rve are small. The amount of :first-class bills, as they ar called in London, will be small at any time. The use of ordinary trade bills in Au tralia is limited because of · our very hio·h stamp duty. I do not advocate a

return to the old system of three or four months' bills that merchant took many years ago-they are not the kind of bills in whi h a r e.serve bank should trade. The fullest po ible information should b obtained from :fin ancial expert of the highest tanding before embarking on the cheme contemplat.ed under the Central R eserve B ank Bill. W hear opinion

expr essed in u tralia on thi matter; but they are not the opinion of m n who have b. en in the entre of

the world :finance. n know] d e we have of central

r eserv 0 banking is merel the r ult of r eadino-. Th

deposits of the tradin banks now h ld b. the om-

monwealth Bank amoun o om £13, 00,000. nder

the pro po al in the bill i will b , n for the

private bank o withdraw thi amount, and, a th

·Commonweal h Bank ha not £13 00,000 in pare ca h it would be the first borrower from the proposed bank. Thu much of the fund of the priva e bank would b l nt o the new Commonwealth Bank.

The wi_t_n es,. 1JJi/f; dre .

24

•

Ernest H enry Wreford, hief Manager of the

ational Bank of Australasia Ltd., was called, worn and examined.

To the Chairman.-I have prepared the following statement for the information of the committee-I am in accord with the generally accepted principle

nn der lying central re erve banking systems. I regard the pre ent Commonwealth Bank of A ustralia :ts conforming to many, though not all, of s uch principles, and . ubmit that it h as been for some time past, and i ,

usefully functioning as a reserve bank, and as s uch, holding clepo its for, and lending when required to, other banks, _ and c>xerci sing a useful and limiting influence upon exchange and interes t rates. Its po\-ver as a trading bank are reasonably

kept in re erve, and the relation between it and the trading

b::mks have developed into conditions of confid hce and co­ operation. I ,tm in favour, as times and ci rcumstances permit, of a

gradua l further . development .of the Commonwealth bank along accepted r eserve bank lines. I am not in favour of the reserve bank as outlined in the

bill, and my r easons are-rt is very defective in many respects according to the best accepted standards, particularly in that-1. It proposes too low a gold reserve, compared with

other centra l reserve banks. 2. It contains provision for the compulsory maintenance with it, in current account, of a fixed percentage of the

tradino- ba 1ks' cash reserves. In the case of the Bank

of England, there is no s uch compulsion, yet all English b:-inks deposit most of their cash reserves with it. :3. No limit i s proposed for advances to governments a.s regards either amount or term. All the bank's funds, including the trading banks' balances, could be locked up in loans to various go·,rernments.

4. There is no prohibition of i1r estment in non-liquid or long-term securities. Thi might res ult, in operation, in a locking up for long periods of moneys which should be kept liquid for the needs of any time of special

str ess. fi. The hill is associated with another measure intro­ tl ucecl to amend the present Commonwealth Bank to the extent of removing its central bank features and setting it free to operate more freely as a trading bank.

G. The pre. ent time is particularly inopportune for any drastic change in our financial system, in view of the

critical :fin a 11 cia I position now obtaining in Australia, which makes any interf~rence with banking most

nndesirable, a nd likely to cause g r eat financial disturb­ ance. The bill as framed is more likely to cause trouble than provide safeguards against it. H aY ing thus briefly outlined my general views towards the bill, I now off er some detail comments upon .a few of

the mor e important section of the bill, and add certain

informative appendices :-lat 1. e ] 0 sub-clau e 1, provides for the deposit by other

banks on current account of fixed percentages of their

deposit liab ilities . .As a lready pointed out, there is no such pro\·i. ion at the Bank of England, nor is there any at the

present Commonwealth Bank. · .\ ll t he big bank of E ng land keep their loo ·e cash re erves

\\'i th ti1e c -•n tral institutiqI), and practically all the big banks of A ustra.lia keep their with the Commonwealth Bank, the recen t total being omewhat in the neighbourhood of lH mil­ l;on pound , with a tendency to increase. Fixed minimum per­ centage rn an rigiclit_ where there should be ela ticity, and

\Y Ould r edu ·e the hanks' a bility to lend, or to meet other

peci a l emergencie -save by borrowino-. And i t i to be

noted t hat in practice t l1 e operation of the minimum per­

centage \1·ould mean that till heavier balanc would require to be kept o a to avoid the pos ibility of daily come-and-go

operation cau-ino- t he balan es t fall below the pecified

p r entage .

~ u h r e:;e nes when in the hand of the ownino- bank may

he dra"·n 11p n for ome-ancl-ao purpo e , but in the hands

of tl1 cen tral in ti ution w nld be out of the control of

tl1P owner. wino- to he opera ion f t}1e t atutor

r es rv

cleba a.bl bank i

, heth r in th f

a I og her ,vi

Y r

hould hould

52 25

appointed by t he Government .

present Commonwealth Bani· 'thalthough m the case of the well and caused little O ~ d" e srstem has so far worked

Another form of tr 1 no issabsfaction.

A:l>PENDIX B

GOLD RESEHVES PRO .

RESERVE BAJ.~K Br£2S~D BlE THE CE TRAL

, k b con ro would be th t· .

o~n · y m eans of shares w ' th . . : cons 1tut1on of the

dl!"ectors by the proprieto;s \ib. P1 ovis10n for election of

and to cla uses providing fo~· tluti~! to Gove:nm:nt approval way of a diversity of business . fresentabon m a g~neral

producers, manufacturing ba k' in erests, s uch as pnmary 1 , , n mg, etc.

11 cl,.use 22, there is no d

possibility of the executive coa eql\ate safeguard against the m practice of the official mem~mi e; ff the board consisting J{eferring to clause 50 old ~rs .o, he b?ard. . .

alarm provisions which ~v~u'd iese~ ; es, I view with profound· reserve to be represented oni ~na e ~n. actual me~allic gold per cent. Other central resirv/ b:nf m1r~: holdmg of 12} an average 30 to 50 er cent ~s. 0 e world hold on

judgment, that there 1s : . It 1s not enough, in my

England in the form of fu;~ov~sion for . f~rther. res_erves in ary times are s u s · c ass securities which m ordin­

It is essential I cepb~lde of sale and conversion into gold

' , cons, er that the bank h ld h ·

r eserve of at least 2 5 e r dent . s ou ave a the major part of it .P ·t ··· 1?- gold, preferably wholly or lrnt certainly t here sh~~,l~ s b~h{:{lal poss!ssion in. Australia, no less a percentage th 25 . some~ rnre on its account an pe1 cent. m gold. Appendices are submitted as follows:-

A. Gradual d~velopment and co-01)eration of central bank with other banks. reserve

B. Gold reserves proposed by the central reserve bank bill ancl central reserve banks of other countries con·

trastcd.

0 . Cons~itution and . ~unctions of a -cen t ral r eserve bank as liud down by ·Sil' Ernest Harvey, deputy governor of the Bank of En"land. D. Definiti_ on o\ a ce~tral reserve bank by Professor L. G.

E . Mi:l".ille, I rofessor of Economics, .Adelaide. ·

Provisions _of the· proposed bill in regard to advances eb gove1 nments and ~hose of the South African

Reserve Bank· Act . contrasted. F . Exchange. G. National Bank's pamphlets on Central Reserve Bank and Commonwealth Bank bills-issues April, May and

June. are. other sectionR and clauses. in the bill poRsessing of mterest, a1;1cl I am ready to answer any question to them which the sel ect committee may des ire

-There features relating to put.

1 have cndea,·oured to confine my inemoranclum to the more vital m atters.

APPENDIX A.

GRADUAL DEVELOPMENT AND CO-OPERATION OF CENTRAL RESERVE BANK WITH OTHER BANKS. Mr. Clegg, Governor of the South African Reserve Bank stated in his paper on banking in South Africa, page 277:

Journa l of Institute of Bankers in South Africa, October

1929, as follows:-'-" The transplanting of tfre central bank sy;tem from countries where it has evolved in the natural course

of events to countries where it has to be superim­

posecl upon a local banking system, is an operation

which must be clone with care, for the r eason ' that

Parliamentary banking has "slowly broadened down from precedent to precedent," though even in- the oldest

banking counties it is of comparatively recent origin. That is to say that · it was not until recently, I think

I may say almost within my own banking lifetime, that central banks have fully recognized themselves as s uch. In the middle of the l ast century there were Bank of

England directors publicly stating that the Bank of

England's chief duties were to its own stockholders, and that its public responsibilities differed from those of

other banks in degree only, if at all, and cer~ainly not

in kind. On the other hand, at the same time there

was in existence a certain person, Walter Bagehot, by name, who was perh aps the first to see something of

what central banking really meant. His boo~ Lom_ bard Street, after having been read for a generation, either created, or accompanied the formation of modern central bank ideas. Towards the end of the century the Bank

of England, keeping the noiseless tenor of her way, had advanced a long way towards being the ~omplete central bank. "Although it is desirable in highly develoJ?ed

bankin" countries there should be such co-oper at10n betwee~ the central bank and the commencial banks as would be impossible if there were active. competition between them it is not only, or even mamly on t~at

()'ro und that ' I deprecate such competition. The chief ~eason 'is that it' is impossible for a central bank ~o

compete · effectively with the ·commercial l:)an)l;s irnd still remain an effective c~ntr!'ll l)an)l; ,"

B~KS OF OTHER COUNTRIE 0~ ~fo ERVE The bill provides for a wh"ttr d .

to be held against notes an~ dmg . own ~f the gold resen-e

Bank Act provides for a 2 ~ ep~sit\ 'Ihe ommonwealth

trali~n n_otes issued and ~Jt:~a~:~ go d reserve again t us-Tins bill provides for 2 5 g. and a similar reserve aaa~st dper ~fnt. re erve ~g~inst note ( beyond that 50 per "cent ) ~ 0:1 ts! up to 2;0 lllllhon pounds

of part ld d · ' u ie reserve may con ist

~ritain !e 0curifi~s f:~t fi:ii~(;tss fi~ad!ov:i\fteniafff of rtehat i ese1 ves can be held . b. d cl · . · e bonds and/ . b"ll a toa ' an . u~vested lil paper-British Under OI i ~-:-and the remammg half a.t home in old

12 ,. these provisions the gofd reserves may be reduce~ ~

-,- per cent.

acfe~erv: banks of other countries are compelled under their t s 0cl eep· reserve~ as follows, the ca es cited being taken

a ran om. (See Kisch and Elkin)·-

Bulg_aria.-Gold reserve of not O less tha.n 33! per cent !n respect of n otes and other demand liabilities . ·

Belgium.-Golcl reserve of not less than 30 per cent. plus ~o zer cent. ( 4~ per cent_. in all) in claims payable

Ill '?old_ abroad rn r espect of the a.mount o·f the siaht obhgat10ns. o

Aust?·ia.-(?ne-third cash cover against notes and a.II 1mmed1ate liabilitie s. Ohi/e.-Gold reserve of 50 per cent. of notes outstanding and deposits combined. Roumania.-25 per cent. in gold and 10 per cent. in

foreig1;1 drafts payable b! law in exportable gold. South Africa.-40 per cent. m gold a.gamst notes issued. ~n respect of dep~sits ~nd bills payable 40 per cent. m gold and specie; silver specie not to exceed 20

per cent. of the total reserve. United States of Amer·ica.-35 per cent. in aold or lawful money against deposits. 40 per cent. i~ gold a.aain t n otes.

0

. While the trend of opinion amongst economists and bankers is t?wards a re~uction in the old high levels of gold re erves agarnst notes, it cannot be fairly claimed that a reduction to the level made possible in the bill has tbe approval of

any but the framers of the measure.

A PPENDIX C.

CONSTITUTION AND . FUNCTIONS · OF A CE TRAL RESERVE BANK AS LAID DOWN BY SIR ER .EST HARVEY, DEPUTY GOVERNOR OF THE BANK OF ENGLAND. ( 1 l. :A central bank s hould possess the exclusive right of note issue.

( 2) A central ba nk 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 busiriess of its own government. ( 4) A central bank should be tbe banker of the trading

banks, and should act as a. settli ng agent for clearing differ­ ences between such banks. ( 5) A central bank should not ordinarily compete with the trading banks for general banking bus iness.

( 6) A centr al bank should ens ure to the public the pro·

vision ·of adequate banking facilities on reasonable terms. ( 7) A central bank s hould not take money11 at interest

on its own account. ( 8) A central bank should quote publ icly the ra.te at which it is prepared to discount bills, and should publish a.t regular and frequent intervals a clear statement of its position.

( 9) The assets of the central bank s hould be of the mo t

liquid character possible. ( 10) A central bank should not draw or accept bills pay·

able otherwise than on dem and. ( 11) A central bank s hould not engage in a. general

exch a nge business on its own account for tbe purpo e of

earning profits. ( 12) A central bank s hould not engage in trade nor have any interest in any commercial, industrial, or other under· taking. ( 13) A central bank should have no branches outside its own country, but may have agencie abroad.

.APPENDIX D.

DEFINITION OF A CENTRAL RESERVE BANK BY PROFESSOR L . G. MELVILLE, PROFESSOR OF ECONOMICS, ADELAIDE. "The object of the bank is to centralize, regulate, and

protect the bankin()' and currency reserves of a. country. Any ba nk which finds "a· strain placed on its reserves can turn

with assurance to the central bank. Banking resources, bein,r centralized, can be hurried to any part of the sy tern when• weakn~s~ develops." ' .. . • <- · - • I

26

A PPE~D1X· K

l'lW \"l ' 10).'S OF TH E PROPOSED B lLL I REGARD TO ADYAXCES TO GOVER~BlJmTS, AND THOSE OF THE SOUTH AFRT CAX H.i<; ERVE BANK ACT CO~TR.-\ TED. Section 8, sub-~ection l.;-To make a d ,·a nces to the Govern­ ment of the Co111mo1111ealth or of a State or to a ny authority co nstituted unrler the la\\" of the Commonll"ealt h or of any Stat<'.

Jlll·estigat io n of a ll constitution of central r eser rn bank~ reported on in Hisch ancl J,)/1.:in shows t hat thi s clause is 11niqu<' in a. central r esen ·e ba n k constit ution. The a im of ,·c ntra l reser rn hank fra mers is us ua lly in t he direction of

limiting go1·e r11 111e 11 tal iu terference, both in co ntrol and bu rrowing. Under t h is section needy go,·ernments co uld absorb nil t he funds of the r e e n ·e bank. As t he main object of a ny nrnnage­ me:i t of a n.v r e eH e ba11k is to keep funds liquid, the

provision proposed in the bill is untenable, both in t heor y, a nd doubly so i n practice. The bill iti sta tcd to be modelled on t he 1:,o ut h Afri can act. Regard ing section 8. sub-section J , however, the So nt h African act contains 11 0 provision fo r g r a nt of b:rn k ove rdraf t to

g-01·ern mcn'.s . There is in fact a prohibi tion agai nst i t except 11·ithin certain narrow litni ts (sec Sout h African act, s ub­ section 2 of section 13 below), and pro1·is ious fo r borrowing are the subj ect of a nother a cL.

, ' ub-section 2 of Sout h Afric.,.n Ce ntn.! Re crvc Ba nk Act rea ds as fol lows :-C'f ot hing in s11b-sect ion ( J ) cont ,, ined slrnll be deemed to auth or ize t he ba nk to adva 11 ce moneys t o t he Uuiou

Governmen t whether by t he purchase from the said

Gornrnmen t of stock, debentures or bills, or other wise to a n a mount exceeding tha.t which t he said government is a n t horizcd to borrow u nder t he provisions of section thirty-two of t he E xchcqi,or an d Andit A ct, 1911 (Act No. 21 of 19 11 ), a nd the pr ovisions of sections one to

fo ur in cl u sive of t he Gen eral L oans GonsolidaUon and A.mcndment A.ct, 1917 ( Ac t No. 22 of 1917 ) . The maximnm .a moun t t he r eserve ba nk may ad vance t o the U nion Govern ment is £3,000,000- fixed by Gener a l Loa ns C'o nso1idation a nd Amendment Act 22 of 1917, section 2. If

Pa rli a menta r.v a u t horit y is g- irnn fo r furt hPr borrowings it 11·011ld be a matter fo r a rrang-e mc11 t hetween reser ve ba nk n.nd

t he Tre,ts ur:v '1S to t he fo rmer g ran t ing a ddit iona l loan.

A PPENDIX l?.

EXCHANGE.

A ce nt r a l reser ve bank may fix t he r ates fo r o,·erseas

e·, cha nge since it may co nt r ol gold at home or a broa d, but t he supply of exchange a br oad is con t r oll ed by t he ebb and fl ow of expor ts a nd impor ts. A cent ra I ba nk cnnnot cr eate

ex~hangc any more t ha n public IJa nks can. Tt ca n on ly

ront rol and deal i n i t. Mobilization of gold a t home or

abroad for excha nge purposes is t he last re ort for providing exchan.~·e abroad. If we t a ke t he case of Sout h Afri ca, where n central ba nk oper ates, we fi nd t h e r ates of exchanire on

London n ominal. l 5s. per cent. , a nd t he sn pply a mple, bnt this rloe s not a rise from t he fact t hat t he Ro n t h A fri cnn· Reser rn Brr nk rontrols tl,e rates or s np p!i es. Tt co-operat es wi t h t he member ban ks in both, but t he easy exchange position in South Af rica as contrasted ,Yi t h our diffi cult and costly pos i t ion in Austrn li a. a rises from t he fact that their expor ts (ma inly gold and dinmon ds) largely exceerl t heir tota 1 impor ts, makin)! balances a lways arn ilable i n London fo r t heir gornrnmenta I or public needs. T he Ron th African a nd Australian imports a.ncl exports posi t ion for t he past four _vcnrs compare a s

follows:-

1926- 11)29.

Australia-Impor ts £605,920,000; Ex.por ts, £5fl 8,227,000 ; Excess Im­ por ts £37,693,000. Sou.th A.frica-

Im port £30n.921,000 : Expor ts £368,234,000 ; Excess Ex­ ports £,58,:ll 3,000. The proposed central reseH e bank could do no more in t he ex.cha nge mar ket t ha n the publ ic ba nks a nd Common wealt h

Bank ha re done a nd a r e now doi.n ~. As stated. it cannot

rreate a supply of exchanire n.broacl i f our expor ts fail in

1·0!11mc or s nffi cienc_v to pay for impo r ts . n.nd it cannot so control rates as to pr e1·ent movements. Excha nge charges a r e controlled and fixed by supply a nd demand. YVhateYc r po 1rnrs a central r esen ·e ha nk ra n exerci. r in t he exchange market are now exer cised by our Common ,·ea. It h Ba nk. It ro-operntes wit h the traclin _g banks now, a nd rate are fi xed onl:v by agreemen t with that ba nk.

It is ubmi tted that our p resent Commonweal t h Ban k

nnw funct ions satis factorily a an exchanire re_gulati ng centr a l hank, s in ce rates a r e only fixed by agr eement with i t. It

controls /!Ol d s u pplies a nd t rading ba nks co-operate with it, and it '".ith t liem. in su pply in"' t h e country's needs to t he

full est extent possible. · · ·

If the reser ve bank made advances to governments, the government should give .security fo r them, unless the advance.s were of moderate dimensi on and for a very short period. I r ealize that gover nments some­ times want money for carryi ng-on purposes, p ending the issue of securities on the market. If a t r ading

b:rn k went to the r e erve bank fo r assistance,

as contemplated under the bill, and the assistance r equi r ed was gr ea te r t han the amou11t of the balances of th at bank held by th e r eser ve b::tnk, the extent of tho assis tan ce that should be given would largely dep end on the circumstances a t the time. If a bank r equired a lar ger amount than i t h ad lying wi th th e r eserve

bank, I do not know tha t I would say that i t should

necessarily put up securities. These would be desir­ able, bu t I think th at a r eser ve bank should deal wi t h a trading bank in circumstances of need in the same way as an or dinar y bank deals with i ts cu stomers; it does not ahvays ask fo r security. If the customer 's posi tion is quite sound i t soinetimes goes beyond the securities. It is essential that, so far as p os.sible, the board of the prop osed r ese r ve bank should be absolutely free from government con trol. I believe in the development of

the ·Common weal th Bank as a R eser ve Bank. If i t were deci ded to es tablish a r eser ve bank, i t might be desir­ able to h ave i t consti tu ted by sh ar es, which would be represe11 ted on the bo ard in some manner to be deter­ mined.

To Senator Sir H al Colebatch.- A t present the gold roS€ rve is about 42 per cen t. of t he note issue, and the minimum permissible is 25 per cent. I tl:ilnk . that fo r our pur poses the presen t gol d 1·ese rve is ample. If the notes were made conver tible in practi ce to-cl ay it. would be necessa ry, of course, in theory to

i11 crease the· gold reserve to 100 per cen t. If t he

r esen e bank had the r esp onsibility of converting its notes into gold it woul d necessarily h ave to be

extremely careful abou t the amoun t of notes issued. If th e bank were not responsible for the convertibility of the notes, and if, as proposed under this bill, it were permitted to lend ·without r estr iction to governments, the posi ti oJ1 created would be most unsafe. The

ma king of th e notes incom·e rtible should be regarded as a n emergency measure to be taken only in a time of great stress. A r esult of over-lending to governments migh t be that some of the ordinary banks'· cr edit

balances migh t be so depleted that af ter meeting

de mands by some needy banks for assista11 ce th er e would be an i nsuffi cient amount lef t for oth er and probably stronger ba nks r equiring aid . That might accent u ate our tr oubles in a time like the present, u nless t he r esources

of the r eser ve bank were almos t unlimi ted. The inter ests of the banks which came in last fo r assistance would be prejudiced i n any case. If a reserve ba nk were

establi shed to-cl ay, its . reso urces would be strictly l imi ted to t·he funds put in to i t. The functions of

such a ba nk ar e to control and not to cr eate credi t.

A re~erve bank, established . and functi on ing iu n ormal times, should build up a r eser ve of its own . The Com­ monwealth Bank, a i t stands, bas built up r eserves. I feel tha t this bank is n ot p erfect, but i t meets the

requirements of the people at the present time. The boar d of tho Commonweal th B ank, though not p erfect, is solid and dependable, and enjoy th e confi dence of the gener al community and of the trading banks.

After a good many ,·icissi tude , the Commonwealth Bank bas now r eached a very _ satisfactory posi tion, whirh one likes to predicate when discu i ng the r el a­ tions of the tr ading and central banks in any co untry .

To S enator ThomzJson.- I should like to suggest th at the profi t of the note issue should be applied towards the redem ption of the public debt. If, in the course of

time, i t should be thought desirable to extend the func­ ti ons of the Commonwealth Bank, and make it oper ate as a central bank more than it does a t the present time it has occ urred to me that in order to prevent th ~

27

~x ercise of undue political influence i t mi ht b

improvement to constitut~ the bank by meansgof sh~r:: the 1shareholde_r s .to nommate their representatives 0~ the oo ard, subJect to the approval of the Government. l cannot see 1n what other way one could sub ·t

rcason abl proposal for a board that would not be :1~de~ Government control. One might su ggest directors nomi­ nat_ed by t!ie Chamber of Commerce, or other represen­ ta tive bodie~, a1:d ultimately approved by the Govern­

n~ ent ; _ bu t 1t ~1ght be said t h at those bodies h ad no

duect m ter est rn the bank, and no right to nominate. That has led me to say that any new deyelopment of the Commonwealth Bank should be carried out by a shar_ e arrangem ent. I prefer the capital to be found outside, so that r epresentatives of t h e Government could n ot dominate the board. I prefer t he executive

o:£fice r not t~ be on the board, or if the principal execu­ tive offic er is there, his depu ty sh ould not be. The

principal executive offic er cannot be an employer and an employee at the same time satisfactorily . The

control of the b ank should be entirely in the handa

of the board of directors. To the Ghairman.-The Commonwealth Bank r eally controls exchange. It does not quote a discount rate · there is little such business to be done under present con~

ditions. The Commonwealth Bank controls t he note issue. It is the bank for governments, and it is the

bank for bankers. It acts in conju nction with other banks in regard to exchange rates; in practice, it has the power of veto in that regard. To all i ntents and

purposes, it almost completely operates in Australia as a central r eserve bank. If a reserve bank wer e estab­ lished on a share basis, it should be limited to a

moder ate rate of dividend, but sufflc ient to en­

courage investment. If the relations b.etween the

Commonwea1th Bank and the trading banks were unfriendly, and detrimental to the proper conduct of the trading, commerci al and banking affairs of

the Commonwealth, I should be in favour of

some al teration; but not such as is proposed in the

bill. The t r ading banks are treating the Common­ wealth Bank now as a central reserve bank. If

my bank ran short of money through holding Govern­ ment bonds, I could go i.vith confidence to the Com­ monwealth Bank for assistance. My bank now has over £2,000,000 lying at t h e ·Commonweal th Bank. That sum has bee n deposited voluntarily, and that arrangement is preferable to a fixed minimum. I

believe that th e general public of A ustralia f eel that their interests are much better safeguarded by the present banks having control of their cash r eserves th:c1-n if they were h anded over to a bank created by Parlia­

ment as proposed under this bill. To S enator Thompson.- I think that the present banking machinery aiforcls as eff ective a . measure to cope wi th a crisis as anything else that might be sug­ gested. It provides for co-operation between _the pre­ sent banks and the Commonwealth Bank, and, 1f neces­ sary, for co -operation wi th the Government. !n

Canada where ther e i s no centr al reserve bank, a sp ecial act pr~viding for Government assistan ce has been passed, and it works very well. The witness withdrew.

George Daniel Healy, Superintendent of _ t he. Bank of Austral asia was called, swor n and exammed: To the Chairman.-I have prepared the following statement:-. I underst and the committee has already had full a nd

detailed cri t icis m of the bill from several of the b~nks, a nf

I do not pr opose to go over the same ground, _but, if a ccep .­ a ble to the commit t ee, I will content mysel~ wit h the foBllo"i,: ing brief sta t ement. wh i ch represents the views of the a n

ot'· Australa.sia on the s ubject . 1- h The Bank of Australasia is not u nfavo;able to the est.ab IS -ment of a central bank upon orthodox Im es, a lthough it may he doubted whether the present diffi cult times are opportune,

o:: e,· en '~'hethe: Australia. i ri pe for t h mo,·cmen t. The

~ e en_t di ~cul tic_s a r e, to a r eat extent, d ue to 01·ernmcnt

7in a ncia l diffic ul ties . and it can harclly be expected that con­ iden ce rn t he genera l po - ition will he re -tored by any n -

pulsor y sequestra t i on of prh·atc funds. ·

f _l' h~ proposal present unfa vorable and obj tionable

~atm es. .A cen t r al bank should be entirely fr from poli­

~,1cal cont rol, b~t it wo uld appear that the propo. ed bank

. o u Jcl be a se m1-G01·e r nment, if not entirely, a G01·e r11men rn s: 1t _ uhon . It _ s ho uld ce r ta in ly not ha,·e ·a s a corollary a f o. e1_nme nt trachng _ ban k to whom i t could lend the mon y c_ epos1t ecl by t h e ordrna r y banks . T he Go,·ernmeut tradin.,.

ba nk ~vo uld not be s ubject to taxation or hamper ed by th: nece~ s1.:y of profitable_ trading to t he extc 11 t tl,at a n ordinary ?a llk 1_~ t hroug h h a n ng to account fo r it - tewnrdship t o

its pnv1:1te s ha r eholder s . The Ba nk of A u tralasia ha

volun~anly k ept with t he Commonwealt h Bank con idcrably la1 ge1 ba la nces than ,Y ou Id be r eqmrecl u nder the propo eel s?h e_1~ e! but to be f?rcecl_ t o keep a fi xed proportion of their hab1hhes on de posit with the r e er ve bank is a different

proposi tion. So far as the general ba nking posi t ion is con­

cerned,_ s u ch r egul a t ion would ma ke fo r a r ig idity wh ich cou ld not fail to be r efl ect ed in t he volume of cr edit which banks

would fe el jus tifi ed in according t o t heir customer s, a nd the effect thereof would be severel y felt by t he tradina com­

mumt y, w1less bank deposits with the reserY e ba nk0 found their wa y to trade thro ug h the Common wealth Ba nk which would be unfair t o the ba nks generally. '

In connexion with cr edit faciliti es, J wo uld a lso like to

take this opportunit y of s t a ting tha t the present excessive stamp duties imposed by the va r ious States ha. Ye a hamper ­ mg eff ect on tT a cle gener a llv, and s hould be reduced in t he interest s of primary produ~ers as well a s trader s . This

r : late_s particularly to Vic~o ria, wher e the stamp d uty on bills 1s 4s. per cent. as agams t 2s. per ce n t. in other tates,

and l s. per cent. in South Australi a on over sea draf t

neg otiated or issued.

I r eali ze that it is almost imposs ible to avoid the

political control that is involved in nominees of the Government being appointed to the board of the pro­ posed r eserve bank. The party in power might con­ ceivably appoint men who had not sufficient knowledge to enable them to fill such positions. I think that

t h e mode of appointment of the present . board of the Commonwealth Bank might be taken as a fair guide a s. to what should be done in having various inter ests r epresented. That might give greater confidence to the general community, including the trading banks. Al though the capital of the proposed r eserve bank is

to be found by the Government, I think that the

Government of the day should confer with the leading :financial interests in order to secure the services of the best business men available for appoin tment to the board.

T o S enator Thompson.-I suggest a panel of three r epresentatives selected by each of th e bankers, the wool-b rokers, the chamber s of commerce and th e organization of Labour. That seems suitable representa­

tion and such a suggestion might be submitted to the Gov~rnment for its approval. The high stamp duty is having a detriment al eff ect upon t he use of bills in Australia. I am not r eferring to bills other than

those arising out of ordin ary trade transaction s. A Victorian co untry storekeeper who is in a fairly sound position may refuse to give a city merchant a bill

because of the 4s. per cent. stamp duty involved, and the city merchan t cannot insist on a bill being given for fear he may lose his tr ade. It -.vould be much better for us to make advances by disc ounting bills instead

of by way of overdraf t. If a tr ading bank h ad t o

stretch i ts credit in time of diffic ulty it would be much ea sier for it to take bills to the Commonwealth Bank functioning as a central ban k, 1: nd to have them r -discounted. The bank would either get an advance against the bills from the Commonwealth Bank or endorse th em over to the Com monwealt h Bank.

You suo-gest to me that that would be 1·eturning to the old p~incipie of three or four mon ths' bills when the merchants did not kno w where they were. If they have the bills they are proof of debt, and finan ce could be more easily arranged.

25

To the Ohairman.-The creation of a bill market in J.. ustralia would be a gradual process . T he customer of a bank, in tead of having an overdraft, wo uld dis­ <;uuut a bill. I under stand that this is done in Canada,

wher e there i no stamp duty. The creation of a bill market wo uld assist the op erations of a central bank. If my funds were invested fully and I wanted more money, I co uld take bills to the cen tral bank and obtain whatever facilities I r equir ed against them.

'l'o Senator Sir H al Oolebatch.-The establishment of a go vernment trading bank, as distinct from the r ese r ve bank proposed under this bill, might lead to such an extension of credit that it might mean the

taking by the go ve rnment tr ading bank of business that the existing trading banks r egar ded as unsaf e. Thus the government trading bank would be the :first to le an on the r eserve bank. It might happen that the government trading bank would lea]) on the deposits made by the private tr ading banks that had insisted on the observance of sotind bu iness principles . The Com­ monwealth Bank should not seek to enlarge its mer­ cantile connexion. There should be a rigid recognition of so und :fin ancial principles. Cr edit is already ex­ tend ed unduly. We also wish to ensure that t he money of the trading banks shall not be lent to any other bank that may open up bu sin ess in Australia.

To Senator Sarnpson.-If the bill became law the Commonwealth Bank would be mer ely a trading bank, and the money of the present tr ading banks might be used to supply funds to the Commonwe alth Bank to enable it to compete against them. I point out that th e banks contribute very largely to the r evenue by way of heavy taxation .

The witness withdrrw.

George Sta nley Colman, Join t General Manager of Australian Estates and Mortgage Company Limi­ te d, and Chair man of the Melbourne Wool-brokers' Association, was called, swo rn and examined. To the Ohairrnan.-I have prep ared the following statement:-

The member s of the iVool broke r s' Associations are closely concerned with the fin a nce a nd credit of Austr alia in that they act to a large extent as bankers in a d vancin g money to woo l­ grower s, large and small. Their total a dvances r un into

many mill ions, a nd without t his extensiYe accommodation the wool industr y co uld not exist. The welfare of the pastoral industry i s of paramount im­ porta nce to Australia in t hat it co 11 t rib11te . 1 i10re largely to the n ational in co me hy its exports than a ny other pri mar y or secondary commodity. The probl e m of fina ncin g wool-growers

of recent years has uee n a rnost diffi cult one, due to la r rre

advances being necessary to ena ble them to preserve thcir flock s during drought conditi ons, a nd a very la rge percentage of growers a re now, a fter heavy drought expenditure, em­ barrassed t hroug h a sel' er e fa ll in wool pri ces . It is therefor e essen t ial to guard again st a ny poss ible danger of inte rfer ence with a continuance of the extens ive cr edit and accommodation n o_w bein g a ffordcd to fa rm er s and g r azier s to carr y on, as

this would p r eC'ipitate a cri . is in the woo l indus t r y, with con­ sequen t seri o us r es ult to Australi a. l<'o r these r ea,g ons the 1'Ielhourne \,Voolbrokers' .Association fel t that ce rta in pro,·isions in the Federal Reserrn Bank Bill :c.,ight conceiYabl y r eact in s uch a way as to a ffP ct the cr ed it

now being extended to t he wool i ndustry, and t hey accordingly despatched a cable to t he Prime Minister on the 15th May, readmg as follow :-" The Melbo urne \¥oolbroker s' Association desires

strongly to u rge the auandon ment, or at least t he post­ ponement, of the Ce nt ral Resen ·e Ba nking Bill. " They r egard the hill as not on ly most i nopportune in t he pre e 1! t cr itical fin a ncia l co nditi on of the co un try, but fr aught with danger to .Au st rnl ia n uankin g a nd commer cia l

rn ter estR. . ' · - s tlic bill is fra med, they belie,·e t her e is a grave

n sk of restricting the facilit ies which t he t r adin g banks and fi11a11cial houses will be r eq ui r ed to give t o their cus-· t omer s, and s uch r estri ction would, t hey con side r, tend to cripple industr y a nd in crease unemploymen t." It is fe lt t hat the Go ,·ern ment h as not satisfactoril y ex­

p_ lain~d the re_ason s for creating a reserYe bank at the present t une rn at! d,t10n to t he ommomvea.lt h Ba nk, particularl y as

28

the latter , a lthoug h not yet a t rue r esen e bank, has by careful and s low e,·olution actually bee11 pe r forming many of th< f unction, of a reser\'C bank. It is feared that, if the Co 11111 1o mrnalth Bank were also tc r e main in operation, i t might h a ve to com pete actively with trading bank s i 11 o rd e r to ma intai n its profits, and s in ce both th e r ese r rn bank and the Commonwealth Ba nk 1rnu ld be under the sa 111 e political co n t ro l. s uch competi tion wo uld be unfair to the t rading banks; a nd, furthe r, the pol itical needs of the Com mo1P.vcalt h Ba nk might conceintbly so embarrass the feder al resene bank a s to make the latter 11 seiess as a r eserrn bank in t ime of nation a l difficulty.

H iB fe lt t hat clause 13, g i,·ing t he composition of the

management of t he proposed federal r ese r rn bank, contain R unus ua l a nd obj ectiona b le features, a s four of the nine mem­ be r R- o [ . t he board of directors may be ter med "political

11 0111 in ees." It i belie1·ed that the experiences in E urope ha Ye

pro,·ed beyo nd ques tion t he danger of political control of a resen·e bank. It is s ubmitted that, a s any syste m of reser ve banking has an importa nt relat ions hip to Austrn li a's over sea s t rading,

credit, a nd banki ng fac ili ti es, it is mos t e ·se ntial tlrnt n o

r esen e bank s hould bee tahl is hed in Austr a li a unless it ca rri es . the full confidence of the bankin g communi ty, both in Aus-tral ia a nd in London, in r es pect of its po li cy and management. Jt is therefo re r es pectfull y urged that a federal r eser ve hank

Bhouid 11o t be es tablis hed unless on th e bas is of complete public co n fid ence on tlie abo,·e line . A consi deration of t he proposed leg islation to provide for t he establ ishment of a r eserrn bank raises fou r questions which,

though closely r elated in t he whole scheme, invite atten tion under thei r respec tirn h eadings, Yi z. :-1. Wou ld t he establis hment of s uch a bank he in the

in terests of the communi ty as a wh ole. and of t he t rading co mmunit y in particu lar ? 2. If on general g r ounds i t is des irable, does the present off er a n o pportun e ti me for its esta blishment ?

3. If it be so considered opportune, does the bill as pro­ posed commend itself from the point of view of control of the fuu ctions with which the ba nk i s to be ch a r ged ? 4. Ar c tl ,e functions a nd powers of the bank as set o ut

in the bill in t he best inter ests of t he co mmunity ? The Sydney Woo lbrokers' Association desires to place on rl'enrd its ,·ie ll'R on t besr qnes•i ons, the j ustification fo r which is the fact that its n, e rnbe r s play a part seco nd only to that

of the banks. so far as t he s t a pl e industry of grazing a nd wool­ gro,l'iJJ g is conce rned. The a ssoc iation accordingly s11brn its its v iews as foll ows :-l. The association has grn,·e doubts as to t he advantages, if a ny, accru ing to the t rading co mmunity by the est a bli shment of a rese rve bank, but if s uch a n inst itution is to be cr eated,

t he n furth er quest ion s .a ri se whi ch are dealt with h er eafter . 2. The prese nt financia l a nd econom ic co r1ditions throughou t .\ust r a lia a r e so s t rirr ge nt a nd abnormal t hat g r a,·e doubts ari se a s to t hi s be in g ,111 oppor t u ne t ime to disturb existing

cr edit fac ili t ies under the provisions of t he bill. These pro­

vi s ions a re s uch tha t t he j oin t stock ba nks wi ll he r equired to lodge with t he r ese rve batik ce r ta in percentages of t heir call depo ·its a nd th eir fi xed deposit , and to maintain t hose per ­ centitges so lodged. Having r ega rd to t he numerou s a nd widely

separated branches of mos t of the joint s tock banks, it fo ll ows tha t the e banks, to avoid ris k of penalty, will r equire to keep at their credit with t he r eserve bank s ubstantiall y more than the minimum per ce ntage of depos its r equired.

The proposal rc rn o,·es from the absolute contr o l of each join t stork ba nk a nd p laces i n t he c01 1t r ol of the r ese rve bank a co nsiderable portion of the existi ng r eserves of t h e fo r mer. ~ .\ s r eco urse co uld only be ha d to t h ese r eserY es by t he co nsent of t he r esen ·e bank, it fo ll ows t hat t he jo in t stock hanks lose

wh at t hey now h,we, Yiz., u nre tr icted accetiS to a s ub tantial proportio1 1 of t heir exi ting reser ves. Furth er , the reserves so withdrawn fr om t he trad ing ba nks, if made a vailable to them by co nsent of th e resetTe baJJk, would be s ubject to a rha rge by way of discount or in terest.

The fo rego in g co ncLi t ions would, it is recogni zed, apply in any sr heme r equiring fi xed percentage of deposi t to be lodged

with t he reser rn ba nk, !Jut tl ,e poin t now sotl"ht to be

enq!ha.sized is that a ny co urse whi ch has tbe effect of r e- t r ict­ irr g the cred it fac ili t ies granted by t he trading banks to their cus tomers, wh ether woo l-broker s or pasto ralist or traders ge nerall y, mi g ht wel l be deferred till ther e is less need than at pr ese nt for ali .ec·t ions of the commtu1ity t o eek accom-111odati on from their uan ker s.

It i s well known that pastoralist a r e looking to their

ll'Oo lbroker s for advanC'es to a g r eater extent tha n in former ~-ears , a nd in turf\ the publish ed balance-sheets of many wool­ brok i n6 com panies s how that t hey a r c lea ning on thei r

banke r. to a 111n ch greater ext ent than in normal times, in

order Lo fina nce wool-gro 11·ers 11·h ose bus iu ess io many ca es is not a t trnctiv c to t he trading banks-in other words, the wool-br oker is in ome cases a n in termedi a ry between the

ba nk er and the 11·00!-growe r . ·

29

The restriction of credit whicl ·t · b .

from the w)thdrawal of funds \:0 ~s :~e ~:~t~~' "m~st iollow lod_ gment \;1th the r eserve bank, must res:ltmhl r~~a:dfi: ~evelop_ men ,s of the pastora l industry, with the certaint of rncreasmg the already a la rminu amo t f 1 y

th h t t i " un o unemp oyment

roug ou · ie country. The inevitable r esult must b t

postpone r~ther than to accelerate the recovery from e th~ present penod of d epression. For t hese reas ons t his association requests the postpone­ ment of the Reserve Bank Bill till a more oppo:i;tune time

3_. ~s t? the m~t)iod of control of the reserve bank this· as­

socrnt10n i s of. opm1?n that the board of directors of the bank ~hould be entirely m~e pendent of political or governmental influen ce or control , ei t her as to tenure of office or electi n

to the boa rd.. · ' 0

4. '!he f unctions and powers of the b a nk are more or less

tech~ncal fi_-om the. p~int of view of the banker, but in broad outlrne, tins association considers it most desirable that if and when a reserve. ba!1k i s established, the funds it cont;ols shou ld be k ept 11;s liqmd as possible to meet the needs of the ,gener a l co 111rn1;1mty, and therefore its powers should not in­

clude the l cndrng of money to quas i-"overnment or municipal or lo cal government bodies except i n - short-dated securities readily realizabl e.

To Senator Lau:son.-l fear that this bill will have the effect of restricting credit. Criticisms u ttered in London and Australia, mostly in banking circles sug­ gest that that might be the result. Wool houses' have

to r ely on ~ccom'?lodation from their banks,, and if they were restricted rn credit they would have to restrict credit to their clients. We are basing our view largely on the statements of the private banks themselves.

They fear such a r estriction, and that fear is conveyed to us as part of the community that relies on credit. To Senator Thompson.__.:._Each company of wool brokers would deal through its own bank. A "f ew

might do business with the Commonwealth Bank, but I do not know of any. In my opinion, the establish­ ment of a central reserve bank in Australia is desirable. The actual policy, and the best method of choosing the management of such an institution, are matters for ·experts. You suggest panels of three men from, say,

the Chambers of Commerce, the Associated Banks, the wool brokers, and the Labour movement. I t_ hink that it would be possible for such an organization to suggest suitable nominees to the Government.

To Senator Sampson.-One of my objections to the bill is that there is no limit proposed to the advances that a reserve bank might make to governments, and that might make credit more rigid, alt~ough the tr~d­ ing banks' reserves would be compulsor1ly lodged with

the reserve bank. We are afraid that the resei:ve bank might lend ·money to the Commonwealth Bank, which might, for political needs, lend thaJt money out. If

this bill bec ame law, the Commonwealth Bank wo~ld simply be a trading bank backed by _th e Government, and in order to keep up its profits 1t would have to

go into compeitition. There might be so much d~a_wn from the r eserve bank a& to prevent it from exerc1srng its proper functions when there was urgent need for it to take a steadying action.

The witness withdrew.

Edwin Owen Giblin Shann, M.A., Professor of History and Economics at the University of Western Aus­ tralia was called made an affirmation, and was ' ' examined. To the Chairman.-l have prepared ·the following statement:-

1. Banking as I understand it, should aim 3:t entrusting ' ·t t those of its members the resources of the commum Y O · .~ • d h t capable of makincr the most intelligent, active an ones

use of s uch resour~es on terms of deferr~d paymen t.the multi-To make sure of those it selects as c!Ients from .

tudes who would like to handle the r esources of othei ~

such terms a bank takes security for the r epaymen rn

"money so;e d ay " of its advances of rights to mo~:? nfw. But the best laid schemes of mice and mef ga?-g a d~!n~r

The trend ·of all markets has a wa;r of c iangmg sume un'.

Securities. especially ~hose of ab cakp1taii nat~l~e~s b~:~e need . saleahle, At s uch times the an s 1ems

527

~! a p_awn_-shtohp whet~·e. they may pled<>e their ass in order mamtam e ac 1vity of their clients and throu h th

of the wh?le . con~munity using the f~uitf~l but delic~

method of mstitut10nalized money. b 2. run statements of the principles on which s uch a

anks pawn-sh?P, or central r e en,e bank, may afely ope.ratl' • may be found m :-1. Sir Henry Straka ch's article in the Times Trade

Supple_ ment of 21st fay, 1921 ; 2. Sn Ernest Haney's addre s to the \ ictorian

?ranch. of the Econol'nic Society of .Australia., delivered 111 Apnl, 1927; ;md in

3. Kisch and E lkin's Central Ranks first published in 1928. '

But no one interested in the subject can afford to neglect

Walter Bagehot'~ classic, Lombard Street ( 1873 ), which first drew. the_ attent_1~n o~ bankers to the necessity of supple­ ~nentrng competition rn the sale of cr edit by a steadyin<> m~uence that would keep banks sane in their judgment of clients and of securities.

I a ss ume that all those writings are available and familiar to. t he members of the committee. 3. It is argued by many that there is no need for a central

bank for Austr~lia, that th~ Bank of Eng lana has always dis­ charged and will a lways. discharge the fun ction of a reserve for the banks _of the Empire, most of which have either

h ead offices or important branches in London. We should, therefore, let well alone. . 4. The most rea~o ned form of this arg ument may be read

m _ A. S. J. Basters book published In.st year, The Imperial Banks. The author _i s a lectu_r er in economics at University College, Exeter. Hi~ conclus10ns may be stated in his own words,:-

Page 144. "B.efore the war, the only ' rese rve bank' of the Empire "'';LS the Bank of England, and one import­ a nt monetary lmk between London and the financial centres of the colonies and dominions co nsisted in the fact that most of the Empire banks kept considerable amounts of sterling assets for the sake of being able to draw gold from L ondon when it became necessary. Ont­

side London, there was no ready indicator of changes in credit conditions in the shape of the fluc tuating gold reserves of a central bank, a nd the next best thing was these fluctuatin g London balances of the commercial banks. If these grew smaller, the banks could move up money rates in the local areas, and restrict over-importa­ tion. If they grew too large, exchange rates and, as a

last r esort, gold, could be moved." Page lu8. " The Commonwealth Bank has many of the attributes of a central hank, but in its work as a central bank it is severely hampered. Firstly, there is no bill

market of any consequence in Australia, and thus the provi sions in the 1924 act with r egard to r ediscounting at a published r ate have never been effective. It is sug­ gesteq_ that heavy stamp dut ies discourage the extended use of bills of exchange, and a com pari on between these charges and the equivalent English scale certainly sup­

ports this. Internally, however, the ordinary form of accommodation i s by overdraft, and the Commonwealth Bank seems to have no greater success in abn.ti ug this nuisance than the Reserve Bank of South Africa. The only form of control of credit is the 'ration in<>' procedure -a much more difficult and delicate operation than dis­ count rate manipulation. Further, although the commer­ cial banks effect clearing settlements through the Com­ monwealth Bank, it is not a reser ve bank, since the gold reserves of the · commer cial banks are not kept with it ; together, they hold nearly as much gold as the. Co_m mon­ wealth Bank itself. The obvious reason for this 1s that the commercial banks fear the Commonwealth Bank as a possible competitor, a_n~ this hes~tant atmospher,~ is not improved by the poht1cal co nnect1ons of the bank. Page 169. "The central bank problem is, therefore, full of difficulty for Australia. . The Commo~wealth Bank ·does not control r eser ves, 1t cannot ma111pulatc money rates and thus control credit. The Anglo-Australian banks, a nd the local Aust ralian in titutions are far too interested in the London money market to make much use of a loca l central bank on the orthodox model, even if one were provided , and t hey ar': ha~dly_ lik~ly }o look for creneral leadership to a co m petmg mstitut1on. :Mr. Baster sees more hope in what he calls the_ integration movement. yiz. , a bsorptions of dom inion banks mto Lond n joint stock ones, su ch as that of Nationa l Bank of outh Africa into Da rclay's Bank. He concludes :- . Page 261. " The moYem~nt has lee! to _the . clir~ct _ con - trol of Imperial banks by t he great English m ~1tut10~, but this development brings few unknown ~1fficult1~ s essentially different from those a lready experienced m the nineteenth century, and up to the p r esent. Connec­ tions exisled when the Imperial banks first. began to operate in London, nearly a century ag?, and perhaps the most important difference at present IS not that the

.:onnexions a r e firmer and more numerous, but that they are more obvious. The Imperial banks have in the

Empire, on the wl10le, a long and honorable record of public senice, and if objection is fel t overseas to their incorporat ion 111 larger English banks, the remedy, either in the creation of more local banks or in the more

strict local s upervi ion of the existing insti t utions, is at hand. From the regulatory pr ovisions of a well-drafted local bank act (now long overdue in India, Australia and Sou t h Africa), the ImperiR,l banks have nothing to fear, and the cen t ral -banks, the only essentially new

factor in the position, will find it difficult to exercise fully effective control over them while they depend upon Lon­ don so la r gely as they do at present."

5. The ffaw in this argument is that London is very

obviously nen-ous of indefinitely growing investments and advances in the Dominions. When an Imperial bank to per­ form all the functions of a central bank for the whole

Empire was s uggested just after the war, by J. F. Darling, the city applauded Sir Henry Strakosch's pointed criticism of what its author (Mr. Darling) described as-" A partnership between the component parts of the

Empire". " The proposal" said Sir Henry, "would be more appropriately described as a joint banking account, upon which each partner is free to draw without a very effective check, eveu to the point that one or more of the partners may overdr aw the account without the other

partners being able in any effective degree to restrain t hat policy. This possibility seems by no · means remote, for the Dominions, with their vast undeveloped resources, are naturally eager to develop them as rapidly as possible.

One or the other of t hem might easily-probably unwit­ tingly-' outrun the con stable', for the true position is hardly ever ascertainable until long after liabilities h ave been incurred". '

6. He wrote in 192 1. Three years later Mr. J. M. Keynes

offered s ome still more definite warnings regarding Britain\s "Foreign investment and nation a l a dvantage ", in an addres~ to R, Liberal s ummer school at Oxford, published in thi,

Nation and Athenaeum, 9th August, 1924, and in the Man­ chester Guardian. Though he held English and Scottish ventures in foreign trade, 111ining and exploitation to have heen the foundation of their national fortun es, ;he could see nothing but menace in the modern cult of loans to gornrn­

ments and local authorities abroad. "The investor", be noted, "has n o remedy-none whatever-against default, and there is, on the part of mos t foreign countries, a strong ten­ dency to default on the occas ion of wars and revolutions, and whenever the expectation of further loans no longer exceeds in amount the interest payable on the old ones.

Defaults are, in fact, worl.d-wide and frequent. The southern states of the United .States of America, Mexico, all central America, most of South America, China, Turkey, Egypt, Greece, the whole of the Balkans, Russia, Austria, Hungary, Spa in and Portugal have all defaulted in whole or in part at one time or another. In the future, the motives

tending towards repudiation, partial or complete, may become much stronger. At present, the Dominions borrow each year more tha n the interest on previous loa ns. But in the long

run, from our not having so la r ge a s urplus to lend abroad, this will cease. Our difficulties on a grand scale will then

begin." He pronounced t he Joan of vast sums abroad with­ out any possibility of legal redress "A crazy construction". "Imperial piety" h a d hitherto "silenced tongues and

_criticism". It has not clone so since. Mr. Keynes'

attack; on the credit of the Dominions with the holders in

Britain of trustee moneys has been echoed ever since, and the flow of s uch funds h as rapidly dried up. 7. But it will be objected, a cessation of loans to Govern­ ments without possibility of legal enforcement of repa yment does not necessarily m ean the cessati on of private banking on good and lawful security. It may be so. A system of private interna tional banking implies, however, the existence of a

common money. Unhappily the e..,travagances of Australian public finance in the last decade have for the present broken down that bridge of mutual advantage. When one· is adjured to let well a lon e it is permiss ible to ask whether it i s well with Australian finance.

8. There is no need to r ecite a fresh the striking facts

of tlie s udden drop in our nationa l income. But however

sharp the fall be, thi~ in itself would not have created

a situation calling for a fm1damental change in .Australian banking. We have faced droughts before and drawn fresh strength from the effort of making their ravages good. We have been h~rd hit before by falls in the value overseas of

our staple products, and have s t ood up to them successfully by r eason of t h e quality of our goods and the low cos t s at

which we have produced them. It i s the third element in

the present cris is, the momentum of the policy of protection a ll round,. loading our present costs with legal restrictions, that makes a national lead in a new direction at once difficult, unpopular and imperatively n ecessary.

30

9. Befo1~ e I offer any opinion of the provisions of the

present bill for a Central Reserve Bank I should like to

indicate a post-war change in the character of the monetary system which ma kes a central reserve bank in each Dominion essential to the maintenance of international trade on sound lines.

10. (a) The Australia we know is a product of the nine­

teenth centur y and the period of indust rialization. The

savings of the British middle classes equipped it and the other countries of the New World with railways, ports and communications. Britis h manufacturers paid for their pro­ ducts. It was an. integral part of this great interchange

that its financial organization was based on London and on t he British gold currency. ( b) Gold was the only legal tender in England after the first quarter of that century. In tbe third and last quarters

much of the gold needed to finance the growing volume

of international exchange came from the New World, and it greatly helped British inyestors to take kindly to foreign as well as home investment when, whichever he chose, the interest wa.s paid in gold. It also suited the borrowing

communities to meet their obligations to Britain in gold when their own monetary units were of gold, u sually out of local mines, and were convertible into London money at mint par or thereabouts.

( o) The Bank of E ngland, holding a monarchical place

among the 1:nany small banks of Britain in the firs t h alf of last centmy, had almost unconsciously slipped into the task and policy of encourag ing the free and common u se of gold as the best available international money. It did so in

defence of the convertibility on demand of its own notes. It had a legal privilege of issuing a limited amount of

notes backed by Government debt only, but it h ad to main­ tain for all notes iss ued beyond that " fiduciary i ssue"

a sovereign for every pound. This currency task was the first and plainest duty of the bank. Ln meeting it the "Old Lady of Threaclneedle Street" evolved a prudent leadership of the world of finance. Her banking methods might with little exaggeration be-described as "sparing the humble and warring dow'n the proud." In times of stringency the bank would prevent a business crisis from becoming a panic run on

money reserves by allowing bank credit to any and every solvent trader in need of it-at a prioe. ( d) This policy, while not saving the rash from the reward of their folly- insplvency- kept the salutary process of

c ut ting losses from degenerating into a panicky and universal return to petty hoa rding. That is the negation of cr edit, the abandonmeu t of social co-operation. A further r efin ement . of the same policy of preserving

sound credit was that the bank should, in t imes of excitement, do all i t could to prevent over-lending by the joint stock

ba.nks. .

( e ) In this watchful rega.rd to the financial weather the

bank had in pre-war days a sensitive barometer,. the demand on London for gold. An influx of gold enabled the city to

s t imulate trade by lowering the price of credit there. But easy money mig ht tempt to s peculation, the symptoms of which are always mistak en for progress. Rising prices would set . up a· drain of gold out of the bank's r eserves into other banks' tills and circulation. If this persisted, even quietly,

g ood banker s knew that prudent folk were preferring to hold money rather tha n goods, i.e., that they were expecting a fall in prices. An external drain might serve to show that they were finding better value or better interest for t heir money

elsewhere. The Bank of Eng land could check s uch an efflux by r !!-ising the' rate of interest in London and so inducing folk to leave or send gold there. The essence of the system, considered as a working policy was that London, at t he centre of the

world's t r ade routes and owning more than half its gold

mines, not only allowed gold to flow but actually encouraged and helped it to do so in the inter est s of an even internationa l price level. (f) Thus gold had much the same purchasing power every­ where a nd trade was conducted with· as much security as could be derfred from knowledge that there was a common

rueans of payment throughout the trading world. ·As every one handled gold, more or less, every one took a hand in

pre-war days in maintaining the common l evel of gold prices. The bank's main task was to guard against t h e extravagant impulses of hope and fear to which even whole communities might fall victims. That done, by raising and lowering t he

price and the exten t of the credit it gave to its main

~nstomer s the other banks, it could justly take pride in t he liberal system that had evolved around it. ll. The war ended all that, plunging the world into inter­ natio1ial striJe a ucl paper m on ey.

After intricate exchange troubles accompanying the u se of a mttltiplicity of paper moneys, each with an indeeenden t ly varying purchasing power , the world engaging 111 inter ­ nation:i.l trade acclaimed the return to gold in 1925. But

the gold standard to which it returned was n ot the old

system. Gold did not come back into circulation . It was to be used in future a s bank money only, as the means of

adjusting balances of indebtedness across the boundaries where any and every paper currency's standing broke down.

}~his put a ~ifferent complexion on the task of maintainin" 1e . approximately equal purchasing power of moue ·~ nonuually convertible into, but not composed of gold. y 12. Any one with a credit balance at a bank mi"ht ·

pre-\~ar d a ;ys take a hand in transferring gold from a0 see~~ of lugh P!·ices o: unfavorable business prospects_ Deflation was a policy wlnch sober middle-class opinion could quietly and smoo~hly enforce.. Mor eover a suspens i on of t he "Old

standa i:d 11~vo lved a big interferen ce with public habits b alterat10n Ill the. money of everyday use that was paten't ~~ a ll and mconvement to many. Under the post-war plan of separ~te paper ~oneys meant to be kept in adjustment by gold m the _ke_epm& of banks, _ a deml!,nd for gold was only

legally admissible if on a considerable scale. Every such

demand presented, too, t h e appearance of an attack on the nat10nal money. Thus a suspension of the o·old standard

became a matter affecting , in appearance a t l~ast, only the banks and the. Treasury. And if the professional and the amateur financiers fell ou~ concerning it, the public who had chose!! the latter were hkely to sympathize with the less <>xpen enced element.

13. In view o! this change_ over to a monetary system in the .play of winch the man-m-the-street can neither take a hand n or understand the score, the distant action of the

Ba nk of England is not enough to safeguard the benefits

of an i_nter_national money. There is n ee.cl of a local guardian of samty m money matters, not as a rival but as an a lly

of the Bank of England in partibus infidelium. 14. How could it help u s in this rugged crisis to place a

central r eserve bank in ch arge of our finances? We have

certainly erred and strayed from the fold of international parity. Our price-level has stiffly diverged from the rapidly falling levels of other countries. Moreover, the fever of

speculation is still in our bones. Men, it may be, have

ceased land-booming and commodity-cornering on private account, hut they are still urging on Parliament, on farmers and pastoralists, and on the country generally, pools and schemes for enhancing values by withholding goods from market. Being individually impoverished they want the Government to speculate for them.

15. The first duty of a cen:tral r eserve bank in Australia

to-day would be to liquidate stale positions. Since · the

grandiose days of war-finance and repatriation we have taken advantage of our banking group because it was without an Old Lady in charge. We have played off one bank against another, during a time of abundant money coming to them from high production, high prices and high borrowing. If

one banker would not handle the big business whlch a pool or combine could _ offer, an eager compet itor could always be found. But banks cannot, without creating difficulty for all, lock up their funds and l eave them locked up, in stale

specula tions and sluggish trade positions. That is what

pooling on a falling market t o9 easily involves. 16. The duty of a central r eserve bank in breaking such

bad habits and liquidating the remainders would make it very unpopular in Australia to_day. Yet, to enable the pound Scullin to look sterling in the face again, we must sell goods over seas as actively as possible. Only thus can we· build

up London funds, repay the banks their swollen advances a nd thus ena ble them to finance t he expansion of production

which will keep u s solvent, and self-respecting. 17. Some, no · doubt, will be willing and ready to deny that we are "off" the gold standard. Such an ost_rich-li!-

the obscurantist style in which our banks quote the rate of exchano-e on London and (ii) from what Sir Henry Strakosch called ~ The fact th~t the exchano-e balancing device h.as been put out of commission by the b a nks r efusing to a llow the

exchange on London to find its own l evel." He r eferred. to their method of maintainincr r eserves at both the A ustrah a n and the London end of their system, of quoting u?iform

rates of exchange for long periods, and of pr~ferrmg to

" ration" short supplies of London or Austra h a n money

rather than quote "extreme " rates. Much, no ,~oubt1 .~ay be said in support of this unique metho~ of stabih zmg

exchange". The complex internal mecha m s m and obfus ca ­ ting style in quotation can, however, h ardly be reckoned a mong its adva ntages. 18. These features go s~me way, at the presen~, in .expla in­

ing t he stolid acquiescence with which expo:ctmg mterests have r eceived the t ight r ationing of London money for m a n y months past, and the quotation of rates for s u ch money far below what the demand warrants. If a farmer employed an a"ent to sell his chaff on commission he would be vas_tly

a~noyed to find that agent, faced by an eager marke~, keepm§ s weet with his regular customer s by doling out a \:ttl~ ch:ii to each at a shade a bove the " customary fi ~ure · s e

position of our expor t ing industries much _ differ ent ? , The£ earn a price that i s low enough, in a ll conscien ce, at pr1;se? · It is paid in sterling . Therefore a n ything that cm~bs r'?r hmiis the demand in Australian pounds for pounds s er _mg c~ s

down the premium they should _get when their sterlmg pnce is translated into pounds Scullm.

31

529

. 19. A free exchange, it appear , would afford our e.· port

rnd~~tn es a well-earned bonus on production for the world' mat (,et . . It would be one more i ntimately adjn ted to their ser~ ,ices rn balancing t he ledger than any squeezed out of th legislature and Cabinet. A 20 . . T)1e thankless task o f enforcing liquidation inside

/ sti a ha must, however, be tl,e main one upon the doorstep 0 a n;y ne,~ central r cs_ervc ba n k. Only thus can it maintaiu tl~~ fina ncial sy~te,~1 mto which Australia bas growu and a Justed_ he1: m'.'-m m dustries. We need, therefore, an a.uto­ nolll?us rnstitutiou of h ig~ indepeudence--" a genuine central bank, a1:d not ~ commer cial bank ma quer adino- a one" to quot e Sir H enry Strakosch again ( page 4 in duplicated

copy ).

2 1. D oes the bill under consideration secure the e tablish­ ment of s uch a public t rustee? Part III. of the bill, etting

fo1 the ma n agement of t he r eserve bank, promises a board of director s on e of whom would hold office ex offecio viz. the Secretary to t he Treasury; a ll the other s would be' appointed b! the Governor-Gen.era], doubtless w ith the a dvice of Cabinet.

1hey w~uld be appomted for varying terms up to seven years, and the:r remuuerat10n would be "as fixed by the Governor­ General ". . S_o, too, mig ht _be their policy, seeing that they wo:nld_ be eligible for reappomtment. ( Cf. Sir E rnest Harvey

Prmc1ple No. 2) . '

2~. Do t~e terms· o_f the bill regarding the bank's powers pla mly envisage a pohcy of liquidation and a steadfast return and_ adh~rence t? the gold standard, as the best available basts of rntern a hona l trad e and credit ? If a central reserve

bank is tb be worthy of its n a me its assets must be of the

m ost liquid character possible. H ence Strakosch 's rule that "A centra l bank sh ould not purch ase shar es or securities o~her than securities of its. own government or local authori­ ties that ha ve a currency not exceeding sbc months".

23. Such a limitati on would ensure that the central

r eserve ba nk, in time of stress, would not be caught with

its- loanable funds largely locked up in long-term government loans. In sect1011 8 ( part IL) of the present bill the bank

would be given power-( c) 1' o buy, sell discount or r e-discount securit ies issued by the Government of the Commonwealth or of any State or of Great Britain and Northern Irela nd,

or of any authority const ituted under the law of tbe Commonwea lth or of a ny State. Sub-section ( i) is more easy-going still. It would empower the bank "to make a dvances to the Government of the

Commonwea lth or of a State or to a ny authori ty constituted under the law of the Commonwealth or of any State". 24. These provision s g ive the proposed cen tral reserve bank the a ppear a n ce of a device to per petuate over-borrowing

a nd to incr ease indebt edness rather. than to restore liquidit y. If a further inflati on of credit aud currency i s all we need

to- put us right, one would have thought the Commonwealth Bank and the trading banks adequate to the business. 25. Such powers, to take up government a nd municipal securities "' ith credit based on the massed reserves of the

trading banks, and in adrlition to grant overdrafts to the

same brave borrower s are open door s to fm·ther rash gambles in paras it ic industralism. What with governments taking first call upon the L ondon money ~heir products earn and a centr a l r eserve ba nk to finance persistence in ever y generous

pa rliamentary impulse, the state of o ur already over­

burdened export indust ries will be overwhel ming ly worse. Such devices to escape t he liquida tion a ll round of valuations falsified by events might postpone the evil day. But they

would assuredly do so at the cost of piling up the charges

at the long-d elayed but inevitable reckouing. 26. Fifty years ago, Francis W a lker, ha ving in mind the evils that beset t h e U nited States through clinging to the inflated currency of "greenbacks" long after the Civil War,

laid it d own that-The issue of inconvertible paper money i s never a

souncl measure of finance, no matt er what t h e str ess of the n a tiona l exigency may be. I believe it to be as

surely . a mistaken policy as the r esort of a n athlete

to the brandy bottle. It means mischief always. If

t her e is ever a time when a nation needs its full

collected vigom·, with a steady p ulse, a calm outlook, .a firi'l hand a brain undisturbed by the fumes of th1e

alcohol of'• commerce--paper money- it is when c:illed to do battle for its life with superior force. It 1s to

my mind the hi"best proof of the supreme intellectual " r eatness of Nap~leon, that, dming twenty years of con­ tinuous war, Jie never was driven to this desper~te and del us ive resort. I hold any ma n to be somethmg less

than a statesm an, in the full sense of that word, . who, uncl,er any stress of fiscn. l exigency, support s or submit~ to a measure for the issu e of paper money riot con vertible n.t the instant on demand, wit hout condition, into coined money. The political arg uments by which s uch measures

are a lways supported, on t he ou t ~reak of war, seem to · me the veriest trash, due ha lf t o ig norance, and half to cowardice.

Our prospects at the moment are as gloomy as they were at the outbreak of the last war. Yet the task before us,

being one of constructive co-operation, may well nerve us to more hopeful energy. It is a question of setting all hands to the wheel and thus it is primarily one for the directors of industry.

27. The mere establishment of a central reslc'rve bank will not automatically cme our troubles. The days of an easily administered monetary and banking system, if they ever existed, are gone. Central banks to-day must study indices of financial danger subtler than the state of the gold-drains.

They may need, also, stronger means to assert their control over trading banks, than (a) the discount rate for first

class bills, and ( b) open-1J1arket sales and purchases of

securities. . 28. There is evidence of the changed nature of their task since the war in the ·altered practice of the Bank of England regarding i ts governorship. That office is no longer held in r otation by the merchant-bankers of the city who are

coopted to the bank court. The governorship has. become a professional position. 29. Inflation, easiest of ways of an immediate financial difficulty into worse ones, is being advocated or contemplated all across this continent to-day. With such talk in the

air we certainly need an adequate central reserve bank, to aid our banks in the return to sound values and sane activity. But the present bill does not face that way. To illustrate the point made in my statement regard­

ing oyer-capitalization, I may mention that looking down the Swan River from my study window I noticed recently that a new smoke stack had appeared above Rocky Bay. This is the chimney of a refinery

erected by the Colonial Sugar (Incorporated) Refinery Company. In its report of this year I read that

this refinery cost twice as much to build as the

total cost of the two refineries established on the

same scale at Brisbane in 1891, and at Adelaide

in 1895 or 1896. I think that the pr9:fi.ts derived by such a responsible institution as a central bank should be kept within the banking system, particularly

in a country like Australia, which is, from its nature, subject to crises resulting. from the cessation of pro­ duction during drought. I cannot see any good reason for making a central reserve bank a contributor to the revenue. Such a bank should be used to main­

tain the soundness of the national credit system.

By that I mean the credit system of the whole of

society, which I regard as much wider than the State. In a country liable. to big changes in productivity, there is need, perhaps, not of great capital for such an institution, but it should be a capital growing with the success of the banking system. Its pron.ts should build up reserves out of which to meet just such emer­ gencies as that now being experienced. A banking reserve is a hoard, and. not a reserve, unless it is used in an emergency. The Bank of England uses i ts

reserves very actively when a crisis arises. In a board of management of eight or nine, I think that there should be two Government representatives. A cen­ tral reserve bank, while a public institution, should not be a governmental institution. I ts capital should be contributed by the public, its board should be appointed by the shareholders for the most part, and there should be a minimum of interference from outside the finan­ cial structure of society. The term " private " in re­ gard to banking is dangerous, because it suggests some­

thing inferior to the public, whereas I take society to be someth_ing superior to the State. Therefore, I favour a pubhc trust, but one whose capital is contributed by shareholders, preferably with a limitation of their voting

power in the allocation of the board; but I do not

feel disposed to suggest a constitution for any govern­ mental central reserve bank, because I r egard that as an unsound expedient. Certainly, the making of ·pro­ fits should not be the prime consideration of a reserve bank. I do not favour the maximum amount of profit being determined by the Treasurer; that should be entirely a matter for the board. If the board is dis­ charging its function of keeping its assets in a liquid form, it will not be able to make much profit. I

can conceive that bankers would be diffident in taking

32

as logical a stand as I do, because they might be. accused of self-interest; I am entirely outside any such sug­ gestion. I am thinking simply that in a country like Australia we need rather a higher proportion of liquid assets to liabilities, and, furthermore, big reserves to provide for our requirements in times of crisis. They are needed to enable the other banks to increase their advances so as to carry the producers over a period of great depression such as is now being experienced. Australia ought to be· a country of fairly even average production, becaues tJ:te year or two following a drought are usually years of very great production. A drought has a fallowing effect on the agricultural resources of

the country, as was shown in 1903. On the assessing and :financing of that post-drought chance, the services of a central bank should be freely employed. To Senator Thompson.-! consider that the over­

draft system is a nuisance. It is very good from the point of view of the borrower, but he should not be considered all the time. The present Commonwealth Bank is not so great a competing institution as it was;

but there is an ambiguity · about its position in that it retains the legal power to enter into competition with the other banks. I consider that the right to issue

notes should be largely a prerogative of a government; but in a time of danger there might be a temptation for a Treasurer to use. that power in a way that would make it a dangerous prerogative.

The witness withdrew.

Douglas Berry Copland, M.A., D.Sc., Professor of Commerce, University of Melbourne, was called, sworn and examined. To the Chairman.-The problem of the control of banking and foreign exchange in Australia has been my special interest for some years, and all my public

work centres ·round it. I have prepared the following statement for the information of the committee:-My views upon the establishment of a central reserve bank for Australia have been set out in a number of articles to

which I may refer the committee. These include:-" Monetary Policy and its Application to Australia" (Melbourne· University Press), especially pages 517-524. " Memorandum on the Control of the Business Cycle, with special reference to Australia", published in the repoxt of the Development and Migration Commission on Unemployment and Business Stability, 1928. Pages 35-37.

"Australian Exchange and Banking", The Economic Record, November, 1925. "Recent Developments in Australian Banking", The Economic Record, May, 1930.

"The Banking System of Australia", chapter II. of Ji'oreigti Banking Systems (Henry Holt), edited by Willis and Becklrnrt, pages 85-95. For the information of members of the committee I sub­ mit copies of the ·1ast two publications.

The policy of the Commonwealth Bank in recent years has been directed towards the establishment of a central bankino­ system under its authority. For this purpose, the bank ha~ given special attention to three matters:-

( i) The promotion of cordial relations between it and the private banks. There is little doubt that it

has achieved considerable success, and its prestige has been enhanced by the action of tl1e directors in restricting the trading activities of the bank. (ii) The building up of liquid assets, both in Australia

and in Lor,don. The bank has about 60 per cent. of i ts assets invested in liquid securities, and until the recent exchange crisis it had established a sub­ stantial reserve in London. ATiy central bank

must maintain a high proportion of liquid assets, and the Commonwealth Bank has made a consider­ able advance in this direction. (iii) The development of satisfactory relations with the

Government. Any central bank, whether pri­ vately owned or not, must work in close contact with the Government. Treasury policy and CCH· tral banking policy must, within certain limit s

proceed in harmony. There is always a dan.,ei

tha.t the central bank will be made subservi~ut to Government policy. This callllot be said of the Commonwealth Bank in recent months. Whether

•

agreeing with the general policy of the bank it

cannot be charged with allowino- a nythin<>' to be done tl~a~ will aggravate the diffi~ulties of the pre­ sent cn§>rs. A central ba nk cannot. be established by legal enactment. It must possess ~ubstantral funds, it must be accepted as a leader by the pnvat_e banks, _ a nd _it must be independent of ~he Government whilst workmg m co-operation with the Treasury. It takes many years for a central bank to build . up its authority in this way, and whatever the l aw may be, the _success ~f the b?'nk · depends entirely upon its adminis­ tration a,1;1d _ its relations with the private banks. Even in Great Bnta m the Bank of England could not control the money market unl:ss i~ had the support of the private banks. Dr.. ·walter Lea f, m lns w?rk on banking (Home University Serres) remar~s of the policy of the bank:-" This policy the banks. regard rt as . their d_uty _to support, though they have no vorce whateve r m sh a pmg rt , and, indeed, have no more k_ nowledg~ of the steps which the Governor proposes from time to tinIC to t3:ke tha n the man in the street" (page 219). How loug would it take a central reserve b ank in Austr.alia. under the proposed constitution, to establish such relation~ with the other banks? The problem would be all the more difficult , inasmuch as t h e Commonwealt h · Bank would then become a n acti_ ve ~rading institution · in competition with the other ba nks . It Is probable that the Commonwealth Bank would be left with the less profitable and more doubtful busi­ ness, and would be asked to undertak e speci a l financing for the Government, apart from the fl otation of loans under­ taken by the central bank. It might then be difficult for the central bank to control the banking system if the Govern­ ment, through the Commonwealth Bank, was pursuing a policy contrary to tlrn wish es of the central bank at the moment. With Sta te advances to settlers, State savin"s banks and other mean s of extending credit, there i s little need for a

special Commo1iwealth trading bank. Even if the Common­ wealth Bank became a complete central bank , its organiza­ tion would be available should i t be found that .the private banks were not providing credit in t l1 e m a nner desired for

the maintenance of industry a nd the. promotion of new

industries. ·

My view, ther efore, is t hat t)1e present development of the Commonwealth Bank towards ' a central - bank for Australia should not be disturbed, but rather encouraged. It has

already a well-established connection with the Government, its assets ar.e fairly liquid, and its r elations with the trading banks sat isfactory on the whole. These banks maintain sub­ stantial cash r eserves with the Commonwealth Bank now, and there i s d eveloping a technique under which funds in London will be concentrated under the joint control of the

Commonwealth Bank and the private banks. A central bank mus t maintain large reserves in L ondon, and must be able to supply exchange on London a t fixed rates i;n

normal times. The flow of funds in London i s perhaps the best indicator of the banking and gen er a l economic position in Australia. I h ave examined t his question in the article

published in The Economic R ecord for November , 1925. An excess of funds in London is normally associat ed with a

rise in the margin of deposits over advances in Australia. Conversely, a scarcity of funds in London coincides with a tightness in ba nking conditions in Australia, marked by an increase in the ratio of a dvances to deposits. A central

bank must be in .a position to make a n estimate of the pro· bable trend of funds in London, a nd to take action should it be found that these f unds are likely to be scarce. A

powerful private ba nk, with adequate London funds, or the power to borrow in London, might act independently of the bank. It would be difficult then for the bank to force s u ch

a private ba n k to adopt a restrictive policy, if the latter felt its posit ion was sound and t h e business would be profitable. The only means of- overcoming such a difficulty lies in the requirement that the priv.ate banks should hold a fi xed pro­

portion of their deposits in cash at the cent.a l ba nk. If

tlie latter h a d s ufficient funds in A ustralia, it could afford to sell securities at favorable rates to the public or to the

other banks. This would h ave the effect of raising the r ate of interest, a nd ·attracting to the central ba nk floating funds from the money market. · The hig her r ate of interest and

the induced monetary stringency would doubtless have the desired effect of forcing the other banks to restrict advances, and thus to correct a position that was threatening to. get out of hand throug h excessiYe creation of cr edit for both inter est and externa l purchasing. This technique has not yet been

worked out in Australia, but t h e Commonwealt h Bank has s ufficient funds to influence the money market. Dealing with the specific divisions of the bill for the cen­ tral reserve bank, I desire to r efer briefl y to a few matters-

( i) In t he appointment of the board of directors, efforts s hould be made to make the members!}ip indepen­ dent of political interests. For this purpose, I

make t h e following s uggestion. There should be s ix directors appointed, not necessarily representa­ tive. of industry, bu t wi t h a knowledge of bank·

531

ing. The first appointments should be made on· the recommendation of a committee con isting of, ay, the Chief Justice of Australia, the hancellor of the· Universities of ydney and Melbourne the

Public T~ustee of ew outh Wales, and th~ pre­ sent ChaHman of Directors of the ,ommonwealth Bank. ( ii ) These directors should then appoint the governor

and deputy-governor , and fix their remuneration and conditions of work. Moreover, the whole of the staff should be under the direct control of the d irectors. The governor would be a member of

the board of directors, but not chairman of the board. The Government would ha,·e the power of nominating an additional member, and the ecre­ tary of the. Treasury would also be a member.

Future appointments of the six original directors would be made on the recommendation of the

hoard. It seems to me quite wrong that more

t h a n one deputy-governor should be contemplated at t his stage, and that the deputy-governor should be a member of the board.

(iii) The proportion of private bank deposits held in

cash at the central bank should, in the first·

insta nce, be 7 per cent. against demand liabilities, a nd 3 per cent. against time liabilities. If these

proportions prove inadequate, they could later be m crease~. Under good management, the private banks will tend to h old a large proportion of their reserves with the central bank, and it is not the

legal minimum that u sua lly determines the policy, but rather the customar y amount held. A serious drop would be regarded as a sign of danger by the banks themselves. I have n ot considered the other parts of the bill in detail. As already indicated, I r egard the bill as establishing an

unfortunate break with the development of the Comruon­ wealth Bank as a central bank, and I should like to repeat that t his development should be encouraged. A new central bank could not add to the strength of the bankin<>' system at the present moment. If i t i s thought necessary to establish s u ch a n ilistitution, the proposal should be delayed pending a r ecovery from the present depression.

A central bank _ should have power to trade only as an emergency measure, and the management of its oper­ ation should be left entirely to the board. To Senator Sir Hal Golebatch.-You suggest that a board appointed in the manner that I have proposed might always recommend it.s own r e-appointment. If

the board. was doing its work properly no harm would then be done. I think that the board would have to use its discretion c_ arefully. The government would naturally exercise some infiuen'ce upon it. It is natural

that such a board would consider itself to be the best qualified for the work entrusted to i t. The magnitude of the present crisis is beyond all expectation; but normally the board of management on a central reserve

bank would be able to do a great deal in anticipating such a difficulty and taking steps to meet it. The

board of such a bank would probably have been in a better position than economists two or thr ee years ago to anticipate what was likely to hap_{)en in Australia, because it should have had more facts before it. The

economists of Australia realized that the country was treading a slippery path, but nobody expected such a catastrophe as has overtaken us. It was not antici­ pated that there would be such a big drop in the prices of our primary products. We did not expect the price

levels all over the world to fall to such an extent as they h ave. With all due r espect to them, I think

that governments generally did not give the matter much thought. A central r eserve bank would require proper advice on a matter of this kind, and it would have to act upon it.

To Senator Thompson.-The Commonwealth Bank is now in active competition with the trading banks. Its trading activities amount to a show rather than a reality. I admit that it is doing considerable business in Queensland, but I do not think that the extent of its trading business throughout Australia would seriously interfere with its functions as a central bank. The men whom I have indicated as those who might be consul ted in deciding the right class of per ons

to appoint to the board of management of a central reserve bank are very shrewd, and I have no - doubt as to their ability. You ask me whether I would

favour panels of, say, three each being nominated by the bankers, the Associated Chambers of Commerce, the Wool Brokers' Associations, and the great organi­ zations of Labour. Such a body of men, associated

with the men I have suggested, should together make an admirable committee to be entrusted with the im­ portant task of nominating a suitable directorate. The chancellors of the universities have to select many men for important university positions. University

appointments are usually de facto life appointments, and it is important that very sound judgment should be exercised in selecting the appointees. The chan­ cellors of the universities would therefore have long experience in selecting appropriate appointees. The ·Chancellor of the Melbourne University, Sir John ·Mac:i;:arland, has as a matter of fact, extensive business

expenence. To Senator Sampson.-If a central reserve bank had been in operation in Australia, it could have taken drastic action in the present crisis. It could have

taken earlier action on the lines that I have suggested. To the Chafrman.-I do not think the establish­ ment of a central bank now would enable anything to be done that is not now being done. My suggestion is for the appointment of the board on the lines of the

committee appointed to control the national deht sinking fund. To Senator Sir Hal Colebatch.-You suggest that my proposal might tend to keep the same members of ·

the board· in office once they had been appointed, which would be unfortunate if, in one or ·two instances, the wrong men had been chosen. I see that weakness, and I suggest that, subject to the approval .of the committee

that I have already proposed for the selection of the first directors, the board of directors recommend 'to the Governor-General-in-Council persons for appointment . as directors when vacancies occur. This would give the board of directors a large measure of autonomy, and µ.t the same time safeguard the public interest, should the nomination of the board at any time be unsatisfactory.

The wit~ess withdrew.

Maurice Boyce Duffy, accountant and secretary of the Melbourne Trades Hall Council, was called, sworn and examined. To the Chairm.an.-I consider a central reserve bank to be a necessary part of the financial fabric of the nation, and the establishment of such a bank is called for in Australia. This is particularly desirable in

connexion with foreign exchange. The fact that Aus­ tralia is a young country and dependent to a great ex­ tent on overseas capital does not free it from the re­ sponsibility of putting its own · banking affairs in

order. It is generally said that there is no money

market in Australia, and that the financial position is gov~rned by external conditions; but I am of opinion that Australia is developing a money market of its own, and is displaying chai·acteristics entirely different froni Old World conditions. I should say that in a

time of crisis the need for such a bank is particularly felt.. The banks have been brought together to pool foreign exchange for the purpose of helping the coun­ try through. The Commonwealth Bank at present performs a number of the functions of a central

reserve bank, so far as the note issue is concerned · but it does not control foreign exchange. The bank~ are no~ c~ntrolling foreign exchange, but there was no ob~1gat10n on the part of the pri V f•Je banks to agree to

this arrangement. There may Lt uther occasions when the interests of the trading banks and the interests of the country will be diametrically opposed. The in-

•

34

terests of the community are often opposed to those of the particular persons operating the financial affairs of the country, and, from that point o.f view, the com­ munity's interests should be considered apart from financial interests. In considering the constitution of

the board and its r elations with the Government I cousider that, in the :first place, the bank should be under the directi.on of a man of wide banking experi­ ence in a general advisory and administrative capa­ city ; but the board should represent banking interests,

and also the interests of other sections of the com­ munity, in order that it might have a balanced point of view. I would not have the board overweighted by the representation of any one section. The big pri­ mary pl'oducing interests have a right to be represented, and so have the manufacturing interests. The wage­ earning section, too, is interested in a central reserve

bank. Banking policy can produce a downward trend, or it can check dep_ ression, and the community, as a whole, is more interested in that aspect of banking than the private banks who are naturally inclined to do what is calculated to give them the best returns for their investments. I do not think that the proposed central reserve bank should be under political control. Of course, somebody must make ·the appointments to

the board; but, if the term of · appointment is suffi­ ciently long, political control will not be possible. In the management of a reserve bank, there should be no suggestion of political influence so far as its policy is concerned. Such a bank might deal only in "A " grade securities, that is, trading bank and government securities, a1id these must be sh.art dated. Its reserves should be in the most liquid form; otherwise it would fail in its purpose.

To Senator Sir Hal Colebatch.-I recognize that in the long run the policy of the reserve bank would have to be in the interests of the country; but it might in

some circumstances adopt a short-sighted policy. There is no such thing as a political policy in regard to banking. A banking policy may be conservative or liberal; but credit cannot be extended beyond the coun­

try's r esources. You suggest that the bill associates t~ree elen:ients of danger, namely, political control, the nght to 1s~ue notes, a_nd freedom from responsibility for re_deemrn~ those notes. I point· out, however, that

the bill provides for a percentage of gold behind the !1otes. You ask me if the gold backing is of any value . if the notes are not convertible. I think it is recognized that the shortage of gold is worla wide. The board of directors of the present Commonwealth Bank is uot accus~d of exercising political control, although it was. appo1i:ited. by a government. It has not adopted

a wild policy rn regard to the note issue · in fact its

policy is inclined to be restrictive. An ~ver issu~ of notes would soon be reflected in higher price levels. I have no fear of the appointment to the board of

men who would be prepared to carry out the instruc­ tions of a particular government. . We know what h as happened in.Jiussia, Germany and France as the result ?f the ove~-1Ss~e of .notes. If anybody in authority ll1 Australia fa1l~d to profit from those examples they ~ould be fools_ rndee~. A note issue could be judi­ c1?usly used for,1~mediate turnover production. There rrnght be a .?onflict. between government policy and general bankmg pohcy, and if government policy is

to be taken to represent the interests of the people as a wh~le, I, should say that government policy should prevail. 'Ihe proposed bank should be the servant of the. people. If there were a conflict between banking pohcy an_d ~overnment policy, it would be reduced to narrow hm1ts. The bankina institutions mio-ht say for ~ns tance, that it was not° desirable to exp~nd th~ credit of the country to :fin ance the wool clip. The ~overnme~t of the_ country might favour a more

hberal policy, and, rn such a case, government. policy should prevail. But the board of the proposed bank

35

wou~d be in covtrol of the institution, and would be lookmg at the xnatter through the eyes of the people; .the Governme11t of the day would not be in· control of the bank. It might be suggested that the board as

prop?sed under the bill, might be formed by political appomtn:ients; but the same could be said of the judges of the High Court. Somebody must make such appoint­ men ts. You ask me if I agree to t he chambers of

commerce, the trading banks and the organization of Labour each nominating three members of the board the Government to select which of the three it chose'. I would not like . to . tie mJ'."self down to that plan,

altho~gh I r ecogrnze i ts merit . The popularity of a man is no criterion of his ability. Ther e should be

government r esponsibility for the appointments. If a government does wrong, the people, who are its master s, eventually exert their will upon it. To Senator Thompson.-You ask me whether I

favour .the submission of the names of men nominated by the associated banks, the chambers of commerce ' ' and the Labour organizatj. on to a special committee composed of the Chief Justice of the High Court and

the chancellors of the univer si ties this committee to make recommendations to th~ Gov~rnment who would have the right of appointment. Such a 'm'.ethod would . re~ove much of the Government's resp.gi;is ibility. It

might free- a governmenf frpm a charge of favor1tism, but every government is liable to such criticism. Ther e ~s no .suggestion that the ,right to appoint judges of the High Court should. be taken from the Government. ;Ltk~ j~dge~, :qie mbers of the b~ard of management of

an mstitut10n such as a central reserve bank would be called,' upqn to ,exercise the high~s t degree ~f skill, an,d they s)lould be men· of probity. · Once the board has . peen appointed by the Government, th~ latter must

.. \,~e r espon_sibility ' for. its action, and if that conflicts

w:;th the wishes of the . private ba~ks, the view of the Governmen~ must prevail. If a go·vernment wished a board. to do certain things .which the boaf'd considered to be imprudent, the view of the board should prevail. I consider it very wise to separate the trading activities

from the !)entral reserve functions of the Common­ 'w~alth Bank. The new Commonwealth trading bank will have to stand on its merits in competition wi th the private banks without special favours, and that entails s~parate management . .

The witness witlidrew.

Robert Bennet ~ emmon,. Mercantile Agent and Trea­ surer of the Melbourne Chamber of Commerce, was called, sworn and examined. To the Chairman.-! have prepared the following statement on the subject under the consideration of the

committee:-On the 16th April, 1930, the Melbourne Chamber of Com· merce forwarded to the Treasurer of the Commonwealth the following statement of its views on this bill:-

" The Melbourne Chamber of Commerce v iews with grave apprehension the. proposals of the Government for the establishment of a centra l reserve ba nk to opera te con· currently with the existing Commonwealth Bank. We consider tha t as the bankers a re sat isfied with the centra l bank functions that have gradually been assumed by the

Commonwealth Bank, a new distinct inst~tution i s ;".10t necessary. We share with ba nkers a nd leadmg econ?m1sts the view tha t the present is a most inopp?rtune time. to attempt to bring about any r a dical change m our bankmg

struct ure. The proposal to compel the ba~ks t o han.d

over to the central bank a substantial portion of their

liquid reserves we r egard as the mos! ?bjectionable feature of the bill. This step and the prov1s~o!1 for further. com· petition for deposits should, in our op1mo?, r eact sen ou.sly on industry, tra de, and prima ry product10n ?Y r ender.mg necessary a further r estrict ion . of bank ~r ed1t ~t a time

b bly the most inopportune m our busm ess history for ;~~h aa course. We strongly urge th~ _view, therefore, that no change of existing banking conditions should be made without the full concurrence of the banks, w~o ar e the trusted custodians of the funds of the busmess com·

munity." F.3395.-5

533

. ~n amplification of this tbe chamber desires to tate that

it 1s not oppo ed to the e tabli hment of a central re en-e bank t

on the 8th April, 1927. The chamber however joins with the present opposition to the central re e'n-e bank' a,g propo ed by the Government, considering the time most inopportune for ~he changes in_ the structure of our money market that it would m volY~. It _is gen~rally r ecognized that our trading banks h ave m th~ 1mmed1ate past given generous upport to their cu stomers m the community as well as to our Governments a n~ t hat our present difficulties had their rea l causes outsid; their . co_ntrol. The chari1ber is convinced that the disturbance of ex1stmg banking conditions that the proposals iuvol..-e would

not only be attended by no beneficial results, but would be dangerous as likely to intensify rather than to relieve our present diffi culties. Since 1924 some central reserve bank functions hose been undertaken and developed gradually by the Commonwealth Bank working in co-operation with the trading banks, and although , as a Government institution, its structure does not a ltogether conform t«;> t he requirements of a. proper central

reserve ba nk, t here 1s a general feeling that the relations

between it and the trading banks should not in a time of

grave financial difficu lty like the pr esent, be' disturbed, but s!'10uld be. al~owed to d evelop as in the past along approved Imes, until m more favorable circumstances a full central r eserve bank can be set up with the active co-operation of all the interests concerned .

The proposal to enforce the transfer of a very large sum of money from tI1e custody of t he banks to the contr ol of the

proposed new instit u t ion has already had a disturbina effect on th~ ~on eY, market. In a ddition, the transfer to wh~t may conce1valily be a n ew a nd untried body of Government n ominees .of duties that the Commonwealt h Bank board has been dealing

with satisfactor ily for some time would sur ely be an experi­ ment that ordinary prudence would not advise in the present difficult circumstances. The actual transfer from the Com­ monwealth and trading banks of substantia l part of their

funds would, in our view, tend to deplete t he moneys now

availa ble for the business community, and to further restrict their credit fac ilitie s, a nd might possibly steriJj ze a consider· able part of the transferr ed funds for some t ime, until the new body h ad considered its problems and formulated its policy .

It i s an accepted principle of central r eserve banking that the b a nk's mai:iage ment and policy should be free from govern­ ment control and tlre influence of politics. The constituti on p roposed for the bank in the bill represents a complete repudia­ tion of that fundamental rule.

The Commonwealth Government will, as a matter of course, be reJ.>resented on the board of the bank when created, and will provide part of the capita l. The trading banks a nd private investors (preferably r epresenting business inter ests--€xport, import, trading and manufacturing) should be asked' to pro­ vide the la rger sh ar e · of the capital and to elect the majority of the directors. Following accepted custom, some of the

dfrectors should r eti're> annually in r otation, but sh ould be eligible for r e-election, so as to secure continuity of policy and the accumulation of experience. It is recognized by banking authority that the su pply of

capacity and knowledge n ecessar y for the management of central r eser ve banking is limited, and t he task of pr oviding a satisfactory board here for the specialized i mportant

functions involved will not be an easy matter . A central reser ve bank will require the support and co n· fidence of every cl ass of the community, and an institution or ganized on something like the lines indicated appears to be best calculated to secure this backing.

The satisfactory adjustment of the ultimate relations of the proposed central reserve bank wit_ h the trading banks wou!d, it i s expected, be a sl ow an_d deh c_ a~e process. The special circumstances of our financial position as a debtor countr y

and of our industrial development will give rise to new

problems of some difficulty. Full confi dence in the bank would be ·a matter of gradual gr owth as the evidence of the soundness of its administration accumulated. A board constituted on the lines suggested by us could, it is

felt be trusted to develop gradually a sound policy, providing for 'harmonious r elations with the t r ading banks, while at the same time guaranteeing to the pub)i c the facilities that it is the function of such a bank to pronde.

A central r eserve bank answering to the full requirements of su ch an i nstitution would, a s t he banker of the trading­ banks be char ged wi th "the custody, r egulation and protection­ of th; centr a l banking and currency r eserves of the co untry." Its first duty would be to ensure that its inves~ments wer e in

the most liquid form, and the r ecommendations made by bankers as to amendments of the bill in this regard ought to­ be fo llowed. Such a bank would not ordinarily co mpete with the t r a ding­ banks for general banking business, nor accept mo1!-ey on deposit a t inter est. It should, however, be ready to discount approved bills at a published rate.

Concer t ed action hould be t a ken by t he State Governments, t he ba nks, and t he business community t o encourage the

greater use of bills i n t r ade dealings and t h e necessity for the reduct ion of t he stamp d uty (especia lly in Victoria ) a nd of the a dopt ion of a common cr edit policy by mer cha nts, is

i ndicated as necessa ry in t his connexion. While t endering these cri t i cisms of the bill t he chamber a c!J1er es t o its v iew t hat the est abli shmen t of a new ce nt r a l

r eser ve ba nk s hould be postponed unti l our present di ffi cu lties aT e r eli ev ed, an d somet h ing like normal busin ess conditions a r e r e tored, a nd it again empha s izes the view t hat t he bank so

set u p should be free from politica l control and influ ence.

T o Senator Thompson.-To encourage the use of short dated bills in Victo ria the fir st thing r equirnd· would be a r eduction in the stamp du ty charged on bills of exchange. The duty in Victoria is four times as great as i n E ngl and, fo ur times the duty charged on expor t bills in Sou th .Austr alia, and twice as much a s in any of t h e other States. Owing to the high

d uti es the giving of bills is discourage d. It is des irable also that there should be a common cr edi t policy among wh olesale merchan ts. The r eduction of the duty has exercised the minds of business men and bankers for a consider able time. The Collector of Imposts, after r epresenta tions had been made to the authorities that a r eduction in the duty would probably be compensated

for by the increase in the number of bills given, asked for my opinion on the subject. I told him that I could not confirm that view unless the commercial interests would agree upon a credit policy, that would enforce t he giving of bills in three months' credit transactions.

The bills would be a basis for assistance from a

central r eserve bank in a time of stress. I refer

the committee to Professor Gregory's art·icle on central hanking in the 14th edition of the Encyclopedia Britannica, Vol. V, page 141. There he points out that the centralization of ca:sh reserves economizes the currency requirements of the separate banks, and the

replenishment of the reserves of individual banks is secured by re-discounting at the central bank. If a bank desires assistance, or wishes to increase its avail­ able funds, it can do so only by calling up advances. It is indicated that the calling up of advances under ordinary conditions would not r elieve the financial situation generally, because the people who required

accommodation which was denied them by one particu­ lar bank would probably-have to go to another to get it, so the situation generally would not be improved; but with .a centr!ll reserve bank operating, a private bank could take its bills to the reserve bank, and draw on the funds of that bank without interfering with the

36

banking position generally. That is a very interesting and most useful function that a reserve bank could Perform · in fact a main function in a time of stress. ' ' h d. In the :financial crisiB in London in 1914, t e or rnary

banks called up their advances from bill brokers and the stock exch ange, and the bill broker s and discount houses went to the Bank of England direct with their bills and obtained accommodation. Then P rofess or Gr egory Boints out that the domestic drain on

the cash reser ves is for legal tender r ather than

i or ·· gold, which is r equired for foreign commit~ ents primarily. The r eserve bank controlling the n ote issue can supply legal tender in all ordinary quantities at ordinary times, and the gold would be r equired only for foreign commitmen ts . An aspec t of the central r eserve bank bill that r equi r es consider ation is whether the very stringent provisions in connexion with the reserves to be held by the bank should not be r elaxed to some extent, as has been done in connexion with the Bank of England in the latest legislation dealing with it. In a time of crisis, such as in 1914, and

previously, the charter of the Bank of England,

so far as its r eserves against notes are concerned, had to be suspended under pressure. In the latest legis, lation regarding that bank, express pow_ er is given to the government to suspend the ratio of its reserves

to its notes on request. It might be coµside.red that on similar re·quests from tile· Cotnmoriwe'alth Bank and the majority of the trading banks, pow~r- to suspend the restriction on tlie c·entral reserve bank in that

regarcl should be given. Centrai reserves in a time of crisis are intended to' be used freely · to . help

the firra:ncfal situa:tiotr; an:d' the rigidity of the

prnvisions of the' bill are worth considering in that connexion, _ in view o'f . the exper.ience of the Bank of England and the change that has been expressly mitde in the latest legislation in Great Britain.

Previously 1):te situa.tion was met by breaking the law; now the British authorities are permitted to ta:ke this action within the law. Professor Gregory also states that the demand for cash is centralized under a system of central reserve banking, and the ebb a:nd flow of currency and credit are under constant supervision. The central bank, he goes on to say,

focuses national control and censorship, and can check the self-interested action of others and assume respon­ sibility in time of crisis·. Finally, he points out that a common policy of international monetary authorities is facilita.ted by central reserve banks.

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