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The Pamphlet Collection of Sir Robert Stout: Volume 40

An Enquiry into the Financial Condition of the Bank of New Zealand

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Into the Financial Condition of the Bank of New Zealand.

Printed by E. H. Fail, At his General Printing Office, Auckland Karangahape Road, Newton 1881

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To the Colonial Treasurer, the Hon. H. A. Atkinson.

Sir,—I have decided, on reflection, to address this pamphlet to you, and may state that I intend to review the condition of the Bank after each future half-yearly meeting, in one of the newspapers in the colony, until different banking arrangements are made by the Government of the day, to those now existing. It was you who made the last, agreement with the Bank for the custody of the Public Funds, after you had demonstrated to the Country the profitableness of borrowing money at five per cent, and lending it at four. The rare skill you display in arranging the Public Accounts precludes the supposition that you will have any difficulty in understanding the finance of a bank when it is explained to you. We all confess that you are our only safe guide in financial matters, as on several occasions, for the satisfaction of the bondholder and the maintenance of the credit of the Colony, you have changed the annual yearly deficit in our revenue into a substantial surplus. I now invite your attention and solicit your aid to the solution of a more difficult problem. Dealing mainly with the finance of the Bank since you saved the Colony from impending ruin in 1879 by impairing its credit, and questioning its solvency, it will be seen by a carefully compiled table, how different was the condition of the Bunk of New Zealand in 1870, before your friends began your "heroic policy of colonization." Having told the people that the Property Tax is an aid to improvements, you will find no difficulty in dealing with the lesser issues I have raised. Your known integrity as a politician, and your stern truthfulness as a party man, will save you from the reproach of being thought the tool of a mercantile corporation desirous of controlling the finance and the policy of the Government of New Zealand, when the agreement you made with the Bank in 1880 is generally understood. Those who appreciate these facts will recognize the propriety of this dedication.—I have the honor to be, Sir, your most obedient servant,

Richard A. A. Sherrin.

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An Enquiry Into the Financial Condition of the Bank of New Zealand.

The condition of the Bank of New Zealand is open to the freest criticism as the Bank keeps the Government account, and all the contributors to the Colonial Revenue have a right to enquire whether the monies collected by the State are placed in safe custody. If there had been in my mind any doubt as to the legality of such an enquiry, I should have made myself a shareholder in the Bank before writing this pamphlet; and should my opinion, as is possible, be mistaken, the sooner we obtain definite ruling on such an important matter the better. In determining the financial soundness of a Corporation of this kind we can have hardly any clearly defined rules for our guidance, unless we could find another country in the same financial circumstances as New Zealand, possessing what is to all purposes (save the Government guarantee) a State Bank, having similar obligations to the Bank of New Zealand. And should such a discovery be made we have to bear in mind that no fixed rules have been unanimously agreed upon by mercantile men, which should in their opinion regulate the business of a Bank under varying conditions. It was recently said by a high financial authority, Banking in England goes on growing, multiplying, and changing, as the English people itself goes on growing, multiplying, and changing. The facts of it are, one thing to-day and another to-morrow, nor at one moment does any one page 4 know them completely. Those who best know them will not tell them; gradually, and in the course of years, they separately come to light; and by the time they do so, for the most part, another crop of unknown ones has accumulated. If we wait to reason till the facts are .completed, we shall have to wait till the human race has expired."

Varied, however, as the " facts " of banking may be, there are certain banking postulates with .which most men will agree. I would venture in this manner to describe them :—
I.A Bank should be enabled under all circumstances to meet promptly all legal demands made on it for payment.
II.It should meet these demands without unduly pressing on its customers.
III.The amount of its capital and its reserve fund should form the basis of the calculation as to the extent of the business it transacts.
IV.It should undertake no obligations requiring fortunate circumstances to enable it to fulfil.
V.It should be enabled to lend freely on good securities in times of panic.
VI.Its capital should be sufficient to guarantee the soundness of its business.

A Bank having the custody of a Government account is placed in a different position to other Banks. When the German Government was drawing large stores of bullion from England, after the Franco-German war, they kept a large balance at the London Joint Stock Bank, and this bank required its immediate resources to be larger than another bank, having such a customer doing the same amount of business with an equal capital, by reason of the derangements its deposits were liable to experience. A Government may have, and often has, an urgent need for a large sum of money, and the bank which does its business is expected to be in a position to meet what has been happily termed the intensity of the liability.

If a Bank has a million of money on deposit at call from one customer, its reserve of cash should be greater than if the page 5 million were deposited by ten or twenty different persons. If the Bank of New Zealand has a million of Government money in its custody, and the Government, on the direction of the Legislature, or by order in Council, should transfer the public account to another Bank or Banks, the transfer should entail no stringency in the money market, nor cause any inconvenience to the Bank, or to its customers. You will bear in mind that the amount of public money held by the Bank is not to be confounded with the Government deposits or balances it holds. And this consideration is of importance, because should the Government transfer its account to another bank, the local and other bodies would without doubt, follow the example.

The average yearly balance of the Government monies in the possession of the Bank in New Zealand for the period of ten years ended the 31st December, 1880, has been in round numbers £823,000. Extending over the same period the annual average of the coin, bullion, notes and bills of other Banks, balances of other Banks, and Government securities, kept by the Bank in New Zealand is found to be £931,760. These various assets I shall hereafter call the available cash of the Bank of New Zealand, in New Zealand. You will observe the narrowness of the margin between the available cash of the Bank and the Government deposits.

As the main source of the profitableness of Banks, and the cause of their multiplication is the smallness of the capital needed for their founding, it seems the more necessary that a legal restraint, determining the limit of their operations, should be placed upon their business, as eager competition, and zealous management, may readily produce calamitous overtrading. Banks trade with their customers' money. The Banker's task is so to place the money entrusted to his care that it may be readily available in case of need, or an emergency. I am not writing, or hinting at the Statutory Reserve Fund, which it should be (but is not) imperative for all banks to keep, but of the ability of the banks to be able at any time to produce the deposits at call which it holds. I include, of course, traders' balances in the term deposits at call, After bitter page 6 experience of the neglect of this precaution, or a similar one, the American law says that each National Bank shall have a fixed proportion of cash to its liabilities, and it is ascertained by inspectors, who inspect at their own times, whether the required amount of cash is in the bank or not. In the State of New York, 25 per cent, is the proportion fixed, but the obligation was only made, if I remember right, after 1857, when in New York alone 62 out of its 63 banks suspended cash payments. In the times of prosperity the seeds of mercantile disaster are sown. The prudent banker puts all the strength he can obtain into his reserve fund. It is as a wise precaution on the part of a State to restrain the trading of a bank which does the State business to a limit in accordance with its capital, as it is for the Legislature to determine the maximum rate a Railway Company charges the public for its services.

It will be seen further on, that the Bank has its main cash resources in London; and very large obligations in New Zealand, which it cannot meet without calling on its English funds. It is one of those risks which success does not justify. This risk is further heightened when it is known that the Reserve Fund of the Bank is absorbed in its business, and not invested in securities immediately realizable. No thinking man can regard this absorption without regret. There seems a special necessity for a bank doing a State business to keep its Reserve Fund intact. Under certain social conditions, in our case such as a general failure, or blight in our crops, or a murrain in our stock, we may have to provide a large sum of gold for export. The extra drain of gold in 1847 from Great Britain for a supply of food was estimated £20,000,000. A Government can export no gold in quantities for food when the bank it does business with has only sufficient "to open shop with." It is hardly necessary to trace the history of the Bank Reserve Fund, nor to point out how the strength of the Bank is weakened by the absorption of that Fund in its business.

I shall deal first with the returns of the Bank published in the Government Gazette of February, 1881. They contain page 7 the New Zealand business of the Bank only at the end of the year 1880. I use only £ figures. The liabilities of the Bank in the Colony were sworn to as follows :—
Notes in circulation £492,083
Bills in circulation 34,387
Balance due to other banks 17,391
Deposits—Government 7,56,038
Deposits—not bearing interest 17,34,575
Deposits—bearing interest 19,50,250

The additions are of course subject to shilling differences in the right hand figures.

Coin £706,992
Bullion 1,21,935
Notes and Bills of other banks 19,521
Balances due from other banks 5,434
Notes and Bills discounted 20,07,714
Landed property 70,240
Government securities 24,615
Debts due to bank 37,67,262
Other securities 1,36,736

In the same return the capital of the Bank paid-up is stated as £1,000,000 with a Reserve, Fund of £653,337, but the whole amount may be regarded as the working capital of the bank. By this unfortunate, although common mode of book-keeping, Capital and Reserve Fund are mixed together, causing confusion in the mind of the casual observer. By the 21st section of the Act of Incorporation, July, 1861, the shareholders of the Bank, chiefly non-residents in the Colony, are liable for the payment of another million sterling; an amount equal to that of the capital subscribed. This sum of money could only be regarded as an asset in full, were the page 8 affairs of the Bank in liquidation, if the shareholders were all able to pay the call. When the West of England Bank failed not long since some 70 of the 1000 shareholders promptly met the call; about 150 partly did so; nearly half the shareholders were found to be without means.

Deposits fixed for a term cannot be legally claimed until the term expires. It is optional on the part of the banker to release monies lodged on fixed deposit before the expiration of the term, either with or without interest, unless he has come under some agreement so to do when the money was deposited. In the latter case, of course, the customer can regard the deposit at call. Ignoring, then, the money held by the Bank of New Zealand bearing interest at that date, December 31st, 1880, amounting to £1,950,250 let us see the sum of money the Corporation could have been called upon forthwith to pay should the Government have found reason at that date to have withdrawn its account. I do not know what sufficient reason could be alleged for the Government allowing a Bank to keep its funds if the solvency of the bank were publicly and reasonably questioned.

Notes in circulation £492,083
Bills in circulation 34,387
Balances due to other banks 17,391
Deposits—Government 7,56,038
Deposits—not bearing interest 17,34,575

The deposits bearing interest will of course be maturing daily, but they may be left out of our calculation, as the Notes and Bills discounted by the Bank in New Zealand amounted to a very similar sum viz.: £2,007,714, and the maturing of the assets may be placed against the maturing of the liabilities, with very great advantage to the bank in the way of comparision; the deposits being fixed, chiefly for twelve months, the Notes and Bills bearing much shorter dates.

Let us see then what available funds the Bank had in New Zealand on the 31st December, 1880, to meet a call for £3,034,474.

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Gold and coined metals £706,992
Gold in bullion and bars 1,21,935
Notes and bills of other banks 19,522
Debts due from other banks 5,434
Government securities 24,615

The landed property the Bank has cannot be regarded as an available cash asset until sold and paid for. It is true the debts due to the Bank are put in the assets as representing £3,767,262, and the other securities as being worth £136,736; but the debts would have to be collected and the securities realised before the payment could be made of the monies liable to be called for upon demand. The forced collection of these debts would mean not only ruin to the debtors and a vast depreciation in value of the securities held for the cover of the debts, but would entail consequences on the Colony, which the General Assembly would be regarded as inexcusable in not having foreseen. There are no cash funds in the Colony representing the value of these debts. While the debts and other securities due and held by the Bank at the end of the year 1880 amounted to £3,903,998, the whole of the coin and bullion held by the other Banks in New Zealand only amounted to £1,317,946.

We are almost tempted to enquire curiously how these debts of £3,767,262 are secured, or whether they are overdrafts for which collateral securities have been given. When the General Manager, Mr. Murdoch, at the last March (half-yearly) meeting, is reported to have said that the Bank had no monies locked-up in land. In what other commodity could they be safely invested, the speculative will doubtless enquire? I fully understand what answer will be made to this interrogation, but can attach no importance to such an evasion. If the advances are made on bills, they cannot be met until the land is sold. The notes in circulation although promises to pay, require some description as to the conditions of their payment. The 5th clause of the Act of Incorporation gives the Bank power to issue Bank notes, but it provides that such page 10 privilege shall cease in case of the suspension of specie payment on demand for the space of 60 days in succession, or for any number of days at intervals which shall amount altogether to 60 days within any one year. The notes in circulation, however, form only some 15 per cent of the claims on the bank payable on demand. And here it can be pointed out that the Government appears to have no check over the note circulation. In England the Commissioners of Taxes are empowered to inspect the books of all banks issuing notes, to ensure the rendering of true and faithful accounts, or the amount of bank-notes in circulation. There can be no valid reason why the Government should not take the note issue under its own control, in the same manner as it issues Stamps. By the 6th clause of the Act of Incorporation it is provided that the total amount of the Promissory notes payable on demand, issued and in circulation within the Colony shall, not at any time exceed the amount of the coin, bullion, and public securities held by the Corporation. Without entering into the debated question of an inconvertible paper currency, the consideration arises whether it may not yet be found expedient to widen the liberty given to banks as to their note circulation so as to include other than "public securities" in the note guarantee. I shall, however, revert, to this subject further on.

Should, however, the idea be entertained, that the branches of the London, New South Wales, and Fijian portions of the Bank could afford to help the stringency of a call for money in New Zealand, the surmise will be dispelled by an analysis of the accounts of the Bank published in the New Zealand Herald of the 23rd Oct., 1880, and the returns published by the Treasury, on the 26th of the same month. It is only by such an analysis that the Foreign business of the Bank can be separated from the New Zealand portion thereof.

Foreign Liabilities.
Bills payable out of New Zealand £1,396,196
Deposits and other liabilities 3,754,950
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Foreign Assets.
Coin and cash balances out N. Z. £796,818
Money short call in London 1,442,000
Bullion 30,781
Government securities 246,230
Bills and securities receivable 1,020,812
Bills discounted and debts due 1,254,228
Landed property 146,811
The result of the analysis shows that the surplus assets of the Bank are in New Zealand, and that the Foreign liabilities on September 30th 1880. were £214,000 in excess of the Foreign assets. The New Zealand apart from the Foreign business of the Bank may be thus divided :—
Assets on 30th September, 1880.
In New Zealand £6,628,326
Out of New Zealand 4,937,680
In New Zealand £4,761,523
Out of New Zealand 5,151,146
Capital 1,000,000
Reserve Fund 555,000
Balance of Profit and Loss 98,337

It will thus be seen that although the bulk of the available cash of the Bank at this date was in London, had "a run" set in on the Bank here, or in London, all the London assets would have been required to meet the calls made for payment in London, and the New Zealand business would have had to provide the deficit.

It is instructive to notice how the Public Works Policy has deranged the finance of the Bank. The following table show the amounts of the deposits and the available cash held by the Bank in New Zealand at the 31st of Decomber of each year :—

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Deposits. Available Cash.
1870 £1,230,304 £612,945
1871 17,81,129 8,91,651
1872 19,23,026 7,05,943
1873 28,16,226 7,65,556
1874 31,56,963 8,32,228
1875 35,17,390 10,06,133
1876 32,95,380 9,10,763
1877 40,64,090 10,64,520
1878 49,92,703 11,20,124
1879 38,40,178 11,40,191
1880 44,40,863 8,80,497

At the end of years 1870—1871, the available cash of the Bank of New Zealand equalled about 50 per cent, of its deposits. In 1880 the amount had fallen to 20 per cent. In a statement of 78 out of 118 of the Joint Stock Banks of England and Wales for October 19th, 1878, it appears that their deposits amounted to £235,392,087, and their cash in hand, money at call, and Government stock to £118,452,226; and on the 17th of May, 1879, of 74 banks out of 119 having deposits of £228,902,459, their available cash was £128,181,688. If you take the statement of the liabilities and assets of the Union Bank of Australia of the 30th of June, 1880, you will find the deposits amounting to £6,767,350, while the available cash of the bank was £3,581,610.

I do not think that this pamphlet would have been written had not a section of the New Zealand Press commented with much elation of spirit over the Report of the Bank describing the details of the business up to the 31st March, 1881. Prom the report it appears that the money at short call in London, invested by the Bank, had been reduced from £1,442,000 to £675,900; that while the deposits and other liabilities of the Bank had remained nearly the same during the six months, what I have called the available cash of the Bank, had decreased from £3,343,851 to £2,885,329. In other words, from another point of view, the debts of the Bank had been increased £429,445; the immediately page 13 available cash resources of the Bank were decreased £456,512

The position may perhaps be made more clear to your, mind by the perusal of the following table showing the deposits and the liabilities of the Bank enumerated at the different dates. The note liability is excluded from the calculation :—
Deposits, &c. Bills payable. Available cash
1880—31st March. £7,629,451 £1,337,451 £3,392,243
1880—30th Sept. 80,01,750 14,28,501 33,43,851
1881—31st March. 79,92,405 18,75,041 28,85,829
1881—31st Sept. 76,24,141 20,57,098 23,42,767

You will see from the above figures bow, since you have last been in office, the available cash of the Bank has decreased £1,049,476, while the bills payable have increased £713,647; and the liabilities of the Bank have been extended from £11,116,808 to £11,798,019.

I do not see that any measurable benefit would arise from a further extension of this tedious analysis, but would point out that the fear which may be engendered from its consideration is increased by the reflection that there is no store of what has been termed "unused cash" in New Zealand, from which money can be obtained on the deposit of good security in times of difficulty in the money market. We have followed the custom of the English Joint Stock Banks, without having the safeguard the English Joint Stock Banks possess. They keep in their possession public securities which they can deposit with the Bank of England when they want money. We have no Bank here holding an analogous position, nor has the Legislature felt it incumbent on itself to provide that Colonial Banks should hold unused a cash reserve in a fixed ratio according to their liabilities. It will be said with force that this fixed cash reserve will remain useless in the Banks, and that alarm would arise in a sensitive state of the money market when this legal limit of reserve was reached; but the public safety is a higher consideration than the profits of Bank shareholders, or an unfounded fear on the part of Bank customers. We cannot with safety allow any Banks to incur vast liabilities on securities, good doubtless of their kind, by the use of their customers' monies, which they would find it im- page 14 possible to pay, without a manifestation of patience unknown to general depositors. The one difficulty in the case of the Bank of New Zealand in paying monies demanded, would arise from the fact of our possessing as a people no reserve of cash. It is a consciousness of this fact which, doubtless, has lately made the Bank of New South Wales—alone among the Colonial Banks—hoard in the Colonies such a large store of coin and bullion.

It was not without a definite purpose that I compiled the table in a previous page shewing the deposits and the available cash of the Bank for eleven years. As the Government policy seems to have deranged the conduct of the Bank, it appears only the duty of the Government to aid in every way in its power to place the Bank in a healthier financial position. Although the bulk of the shareholders are living out of New Zealand the Bank is to all intents and purposes the Bank of New Zealand. I was induced to enter this enquiry with a spirit hostile to the Bank on account of its supposed exercise of political influence, and its apparent neglect of New Zealand interests by its keeping the bulk of its resources in England; but seeing how thé Bank has entered into enormous obligation for the sake of helping the Colony, it may be assumed that the exercise of its political power has been considered necessary to preserve its vitality, and that the employment of money in England has been in some measure necessary to enable it to pay its dividends. Placed by the force of circumstances, and the manifestly inadequate control of its Board of Directors in a difficult position, the question arises, what is the best plan to adopt to fortify the Bank, and preserve the interests of the colonists. The interests of the Bank and the interests of our colonists are so interwoven as to be in a large degree identical. The Bank of New Zealand already fulfills nearly all the functions of a State bank, and there seems no reason why it should not do so completely. It would appear to be quite within the power of the Bank to lend large sums of money to the New Zealand Government. To the extent of the amount of such loans the notes of the Bank could be made a legal tender in New Zealand. The Bank of England was founded with a page 15 capital lent to the State. The custom is by no means uncommon of granting concessions for advances. Such a proposal would be received with hostility by the other banks without doubt, but the Legislature could appraise this hostility at its proper worth. The whole question of an inconvertible paper currency is here raised, but it must be borne in mind that one of its ablest opponents has remarked that the experiment has only failed, and the depreciation of a legalised paper currency, after the Governments "had compromised it by the most flagrant abuse." It is not that an extension of paper currency is needed for our mercantile wants, but that we ought to establish and to maintain a Reserve Fund in New. Zealand. Indeed no greater amount of a circulating medium is ever in actual use than is required by the wants of the community; and during the long suspension of cash payments by the Bank of England in the last century, elaborate investigation showing that the difference between paper and bullion was not greater than the enhancement in value of gold itself and that the paper, though depreciated relatively to the value of gold, did not sink beyond the ordinary value at other times either of gold, or of other convertible paper. The danger is not in the use, but in the abuse of an inconvertable paper currency. The consideration is not whether an inconvertible currency is the best currency to adopt, but what is the wisest course for the Legislature to devise to assist the Bank and to protect its customers.

This brochure is put forward in the hope that the questions herein glanced at will be discussed at greater length by the General Assembly at the next session of Parliament. There may be slight errors in the calculations I have made, although they have been carefully checked, but such errors cannot affect the issues have submitted for your consideration.