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The Pamphlet Collection of Sir Robert Stout: Volume 72

A State Bank and Cheap Money Scheme

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A State Bank and Cheap Money Scheme.

Dear Sir,—

I beg to ask you, as a special favor, to read carefully following article, in which I have formulated a scheme establishing a State Bank, that will—
1st.—Involve no State responsibility;
2nd.—That will secure to the State enormous advantages;
3rd.—That will not disturb the finances of the present banks, but will, on the contrary, strengthen their position, and place them beyond the risk of panics;
4th.—That could be put into working order within 24 hours of the passing of an Act to authorise it;
5th.—That will remove all objections and be welcomed by every section of the community;
6th.—That will secure to the Government the immediate use of £1,000,000.

I trust you will give the proposal serious consideration, and, if you approve of it, lend your assistance to enable to become law.

Yours truly,

J. M. Twomey.

Temuka Leader Print.

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A State Bank and Cheap Money Scheme

For the last twelve years I have been advocating the advisability of establishing a State Bank for this colony. I contested the 1884, 1887, and 1890 elections with the view of directing public attention to it, and have given the subject serious thought and anxious consideration ever since. I have never made known the details of my proposal, believing that some day I would have an opportunity of introducing it into Parliament. The fates, however, have been against me but I do not think I ought to withhold any longer what appears to me a feasible, practicable, and easily-worked method of strengthening the position of the banks, while placing in the hands of the Government means by which it can exercise enormous influence for good on the destinies of the colony. So far as I know, I was the first man in New Zealand to introduce the subject, and now I desire to make known the machinery by which I think the scheme can be advantageously worked.

1st.—Presuming that it is agreed to establish a State Bank, the first thing which must be borne in mind is that nothing must be done which would seriously disturb the financial arrangements of the present banks. Any violent change which would force these institutions to withdraw any portion of their advances to the public would be direful in its results, and tend very seriously to defeat the object in view Bearing all this in mind. I have I think, formulated a scheme the; adoption of which would strengthen the position of the banks, secure to the State enormous advantages, and be acceptable to every section of the community.

2nd.—The next thing is to remember that nothing which has not an [unclear: intrini] value of its own must be regarded money. The sovereign is not worth 20s because it is stamped with the Queen's head. The Queen's head is only a guarantee that it possesses [unclear: s] much gold, and it is because [unclear: i] possesses so much gold that it is worth 20s, for the gold in it has a commercial value when melted down equal to that amount. Anything which is put in circulation as money must therefore have an intrinsic value equal to its face value, or we should very soon experience the curse from which all nations have suffered in times gone by—debased currency. I make these remarks because there are some people who think that the Government need only print notes and put them in circulation, while there are others ready to denounce the State Bank scheme as a "depreciated paper currency" scheme. Both idea are erroneous, and proceed from ignorance.

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3rd.—Paper money cannot under any circumstances, even when backe[unclear: d] State security, be regarded as money, and in my opinion the State would make a mistake if it issued an convertible paper currency—that is, take its notes a legal tender. It would serve no purpose to do so, whilst it would give critics a scope [unclear: or] hurling all the opinions of all the [unclear: litical] economists living and dead, from Aristotle to Karl Marx, at the [unclear: heme].

4th.—It appears to me that no one who understands the functions of [unclear: aper] money, and knows how it [unclear: perates], would suggest the desirability of making it a legal tender. The first thing which must be considere[unclear: d] this connection is that no law, no power, no influence can force the people to use more paper money than they require for the purposes of "change," or what is technically called the active supply. The note issue of any countr[unclear: y] that sum of money whic[unclear: h] people carry about with them in their pockets, or keep in their safes, for the purposes of their business. The moment anyone gets into his session more notes than he require[unclear: s] lodges them to his credit in the bank. It is plain, therefore, that [unclear: I] correct in saying that it is impossible to increase or decrease the [unclear: te] issue beyond the public requirement. The note issue increases with the expansion of trade, or decreases with its contraction, but no Act of Parliament can force people to take more paper money than they want. All authorities agree on that point, and, that being so, what end can be [unclear: ved] by making notes a legal [unclear: ender]? It would be legitimate to make State notes a legal tender to [unclear: llay] a panic, but under no other circumstance would anything be gained by doing so.

5th.—Having now seen that the people will not use more paper-money than they require, and bearing in mind that that sum is now provided by the present banks, it would obviously be useless for the Government to issue paper money of its own. There is no room for it. What would happen to it is this: The people amongst whom it would circulate, would pay it into their respective banks, and these banks would present it to the Government bank and demand gold for it. Of course if the Government notes were made a legal tender, the banks could not do this, but they could refuse to take the notes. A bank may be forced to accept a legal-tender note in payment of a debt, but it could not be made to place it to one's credit. Under any circumstance, therefore, State notes would be useless, so long as the present banks retain the power to issue notes of their own.

6th.—We have seen, so far, that the note issue is limited by the requirements of the public; that it is un-necessary to render it a legal tender, and that State notes cannot be circulated effectixely so long as the present banks retain the power to issue notes of their own. We are thus driven to the irresistible conclusion that in order to render any scheme dealing with the subject effective, the State must possess the exclusive right to issue paper money. It is, I trust, needless to dwell on its right to do so. The very fact that it sells that right to the banks at present settles that point.

7th.—To take away from the present banks the right to issue notes would seriously disorganise their financial arrangements, and cause much inconvenience to their clients. The banks would have to call in their page 4 notes, and issue gold in place of them. The public would not like this, as notes are far handier to carry about than gold, and thus great inconvenience would be caused to every one. Of greater importance still is the consideration that the banks would be weakened by the withdrawal of the note issue, and in all probability would be compelled to wrench from their customers a sum sufficient to replace the loss thus sustained. This is not a time when such a thing should be done. The consequences would be direful, and the whole scheme would for this reason be condemned.

8th.—Looking at the subject superficially, one is tempted to say "the place of the present notes would be supplied by the State notes, and no inconvenience would, therefore, be caused to any one." This is a mistake. The note issue of this colony is nearly £1,000,000, and it would be far more if the people were more prosperous. It could be increased still further by issuing ten-shilling notes to take the place half sovereigns, and still further by making five-shilling notes. If the State resumed the right to issue notes, this would mean that it would have £1,000,000 at its disposal for public expenditure. Sir Robert Stout is credited in Hansard with having said that for the Government to resume the exclusive right of issuing notes, would be equal to getting a loan of £1,000,000 free of interest. Now let us suppose the Government had this £1,000,000 to spend, it would not spend it all in one day. It would draw cheques against it as the necessity for making payments arose. If, therefore, its monthly pay sheet were £200,000, and it operated on no other account excepting these notes, it would take five months before all the notes were put in circulation. It is during these five months that all the mischief would be done.

9th.—Supposing, however, the Government found some means of putting these notes into circulation, they could not possibly fulfil the desired end that is, supply the present banks with notes. At present the banks balance accounts, I believe, once a week if not daily, each taking its own notes. For instance, say the Bank of New Zealand holds £100 in notes of the Bank of New South Wales, and the latter holds £105 in notes of the former bank, what happens is this. Each bank takes its own notes, and the Bank of New South Wales get £5 in gold to balance the account. This is the system all over the world and this system would have to be adopted with regard to State notes with the result that they would all very soon gravitate to the Government Bank, leaving the other banks denuded of them. But even supposing the other banks treated them as gold, an even distribution of them would not be possible. Some banks would have too many, and others too few of them, and much confusion would be the result.

10th.—I have now come to the chief feature of my scheme. It is plain that I am in favor of the Government resuming the right to issue notes, but that I see great difficulties in the way of putting the State notes into circulation effectively, and with out causing any inconvenience to either the banks or the public, claim that I have discovered the modus operandi by which these difficulties can be overcome without creating the slightest disturbance, or causing the present machinery to slacken speed for a single minute. There are in this colony six banks, whose note issue is proportionate to the extent of the business they do; page 5 there are also six Ministers controlling the six great departments of the Government. Let each of these Ministers select a bank, the one whose monetary transactions are largest selecting the bank with the largest note issue, and so on down to the lowest. Let each Minister get a stamp for his own department, and let that stamp be put on the face of the notes of the bank in which his account is to be kept. Let this imposition of the stamp convert the notes into State notes; and let them then be credited to the department in the books of the bank. By that means each separate department and each bank will know its own notes, and will have no difficulty in balancing accounts. If the Government accounts were all kept in one bank the notes would gravitate to that bank, but if the suggestion herein is adopted an even distribution of them would be assured.

11th.—This must give satisfaction to at any rate, five of the banks. It will secure to them the note issue free of the note tax; and it will give them a share of the Government business. The Bank of New Zealand will, of course, lose that share of Government business, which the other banks get, but this loss can be made up in some other form. Of course the suggestion about stamping the notes is merely a detail which can be worked in many other ways, and there are things, too, which require exact data to enable one to adjust them properly, but I hold that the machinery is here, and that it requires only a little oil to enable it to work in a manner that just give general satisfaction.

12th.—The note issue is now in the lands of the Government, and the fact that it has behind it State security renders it for all practical purposes "as good as gold" so far as the inter-transactions of the people of New Zealand are concerned. It really means that so much gold is in circulation, for the Government is responsible for the payment of the notes in gold. The notes of the Bank of England are treated as gold for the reason that they are secured by the Government of England, and there is no reason why New Zealand Government notes should not have a similar status. With such a large interest in the banks it is obviously desirable that the Government should possess some controlling influence over them, but this should not be of a nature that would deprive them of their individual liberty to transact their business in their own way. This controlling influence would be acquired by establishing in Wellington, under the control of the Public Trustee or some officer of State, a clearing-house, based on the same lines as those which govern a similar department of the Bank of England. In this clearing-house all the gold in the colony should be deposited, excepting so much of it as the banks would require for carrying on business. There, too, the accounts of the banks could be balanced, and thus a check kept on their actions. The knowledge that the banks were thus under Government supervision, that all their gold was in the safe keeping of the Government, and that they were not responsible for the notes, would place them beyond the danger of panics, and enable them to operate more courageously than they dare do now while trembling in the presence of existing uncertainties. The position of the banks would thus be improved, whilst the clearing-house control would be sufficient to ensure public safety.

13th.—From this clearing-house the Government could carry on its financial operations, and regulate the whole page 6 banking machinery throughout the colony. It is said that the Government contemplates borrowing in London and lending in this colony on the security of land in order to provide the people with cheaper money. In order to do this effectually an offshoot of the clearing-house should be established in connection with the Agent-Generalship in London. In this English deposits could be received, and transferred to New Zealand free of exchange. At present the Government pays exchange on moneys sent Home to pay interest on our loans, and if it carries out the proposed cheap-money scheme it would have to pay exchange for transferring it to the colony. By adopting the above suggestion exchange both ways would be saved. The deposits in London would be in gold, and it would be fair to share this amongst the banks having agencies there. To explain the operation in detail would be tedious, and ought not to be necessary.

14th.—Having now borrowed the money, and transferred it to the colony, I think the following regulations should govern transactions under such a scheme:—
(a)No loan to be given to any landowner holding more land than the statutory limit under which Crown lands are now disposed of. To assist large land-owners would impede the subdivision of the land.
(b)No loan to be given to any man for the purpose of buying more land who already possesses, say, 250 or 300 acres, as it would help those who have land to compete with the landless.
(c)The land-tax value to be taken as a basis, and no advance to be made to anyone of a greater sum than two-thirds of the land-tax value.
(d)Anyone requiring a larger sum than two-thirds of the land-tax value to be given the option of transferring his land to the Grown, and of becoming a tenant in perpetuity.

It may be said that, after all, this scheme does not establish a State Bank. It appears to me that it goes as far as it is safe to go at present If we established a State Bank, all the public accounts would have to be transferred from the present banks to it, and it is quite possible the consequences would be serious. Then it would be necessary to erect buildings for carrying on the Government banking business all over the colony, and that would involve great expenditure. Then there are those who would endeavor to damage the Government by alleging that corrupt practices were indulged in. All these disadvantages have been removed from this scheme. Under it the State secures the advantages of a State Bank without involving it in any of its responsibilities. No man can say this is "a printing press and a bale of paper" scheme. No man can say the Government will make a mess of it, and use it for corrupt purposes, none of the stereotyped arguments levelled by ignorance and self-interest against the proposal can apply to this; it is unassailable, practicable, safe, and sound, and calculated to confer on this colony benefits which will help it to tide over the present depression. It means the immediate use of £1,000,000 of money. It may be said that the Government will lose the note-tax. That is true, but the profits of the clearing-house will supply the loss. It has often been suggested to divide the Government business amongst the banks of the colony, and the excuse for not doing so has been that it would be inconvenient, but the clearing-house leaves no room for so lame an objection, I am of opinion that it is not advisable that one bank should have the manipulation of such a large and page 7 fluctuating account as that of the Government. Sometimes the bank possesses a superabundance of Government money, and of course, is tempted to invest it. Then comes a season when the Government wants the money, and the bank has to screw up its clients to get it. This has been the cause of some of the financial disturbances which have ruined many, and I think a more even distribution of Government money under the corrective influence of the proposed clearing-house would yield more satisfactory results to all concerned. I have looked from every point of view at the subject now; I have, I think, given sound reasons for the faith that is in me, and I sincerely trust that no one will throw this proposal aside without giving it serious consideration.

J. M. Twomey.



It is painful to have to explain self-evident details. The scheme would work as follows:—Say the Premier has stamped notes to the value of £100 and placed them to his credit in the bank, and in comes a man who has a cheque for £100 to cash to pay wages. The banker would have to give this man gold if he had no notes, but he has the £100 lodged with him by the Premier. The banker hands to this man the £100 in notes stamped by the Premier and keeps his gold in his coffers; they are paid away in wages, and they pass from hand to hand. This is the way the whole of the note issue would be absorbed by the people within a few days of being stamped. Then the notes would not be lying idle in the bank; they would be in the hands of the people, and it is the people who could demand from the Government payment in gold for them. The people would never demand payment in gold from the Government, and consequently the notes would pass as gold within New Zealand. Immediately the notes were issued the banks would owe the Government £1,000,000, but the people who would hold the notes would owe the banks exactly the same amount. Say the Government then drew cheques until it exhausted the £1,000,000, the banks would owe not one penny, but the people would still owe the banks £1,000,000. What is still more extraordinary is that the resources of the banks would not be disturbed to the amount of one penny by all these transactions, because as soon as they paid the cheques of the Government the same money would come into their coffers immediately. For instance, supposing the Minister of Lands paid £10,000 to the owner of a large estate, the latter would immediately place the cheque to his credit in the bank. The money would not leave the banks, and no disturbance would be caused. The payment of interest on our loans has nothing to do with this. The interest would be paid as heretofore, just exactly as if no change had occurred. Our exports at present provide the gold for that purpose, and they would still provide it.

J. M. Twomey.


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How to Deal with Large Estates.

For the past ten years I have advocated the following scheme for dealing with large estates:—
1st.—Pass an Act of Parliament making it compulsory on large land-owners to subdivide their estates into suitably sized areas, and lease them to suitable tenants for 31 years
2nd.—Create a tribunal to appraise the capital value of the land when the land-tax value is departed from.
3rd.—The Minister of Lands to act as agent between landlord and tenant, guaranteeing to the former the payment of his rent, and to the latter immunity from landlord aggression.
4th.—Compensation for improvements to be given to the tenant at the end of the lease.
5th.—Negotiable debentures, bearing interest at the rate of 5 per cent., to be given to mortgagees who desire to cancel their mortgages.
To relieve the Minister of Lands of any suspicion of partiality, and to provide for the immediate occupation of the land, so that no loss would be sustained in waiting until tenants took it up, the initiatory steps should be taken by the intending settlers in the following manner:—
1st.—Intending tenants to form them-selves into associations to select the land they desire to lease.
2nd.—Having selected the land and deposited with some person authorised to receive it proof that the intending tenants possess sufficient capital to work the land their next step should be to petition the Minister of Lands to act on their behalf.
3rd.—On receipt of such petition the minister would communicate with the owners of the land, and arrange valuation, survey, etc., on behalf of the tenants.
4th.—Choice of selection would be ballotted for by the tenants, and rents regulated according to the value of each holding.
5th.—The land-owner to have the right to select 1000 acres in any part of his estate as a homestead for himself, and no association shall have any right to select any portion of the area so delected.

This scheme secures all the advantages of purchasing land, and involves the State in no serious financial responsibilities, provided that rents are paid in advance. If the compulsory principle is at all resorted to, this is the least objectionable form in which it can be applied. No man can call this confiscation, and, though it may be said that it secures to the land-owner the unearned increment, I am satisfied to let the men of 1925, that is 31 years hence, settle that point. It also provides tenants for the land the moment it is surveyed, and, the initiatory steps being in the hands of the tenants, no one can accuse the Minister of Lands of having favored friends or wreaked vengeance on an opponent.

J. M. Twomey.



Rents should be regulated by the average market value of products. A scale of prices for the staple products should be drawn up, and rents should be fixed at such a standard as could be paid when such prices were obtainable. When prices fell below the scale, or rose above it, rents should rise or fall proportionately. This would be fairer than to fix rents in seasons of prosperity and insist on payment of them in bad seasons, or vice versa. It would be fair for the tenant and for the landlord alike. Both would share in prosperous and bad seasons; there would be no more petitioning for reduction of rents, and peace and contentment would result from it. This should be the basis of any Fair Rents Bill. It is quite capable of being worked, but it is very hard to explain everything in a few words.

J. M. Twomey.