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The Pamphlet Collection of Sir Robert Stout: Volume 82

State Bank of Issue. Lecture

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State Bank of Issue.


Fergusson & Mitchell, Printers and Stationers Dunedin: Princes Street.

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State Bank of Issue.

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I have been invited to deliver a lecture on the subject of a State Bank of Issue, and have much pleasure in complying with the request. The subject is important at all times, but more especially in a time of depression such as we are now labouring under. It has been a long continued state of depression, lasting now for five years with slight variations, and this leads every thoughtful man to investigate the cause in order to provide a remedy. Various theories have been propounded, and it is probable that each of the causes assigned has had something to do with the present untoward state of affairs. Over importation, speculation in land with borrowed capital, low prices for grain and wool, personal and colonial extravagance, have all had their share as factors in producing our unhealthy state. A general want of confidence has also been mentioned. We may trace the tap-root of the evil in the panic which ensued on the failure of the City of Glasgow Bank in 1878. In this panic confidence for the time was totally destroyed. A panic is the result of an unreasoning fear in the way of self-preservation. The merchant rushes to his banker with bills to provide funds for the dreaded scarcity; the banker, afraid of his own position, refuses discounts, and even withholds the continuance of the accommodation he had previously granted; business and enterprise are checked; men of wealth cannot obtain money at any cost; solvent men are involved in bankruptcy and ruin; and the result is a total prostration of trade. In the panic of 1847 banks in England boarded £4,000,000. The contraction of the usual circulation there produced disastrous effects, now a matter of history. This was exactly what took place in the colony in 1879. The banks, panic-stricken and afraid of their standing in London, immediately proceeded to fortify themselves by calling in advances. In two years, from 1879 to 1881, discounts were reduced 2½ millions, and other debts page 4 half a million, being in all a reduction of three millions, nearly one half of the whole discounts. In 1879 the discounts amounted to 6¾ millions; in 1881 to 4¼ millions. In 1879 the total discounts and advances amounted to 14 millions; in 1881 to 11 millions. This led to a derangement and contraction of the ordinary circulation. In 1879 the note circulation amounted to £1,028,525; in 1880 to £907,084, a contraction of £100,000, or one-tenth of the whole. This could not happen without serious mischief to everybody. Profits were restricted; labour was unemployed; property became depreciated; the savings of years disappeared. There was no elasticity in the money market; no demand for houses or land. Property was unrealisable even at a sacrifice. Mortgagors in numerous instances were in default. The help of the registrar was called in and valuable properties sold far below value—for what they would bring. In the restricted and defective circulation we thus see the main cause of the pressure which has existed. Believe the defect and confidence is restored, trade resumes its wonted channels, men of enterprise can rely on funds being available to carry out their plans—prosperity ensues. In England when, by the Act of 1844, the bank is in such a position owing to an outflow of gold that it cannot issue notes, the Government interferes and authorises additional issues contrary to the law. Immediately hoarding ceases, confidence is at once restored, and the panic passes away Here we have no Such safety-valve. The banks continue under the fatal influence of fear until depression becomes chronic and ordinary business is limited. In 1881 one foreign bank had half a million of deposits unemployed. We have laboured under the trouble of defective circulation for five years.

On March 31
1879 the circulation was £1,028,535
1880 the circulation was 907 084
1881 the circulation was 938,603
1882 the circulation was 967,789
1883 the circulation was 981,435
1884 the circulation was 960,197
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If our circulation had been in a healthy state it would have increased in five years in correspondence with our increase of population and production by at least £250,000. In 1865 it amour ted to £661,735; then came five years panic, termed the dark ages of N.Z., and in 1870 it only stood at £611,185. In five years after, in 1875. it had with one prosperity advanced to £895 518; and in 1879 it reached a million. In 1879 the population numbered 463,729; in 1882, 517,507. The increase of population in three years was 11 percent. The circulation should have been £1,110,000, but it was actually only £907,084, a decrease of 21 percent, below the normal level. Take exports as a test of production. In 1879 the value of exports was £5,743,126; in 1882 £6,658,608—an increase of exports in three years of 15 percent.; and there is a decrease of circulation at the rate of five per cent., which brings the total decrease below the normal level according to value of exports 20 per cent. Take another test—that of the ordinary revenue, excluding territorial. The total in 1879 was £2,816 244; in 1882, £3,408,351—an increase of 20 per cent.; but there was a decrease of circulation of 5 per cent., and it was therefore 25 per cent. below its normal level. Economists recognise two classes of money :—1. Money current with the merchant, such as foreign exchanges, with which we have no concern. 2. Tribute money, or the internal circulation of a country with which tribute or taxes are paid, wages paid, and all the domestic transactions of the country carried on. It stands to reason that the amount of domestic currency must always be regulated in some degree by the amount of revenue drawn by the Government. If our internal currency has not expanded with the increase of tribute it follows that a still greater proportion of the money in the hands of the people will be withdrawn from its ordinary use, and great inconvenience will be the result of this abnormal condition of affairs. This is precisely the state in which the people of New Zealand have been placed. They have had two drawbacks to contend against, operating conjointly to their serious page 6 disadvantage :—(1). A contraction of the usual circulation by the banks. (2). Increased demands for taxes on the part of the State, still farther lessening the amount in circulation. If you have followed me, you will agree with me in thinking that our continued depression is the result of a deficiency in the circulating medium. The body politic requires a certain amount and activity of circulation to be kept in health, just as our natural bodies require a proper quantity of the vital fluid to be maintained in vigour. We know the miserable condition we fall into in our frames if the circulation be defective, and I am fully satisfied our present commercial depression is mainly to be attributed to

Defective Circulation.

The banks in this colony having the domestic circulation entirely under their control are responsible for the situation in which we are placed. Actuated by fear, they restricted accommodation, with the usual results following a short-sighted course. They precipitated a lowering of values, and in consequence they have been obliged to make large advances in the way of dead loans to avert loss to themselves in the depreciation of their securities. I know one instance where a bank has had to take over a run at £82,000 to save itself, and I believe the greater part of recent advances by the banks have been so applied. This is not legitimate banking, and is of no service to the commerce of the country. I have already said the amount of discounts in 1879 was £6,725,726. A reduction of discounts took place in two years of 2½ millions. For the year ending March 31st, 1884, the amount was only £4,444,299, being 2½ millions below what was found necessary in 1879. The disease under which we labour being defective circulation, the remedy is obvious: there must be an increase in the circulation. This is the proved remedy in the case of commercial panics in England. An able writer on banking and finance says :—"It must be kept in mind that notes possess value as being the to presentatives of material wealth: and at page 7 such time as we have described (that of a panio) note issues should be based, not upon gold, but upon material wealth itself. How can this be effected? We think in the following manner: That, on the Bank of England rate for money rising to 7 per cent., every joint stock bank should be permitted, on depositing with the Government a preferential bond on a fixed amount of its uncalled-up capital, to issue notes to that amount; that these notes shall be so issued until the bank rate falls to 4 per cent, when these special issues shall cease, and the amount be repaid by the various banks to the Government within three mouths afterwards. That these notes shall be issued only at the Bank of England, and bear the name of the bank on whose behalf they are given out; that they shall be issued for so small a sum as £1; that the bank issuing shall be liable for converting them into gold; that the Government shall charge a small commission on the total amount of such notes issued by each bank; and that private bankers depositing deeds of real property shall also possess this privilege. Panic or pressure could not then continue, for this general issue would at once relieve the circulation : such a note issue would have a real as well as a preferential value, being guaranteed by the banks' shareholders, and their property the base on which it would securely rest." All experience proves that if the circulation can be relieved by an additional issue the evils of a panio are quickly alleviated. We now arrive at the important question : How is this relief to be attained here? From the history of the "wretched past" we know that we cannot trust our existing banking institutions. With one or two exceptions, they are not native-born, or indigenous to the soil. They are branches of foreign companies, settled here to make the best of the colony as a happy hunting ground, without any sympathy for us, or our trade, or our enterprise, or our local institutions. There are not even local directors to whom application can be made in an emergency. The local managers may be kindly genial men, but they are under the page 8 control of an invisible inspector, who again is guided by policy prescribed by gentlemen thousands of miles away, who often are incapable, from ignorance, of judging the best course for either themselves or the public. It appears to me to be an not of monstrous folly to commit the control of our national life-blood to such parties, who if their bank is safe do not care whether we are depleted to death or not. The issue of and control over our paper currency has been quietly seized by them, and made the best of, not for our advantage, but their own. This is contrary to all sound policy.

The Bight of Issuing Money Belongs to the State.

In constitutional law the right of coining has always been held to be one of the peculiar prerogatives of the Crown and it is a maxim of the civil law that monetandi just principus ossibus inhœret (the right of issuing money is an essential of the Government). The late Professor Jevons in his admirable work on "Money" (p. 308), says:—"As to the right to issue promises, it no more exists than the right to establish private mints. For our present purposes that alone is right which the legislature declares to be expedient to the community at large. As almost every one has long agreed to place the coinage of money in the hands of the executive Government, so I believe the issue of paper representative money should continue to be practically in the hands of the Government, or its agents acting under the strictest legislative control. M. Wolowski in his admirable work on banking has maintained that the issue of notes is a function distinct from the ordinary operations of a banker; and Mr Gladstone has allowed that the distinction is a whole some and vital one." He also says (p. 341):—"We must deal with the paper currency in an analogous manner, and regulate it both more and less than hitherto. Private issues should disappear like private mints, and each kingdom should have one uniform paper circulation, issued from a single central State depart- page 9 ment, more resembling a mint than a bank." In the debate in the imperial Parliament occasioned by the great crisis in May, 1866.

Mr Gladstone

said briefly but emphatically:—"The profits of issues (banking issues or notes) belongs to the State, and what is much more important than the profit, the responsibility of issues also belongs to the State." Mr R. H. Patterson, an eminent economist, in his valuable treatise on "The Science of Finance," admits the principle "that the State itself ought to be the fountain of paper currency—assuming the cost and responsibility of the issue of notes, and thereby entitling itself to the profit which may accrue from such issues," to be intelligible and quite justifiable. The clear-headed Henry George, in discussing the functions of Government in his "Social Problems," says:—"It is the business of Government to issue money. This is perceived as soon as the great labour-saving invention of money supplants barter. To leave it to every one who whose to do so to issue money would be to entail general inconvenience and loss; to offer many temptations to roguery, and to put the poorer classes of society at a great disadvantage. These obvious considerations have everywhere, as society became well-organised, led to the recognition of the coinage of money as an exclusive function of Government. When, in the progress of society, a further labour-saving improvement becomes possible by the substitution of paper for the precious metals for the material of money, the lessons why the issuance of such money should be made a Government function becomes still stronger." He adds—"The legitimate business of banking—the safe keeping and loaning of money, and the making and exchange of credits—is properly left to individuals and associations; but by leaving to them, even in part, and under restrictions and guarantees, the issuance of money, the people of the United States suffer an annual loss of millions of dollars, and sensibly increase the influences which exert a corrupting page 10 effect upon their Government." The late Mr Walter Bagehot, in his interesting volume, "Lombard Street," indicates an opinion that a Government should as a rule keep its own money, and that it should not give peculiar favour to any one bank, and by entrusting it with the Government account secure to it a mischievous supremacy above all other banks. An able writer on our monetary system, "The Author of the People's Blue Book;" in an excellent treatise on "The Bank of England and the Organisation of Credit in England" (2nd edition, 1866) states that it is "a gross error that issuing notes has some relation to banking, whereas there is none whatever; the issue of notes, representing the coined money of the realm, being a sovereign or State prerogative, to be exercised only for the benefit of the community." He characterises the notes of a private bank, not being a legal tender, as being "of the nature of a spurious coinage practically forced upon the ignorant and unwary." If the State, then, resumes its sovereign right over the issue of currency, it is doing no wrong to the banks, who have usurped a privilege to which they have no just claim, and the exercise of which is found to be prejudicial to the public, especially in the time of panics, when the ordinary and necessary internal circulation is hurtfully contracted and restricted by them, causing insolvency and loss even to men of wealth and substance. Besides, as has been already observed, and is also stated by Jevons, "It is no necessary function of a banker to issue promissory notes, and a great many banks exist in England without any power of issue." The London joint stock banks, doing a far larger business than any similar institutions in the world, issue no notes of their own. Every year, by the application of

The Clearing-House System,

a greater amount of business is transacted without the intervention of a single coin or note. In London business is completed daily to the amount of 20 millions sterling through page 11 the clearing house, which could not otherwise be done. If settled in coin the gold would weigh 157 tons, and require 80 horses for its conveyance. Indeed the prohibition of issue by private banks would actually be beneficial to them, as they would be saved the necessity of keeping a reserve of gold to protect their issue. A part from these considerations there is another and more important reason for the State assuming the responsibility of the issue. The legal maxim salus populi suprema lex, (the safety or security of the public overrides all law) renders a change imperatively necessary. When we consider the risk incurred by the public generally, especially the wages-receiving portion of the public, in a currency issued by private parties, and not absolutely protected or guaranteed against loss, we may express our surprise that such an anomalous condition of things should exist for a single hour. A few months ago in Sydney £58,000 in notes became in a moment valueless through the stoppage of the Oriental Bank. Similar inconvenience was felt in Melbourne, and many of us in Dunedin can recollect how thankful we were to receive 15s in the £ for notes of the Commercial Bank in 1867. If any of us deal with a bank and deposit money in it, we can select our bank, and if it should fail we can blame no one, and only can lament our want of judgment. We are voluntary creditors of the bank. But if the notes of the bank circulate from hand to hand the holders become involuntary creditors of the defaulting bank. This is a position in which the State ought not to permit any citizen to be involved, and it is the result of the improper influence upon our Legislature exercised by moneyed men and moneyed institutions. I affirm unhesitatingly that there ought not to be the most remote possibility of loss to the public in the matter of its currency. I daresay many think we are properly protected now. This is not the fact. In the event of the stoppage of a bank the holders of notes have

No Preferential Claim.

Indeed they are certain to lose. I notice that page 12 Mr Dargaville has introduced a Bill this session to provide that bank notes shall be a first charge upon the banks assets within the colony. The danger of the present system is thus admitted, but there is only one efficient remedy, which will be afterwards mentioned, When a run takes place on a bank it is the depositors and holders of cash balances who make the earliest and heaviest demands. At this moment a single bank in the colony has more money at call than the total amount of gold held by all the banks. The only limitation placed on the issue of paper by the banks is that the amount "shall not at any one time exceed the amount of the coin, bullion, and public securities which shall for the time being be held (by the banks) within the colony, nor shall the proportion of coin be less than one-third part of the amount of the coin, bullion, and public securities so held." But the said securities are not ear-marked to protect the issue, and note-holders have no preferential claim thereupon. In competition with other creditors in the event of a run, they are certain to come off second best. Banks, in the conduct of their business, in order to be safe, require to keep a certain reserve in gold in proportion to their liabilities. This proportion varies according to the prudence of the management, some having a reserve of 30 per cent., others 20 per cent., and sometimes less. The amount of liabilities against the banks in the colony if 10¾ millions; the amount of gold and Government securities held 2¼ millions. The average reserve is therefore 20 per cent. Government securities would not, however, be realisable in the colony; and specie being taken as the only tangible security, the proportion is only 16½ per cent. The total amount of coin in the colony is £1,775 000, and the amount of the circulation and deposits is 10¾ millions. Deposits not bearing interest, and held at call amount to nearly 3½ millions. In these circumstances the public are placed in a position of unnecessary risk as regards the present paper-currency which cannot on any pretext be justified. The banks have it in their power page 13 also, on the occasion of a run, to decline payment of their notes in gold except at particular places. By their private Acts the notes are only "payable in specie to bearer on demand at the place of date, and also at the principal banking establishments of the corporation." A bank in Dunedin could therefore refuse payment of a note dated at Auckland, and as a matter of fact the notes in circulation are dated at various principal towns, so that on a crisis the note-holder's chance of obtaining immediate payment in gold, as compared with depositors at call, is rendered still more remote. It is clear, therefore, that whether the present system be considered in the view of the inexpediency of the public currency being under the control of private and irresponsible parties, or in the view of the absolute safety of the public as involuntary creditors, there is an urgent necessity for a thorough change. This is a matter which does not admit of a doubt. We are not discussing any of the vexed questions connected with the currency—such as whether there should be a paper currency at all, or whether it should be convertible or inconvertible—but we have been considering a matter which is fairly within the common-sense judgment of business men. We are not occupying ourselves with vague theories about which financiers are continually puzzling themselves. We have, as a matter of fact,

A Paper Currency

in our hands. We find it is essential to the conduct of our business, but unfortunately we find also that owing to its being under the control of private parties, chiefly foreign shareholders of banks, it is not free from risk, and that it is apt to fail us at the very time when we need it most. It is a staggering fact that the public of New Zealand, by accepting the promises to pay of these strangers as currency, are actually lending the bank shareholders one million sterling without interest, while at the same time we have to go to the London market and borrow for our own necessities at 4 per cent, besides paying heavy charges and commissions. Our in- page 14 ternal circulation should now require a million and a half, which should he equivalent to a loan to the State of that amount, instead of an advance to the bank. The fact that stamp duties are payable by the banks on their circulation does not affect the question. If we sell our bills or our gold to the banks we are paid in this paper, and absentee shareholders are enriched with profits which ought to remain in our own pockets. The whole matter is so anomalous and so contrary to the dictates of common sense that I will be greatly surprised if the public, when fully informed on the point, allow themselves to be deluded any longer. It may be argued that banks are a mercantile necessity, but I do not propose to interfere with legitimate banking. I am satisfied there is much room for reform in banking practice, but that will all come in good time. Instead of our commerce being under the thumb of foreign banks, who will make advances from our deposits to foreign mercantile houses by the hundred thousands of pounds and refuse the discounts of a local trader or settler, we may look forward to the development of co-operation, the abolition of middle-men, and the establishment of local banks using our local deposits for the benefit of local commerce and enterprise, and thus rapidly adding to the capital belonging to ourselves, instead of sending it away to swell the profits of those who are strangers to us. This will happen all the sooner if we lay the foundation for a complete change of system. The radical change which I advocate is the resumption of our sovereign right of issuing paper money. This can only be satisfactorily effected by the establishment of

A State Bane of Issue.

The proposal is not a new one. One year before Otago was founded the Legislative Council of the colony passed an Ordinance (16th October, 1847) of which the following is the title—" An Ordinance to Authorise the Establishment of a Colonial Bank of Issue by the Government of New Zealand, to Make and Issue a Paper Currency, and to Prohibit the Making and Issuing of Paper Money by Pri- page 15 vate Individuals." By this time a foreign bank or two had gained a footing in the colony, and their influence had prevented the law referred to being carried into execution. It, however, remained the law for thirty years, and was only repealed in 1878 by a general repeal Act which purged the statute book of several hundred Acts which had fallen into disuetude. It has been a reproach to our leading men—I can scarcely call them statesmen—that they themselves have been too much under the powerful sway of our monetary institutions to work out any amendments beneficial to the public. The bitterest debate I ever listened to in Parliament was that in which a Minister, in language more vigorous than polite, was asserted to be more subservient to the interest of a leading bank than to the interest of the community. It is not surprising that the Paper Currency Act was allowed to remain a dead letter. As a rule the mass of the people has been so well off as to be regardless of reforms of any kind, but now, when the pinching of adversity is felt, its teachings will receive more attention, and we may expect our common rights will be more closely scrutinised and looked after.

The Advantages of a State Bank

are manifold, and would be felt in every direction. One chief result would be that our domestic circulation would expand with our necessities. We would no longer be subject to have it contracted by the fears or caprices of foreigners. It is absurd to think that the active industry of our small community should be liable to be checked because there is a drought in Australia or an exodus of sovereigns from the Bank of England. We reside in a group of islands peculiarly self-contained, affording free scope under proper legislation for the exertions of ten times the population we at present number. We have no territorial neighbours to trouble us in the way of our circulation. We might therefore hope to prosecute our varied industries and productions unaffected by the ups and downs which page 16 trouble more complicated communities. We can always find a ready market for our production in raw material—in gold, wool, minerals, mutton, and other marketable commodities. Our local industries would supply our own wants, and the exchanges speedily turn in our favour. Capital would accumulate more rapidly locally, and afford the supplies necessary for the development of our coal and iron fields, and our other manifold mineral resources. Our merchants would effectually grasp the commerce of the Pacific. The great drawback under which we labour in consequence of our present arrangements, namely, high rates of interest and fluctuations in these rates, would disappear. A moderate and steady rate, not above 5 per cent., would be the rule. We need not follow Canada, where the banks are prohibited charging more than 6 per cent. By the operation of sound natural laws our rates of interest would be equalised and remain moderate. The advantages of a low rate of interest were thus summed up by the famous financier M. Isaac Peirre in giving evidence before a Parliamentary Committee in Paris in 1867:—"The lowering of the rate of interest is a thing desirable in all points of view. It gives rise to enterprises which could not exist if the interest were too high; it contributes consequently to the development of industry, to the increase of public wealth; it augments the share of labour, while at the same time it permits all the products to be delivered cheaper, whereas the charges for interest enter for a considerable part in the profits and in the price returned; it facilitates the amelioration of capital of all values, lauded property as well as public funds." You must have noticed that I have been careful not to make rash assertions proceeding from my own inner consciousness. All the chief propositions I maintain have been supported by eminent authorities quoted. Interested parties might pooh-pooh my suggestions as being unpractical and inexpedient. It is an ordinary mode of argument in Parliament when anything new is started for an opposing Minister to say that page 17 it is sot within the region of practical politics, but I hold generally that whatever is for

The Good of the People,

however much it may be contrary to an existing condition of things, is of practical importance, and ought to be carried into effect at once. I will now supplement the authorities adduced by referring to the opinions of two members of Parliament, given on the currency in the committee of the Imperial Parliament which sat in 1858, the accuracy of which opinions has been fully verified by subsequent events. Mr Spooner said:—"The only remedy for the evils in question (extreme and rapid fluctuations producing alternations of prosperity and adversity) will be found in having a domestic circulation not liable to be influenced by the state of foreign exchanges—the creation of a national paper money, suitable for the disbursements and receipts of the Government; the issue to be limited to the amount required for these puroses." Mr Cayley said:—" Our system, both of money and trade, is one of credit, and based on confidence. What therefore is wanted for the benefit of commerce is that confidence should remain unshaken. Confidence has never yet been shaken, except under a heavy drain of gold and then only because gold is the sole legal tender in the last resort; and what therefore is wanted for the support of confidence is a legal tender that never threatens to be unallowable; in other words, a legal tender always attainable in an amount equal to the due fulfilment of all the financial engagements of Our national exchequer. If then Government would only provide a sufficiency of legal tender money for duly facilitating their own receipts and disbursements, the parties engaged in agriculture, manufactures, and commerce would have no difficulty in finding an ample medium for the equitable fulfilment of all the other monetary engagements of this nature." A well-known writer, Mr James Platt ("Money," 1881) states his opinion in reference to the legislation of Sir page 18 Robert Peel thus:—" There can be no doubt his ultimate intention was to provide for the supply of notes for the whole kingdom from a single central Government office as soon as possible." I submit that a case for the establishment of a National Bank of Issue has now been substantiated. I propose, therefore, that the Government shall establish a State Bank of Issue to supply a paper currency sufficient for our wants in

Our Domestic Circulation,

leaving to the banks their legitimate business of regulating the foreign exchanges. I had prepared a Bill for that purpose, to be introduced last session of Parliament, but, as you know, Parliament was prematurely dissolved, and I did not effect my purpose. I did not expect that this measure would have been at once carried, but I hoped the subject would be fully ventilated, public attention drawn to it, and that the Government would have been compelled by the force of public opinion to take it into serious consideration. I will not now trouble you with the details of that proposed measure, because if these are imperfect or unworkable they are capable of being readily amended. It will be sufficient if I state the leading principles of the Bill under which all the details would have been duly regulated. First, the Governor in Council would be authorised to establish a bank for the purpose of conducting the financial business of the colony, and of supplying a paper currency, with power to appoint all necessary officers, and make all rules and regulations required for the proper management and working there of—the bank to be a corporate body under the name of "The N.Z. State Bank of Issue;" the Agent-General to be the agent for the bank in London, and the Bank of England banker there. 2. Circulating notes of not less value than one pound sterling to be issued in exchange for specie, bullion, approved drafts on London, Government debentures or stock or other usual securities affording undoubted margin, and in payment of salaries, wages, and other page 19 debts due and payable by the Government in the colony in terme of any Appropriation Act. 3. The notes to be

A Legal Tender

4. The issue of private circulating notes by any bank or company to be prohibited. 5. The State bank-notes to be redeemable in specie or by draft on the Bank of England. 6. The money received for notes to be applied (a) in maintaining a reserve on hand to suit the convenience of the public; (b) in exchange for debentures issued under the authority of Parliament; (c) in maintaining a credit with the Bank of England; (d) in such good and sufficient securities at three months' notice, as may be allowed in terms of law; (e) in advances to landowners for improvements, repayable by way of annuity in such amount as may from time to time be fixed by Parliament; (f) in the purchase of exchequer or deficiency bills issued under the authority of Parliament. 6. The State Bank to be the Clearing House for all other monetary institutions in the colony. 7. The present misleading and defective quarterly returns to be amended so as to afford more clear and re liable information. 8. Foreign banks to have a defined portion of their capital in use in the colony, and to issue half-yearly balance-sheets applicable only to their business within the colony. 9. The capital of foreign bunks, and their assets in the colony, to be subject to a preferential claim on the part of creditors within the colony. 10. Every bank or monetary institution receiving deposits from the public to be subject to periodical inspection on the part of a public officer. 11. Penal clauses. Several of these points may not be approved of finally, but their postponement or rejection would not interfere-with the operation of the vital principle that the control of the currency should be vested in the State under proper safeguards and suitable conditions. Almost all these provisions are in force in countries where the Government possess the controlling power of page 20 the currency, and before a law could be passed on the subject in New Zealand we might have the benefit of the experience already obtained elsewhere—I would especially allude to India and Canada. The Secretary of the Chamber of Commerce has at my desire already written to the Chambers at Toronto and Calcutta on the subject. There is no fear therefore that the required legislation would be of a crude, impractical, or untried character. To show the advantages of a State circulation, I cannot do better than refer to the system in force in India. On July 16th, 1861, an Act was passed by the Government of India providing for the issue of a paper currency through a Government department of public issue, by means of promissory notes, varying in amount from £1000 to 10s. The notes are a legal tender, and rendered payable at the place of issue and the capital of the Presidency. Further legielation was consolidated by Act III. of 1871, and from a very small begioning, the circulation has now reached the enormous sum of 14 millions sterling, with great advantage to the commerce and production of the Empire. What may be accomplished by a State paper currency may be illustrated by the instance of the Guernsey market. Daniel le Broc, the governor of the island, determined to build a market in St. Peter's, but not having the necessary funds, issued under the seal of the island four thousand market notes for one pound each, with which be paid the artificers. When the market was finished and the rents came in, the notes were thereby cancelled, and not an ounce of gold was employed in the matter. The Governor thus obtained a loan for the construction of the market without interest, and as the expenditure was immediately reproductive the whole transaction was one of pure gain. Whatever amount of paper currency this colony requires, the excess above the reserve of gold is a loan without interest, and it is surely more just that the community should enjoy this advantage than that it should go to swell the dividends of absentee shareholders.

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One word before we conclude as to the expediency of a general clearing house. The tanks in the colony being for the most part branch establishments are jealous of each other, and slow to adopt any plan for their common benefit. Accordingly we see this anomalous state of things every year, namely, one bank sending coin out of the country and another importing an equivalent. It is a remarkable fact that, with rare exceptions, the exports and imports balance one another. In 1881 the imports were £153,000, the exports .£166,000—a difference of £13,000. In 18.2 the imports were £265,320, the experts £262,000—a difference of only £3,320. In 1883 the imports were £195,000; the exports £83,760, so that the balance was in favour of the colony to the amount of £111,240. But if there were once an adequate reserve of coin in the colony it is difficult to see what is gained by the absurd system of sending away with the one hand and drawing back with the other. Indeed it would be a decided gain to the banks themselves were they compelled to settle their exchanges by drafts on a central clearing house. In Scotland, where the amount of business conducted is ten times that of this colony, never a covereign passes, the balances being settled by drafts on London. I have already referred to the benefits which would accrue from the establishment of a State bank of issue in the relief from unwise and unwarrantable restrictions, in freedom from distrust which would ensue, in the maintenance of public confidence, in abundant scope being afforded for legitimate enterprise, in the lowering of the ordinary rates of interest; but I believe other advantages would follow. There might be assistance rendered to industrious settlers at present crushed down by heavy interest and commissions by special institutions established for their benefit, and our tradesmen might also be benefited by encouragement given to People's Banks in every centre of industry. Under proper organisation the State bank might be a vast machine confer- page 22 ring incalculable blessings on trade and production by securing the use of cheap money through the interposition of its support. In Germany, where 30 years ago a working man could not obtain an advance except at usurious interest, he can now get what he needs at 5 per cent, through the People's Banks, which now number nearly 2000, with a capital of six millions, and deposits of nineteen millions-Oar State loans might be more economically managed. The immense tide of surplus wealth in England would break freely on our shores; our own accumulation of capital would proceed rapidly; our progress—dependent on our abundant resources of all kinds—would advance with accelerated pace, and public works of productive power would be prosecuted vigorously, unhampered by the capricious and perilous timidity which is the characteristic of bank institutions not indigenous to the soil. But without looking too far forward, there is no doubt that a State bank of issue would afford us instant benefits by rendering our trade and commerce wholly independent of fluctuations outside our own borders, and every man would have the prospect of receiving the full reward of his hard work and intelligent industry.

In conclusion, I beg to say that in the suggestions I offer for reform in our monetary arrangements I disclaim all hostility to the banks established in the colony. The pole object I have in view is the good of the public and the prosperity of the colony. Any measure which leads to such ends must place banking business on a more safe and satisfactory footing, and be more profitable for the shareholders and more useful to all concerned. I therefore claim the assistance of the banks in carrying these suggestions into practical effect. They must march with the times if wisely guided. I have no desire to interfere with their legitimate business. If a bank of issue were established, banks and finance companies who might be members of the clearing-house, would form the intermediaries between the State bank and the public. No bank need then fear a run for gold. There page 23 would be no drawback to the proper expansion of business. The knowledge that notes could always be obtained in return for any available form of wealth offered in security would make us independent of outside panic, and an industrious and energetic people, numbering half-a-million, having abundant resources and a fine climate, and possessing property after deducting all incumbrances of the value of one hundred millions sterling would never again be placed in the anomalous position of having to encounter the troubles which always follow a feeble or restricted circulation.

On the motion of Mr C. S. Reeves, a vote of thanks was accorded to the lecturer.

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