The 1956 report of the 1955 New Zealand Royal Commission Into Monetary, Banking, And Credit Systems.

The 1956 report of the 1955 New Zealand Royal Commission Into Monetary, Banking, And Credit Systems.

The 1956 report of the 1955 New Zealand Royal Commission Into Monetary, Banking, And Credit Systems gives a great insight into the history of international banking and its impact upon the peoples and economy of New Zealand. It clearly discloses that the gold standard has been nothing but a thing of ceremonial token gesture since the 1600s, and has been replaced by a “credit creation mechanism” at the core of banking. This mechanism is currently in the hands of the private interests who have used and abused it as a means with which to put societies into servitude via predatory lending practices. This report discloses their argument as to why they can remain entrusted with the credit creation mechanism, even after the many repeated cycles of boom, bust, bankruptcy that have occurred on the private watch, as opposed to it being returned to elected public representatives. It discloses that none of the benefits they claimed would eventuate, have eventuated, everything bad they warned of happening under a public credit systems has occurred under the private system, and most of the protections they claimed we had to prevent tyranny of the system have since been dismantled by the infiltration of the legislation process by vested private money interests;

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Royal Commission to Inquire Into and Report Upon Matters Concerning the Monetary, Banking, and Credit System of New Zealand
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38. It is about twenty-one years since the last general inquiry into monetary and banking systems in New Zealand. The report of the Parliamentary Committee reveiews events prior to 1934 and the operation of the banking system before that time. In 1934 the Reserve Bank of New Zealand, established by the Reserve Bank of New Zealand Act 1933, began business and the New Zealand banking system took its present general form. It seems appropriate, therefore, to confine this review to the period since 1934.
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Introduction
150. In appendix C we examine in detail the definition of “money” and how it is created and controlled, the causes of changes that have taken place in the money supply in recent years, and the structure and operation of the monetary, banking and credit systems in New Zealand, with particular reference to the period since 1934. In this section of our report we provide only a necessary outline.
Money and Credit
151. Money is anything which is immediately available and generally acceptable in payment for goods and services or in settlement of debt. In New Zealand, there are three things which appear to us to satisfy these criteria of immediate availability and general acceptability:
(a) The coin and notes in circulation:
(b) The deposits on current account standing to the credit of the customers of the trading banks, or to the credit of the government and variuos marketing authorities at the Reserve Bank:
( c ) The unexercised portion of overdraft authorities granted to customers by the trading banks.
152. The two latter types of money are entries in the books of the banks, recording the obligation of the banker to his customers, but the banker, when he is directed to do so by cheque, will immediately transfer to other people a sum up to the amount which stands to each customers credit or upto the amount by which he has authorised each customer to overdraw his account. Nowadays a very large proportion of payments is made by cheques drawn against demand deposits or against overdraft limits.
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The Government and the Creation and Destruction of Money
177. It can be seen from above that the Government, working through the Reserve Bank, has far reaching powers to curb unwanted bank lending. Through its ownership of The Bank of New Zealand, which in 1954 handled about 40 per cent of the advances and deposit business of the trading banks in New Zealand, it can also, if it so desires, reinforce its general policy as regards bank lending, and influence bank charges by specific instructions to the Bank of New Zealand. Bank overdraft rates have been fixed by the agreement between the Government and the Associated Banks since 1941.
178. If the Government thinks anytime that the supply of money is inadequate, and the trading banks cannot or will not increase their lending, it may itself borrow from the Reserve Bank, and no doubt, in practice, set its own terms as to interest charges and repayment. Indeed, if it wished, it could ensure, with its existing powers, that the trading banks did not initiate any expansion of the money supply required in the future, and that all new money was advanced by the Reserve Bank to the Government. As we point out elsewhere in this report, we consider that this would be most undesirable. However, the above remarks indicate the extent of the Governments power to control the supply of money and the terms on which it is issued.
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Creation of Money and the Public Interest
434. Apart from the historical and legal aspects outlined above, the next question to be considered is whether it is in the public interest that the power to create and destroy money or credit should be withdrawn from the trading banks and reserved to the state or to institutions owned by the state.
435. The burden of the contentions of those who sought to deprive the trading banks of the power to create or destroy money was that the trading banks for their own profit sometimes expanded the money supply to an undesirable extent and so cause inflation, and in other circumstances, such as in times of economic depression, cause an undesirable reduction in the money supply by reducing advances.
438. There is, of course the possibility of bringing about necessary expansion of the money supply entirely by financing government expenditure from Reserve Bank credit, and by at the same time preventing trading banks from expanding their lending through a rigid application of the reserve ratio. We consider that the needs of industry and commerce for additional credit can be more conveniently and efficiently met by expansions of trading bank credit than by expansions of Reserve Bank credit. The trading banks in close touch with the multitude of industrial, commercial, farming, and other businesses and they are in a position to give attention to the needs of individual businesses.
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445. The essence of the nature of the matter is that insufficient or excessive credit creation can have important repercussions on the whole economy and, for that reason, control should be exercised by the government through the Reserve Bank and, if necessary through the Bank Of New Zealand. Such control can be issued under existing legislation. Furthermore, the government has itself adequate powers to create money through the Reserve Bank or through the ownership of the Bank Of New Zealand.
446. To concentrate the whole of the trading-bank activities or the whole business of credit creation in a government monopoly of banking would, in the opinion of the Commission, lead to an undue and unnecessary aggregation of power in the hands of the Government. It would remove the highly desirable element of competition and it could not be expected to provide as good a banking service as the commercial community now enjoys.
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(b) The Principles of Commercial Banking
20. The fact that a large proportion of our money supply comes into existance as a result of the operations of the trading banks obviously disturbed many witnesses who appeared before us. A number seemed to think that this “ creation of credit “ by banks was a relatively recent phenomenon. In fact, the fundamental principles of our banking system have remained much the same since atleast the seventeenth century. The pricipal functions of a trading or commercial bank today are similar to those which certain Goldsmiths began to undertake in England at about the time, in that;
(1) They receive and take custody of money on behalf of customers, who thus avoid the risk of loss or theft involved in keeping notes and coin on their premises or person.
(2) They exchange overseas money for domestic money and, vice versa, for customers who engage in business or travel overseas.
(3) They provide their customers with a convinient means of payment, by undertaking to transfer sums standing to the customers credit at the bank to other people, when directed to do so by cheque. ( In times past the trading bank could also issue notes to their customers in exchange for coin deposited with them, but the provision of notes is now, nearly everywhere, the monopoly of a central bank.)
(4) Within limits and subject to various controls, they make loans to people or firms deemed credit worthy, and lend to the Government or local bodies by buying their securities.
21. The main reason why a bank is able to make the latter loans is that, although its depositors can at anytime withdraw their deposits in legal tender money or require the bank to transfer their money to customers of other banks, the banker, in practice, is called upon to pay out very little legal tender money in normal circumstances. This is so for several reasons;
(1) A few customers will never use the sums which they have deposited and some will let them lie idle for considerable periods. Evidence given by the Chairman of the Associated Banks and the Governor of the Reserve Bank indicated that, early in 1955, there were deposits of between 60 million and 85 million pounds which had remained inactive in the accounts of customers of New Zealand trading banks for a considerable period of time.
(2) Especially in a community where there are only a few banks, many of the cheques drawn by customers will be paid to other customers of the same bank. In these cases the bank will not have to transfer legal tender money to other banks, but merely debit one custmomer’s account and credit another’s.
(3) Even though customers are constantly withdrawing notes and coin or making payments to customers of other banks, they are also constantly making further deposits of notes, coin, or cheques drawn on other banks, which more or less offset the withdrawals.
22. Thus, a banker can normally be certain that, on balance, he will only have to convert a very small proportion of his customer’s deposits into notes and coin at any one time. He has no need, then, to keep a reserve of coins and notes equal to the total of deposits standing to the credit of his customer’s; he can obviously lend some money out at interest for short periods without any danger of his being unable to meet his customer’s demands for notes and coin required.
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41. But the creation of the Reserve Bank and its subsequent complete nationalisation in 1936 left no doubt not only that the Government could issue additional money through the Reserve Bank, but also the amount of money put into circulation could be controlled by the State authorities in the public interest.
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Conclusion
180. To sum up; our credit and debt system performs the following useful functions:
( a ) It provides without excessive inflation of the money supply, a means of calling forth the funds required for modern production and of apportioning the available supply of loan money without undue intervention by the State.
( b ) It enables those who wish to save money for various reasons to earn an income from their savings without investing them in property or business.
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( c ) The specialist financial intermediaries in the credit market aggregate small savings into amounts large enough to be of use in production; they develop experience in accessing the credit worthiness of applicants for loans; and they reduce the cost of marketing credit below that which would rule if people had to find outlets for their own funds.
( d ) The system allows private firms and individuals to obtain control of the expensive fixed and working capital necessary for efficient production; it allows families to obtain houses, home utilities, and ancillary services ( through their local Governments ) earlier in life than if they had to provide them completely from their own resources.
181. A society without debt and interest would be inconsistent with the institutions of private ownership and enterprise, for the funds for capital expenditure would inevitably have to be collected and allocated by the State.