I move the Second Reading of the Currency Bill, 1927. This Bill follows very closely the first interim report of the Banking Commission. In certain respects, the recommendations of the Commission are elaborated. The "i's" are dotted and the "t's" are crossed, but the main recommendations of the Commission, are adhered to. In only one respect of any importance does the Bill depart from the recommendations of the Commission and that is in regard to the limit on the legal-tender note-issue. The Commission recommended a limit of £6,000,000 on the legal-tender note-issue. We do not provide in the Bill for any limit. We received recommendations from a great many quarters that such a limit should not be imposed. With those recommendations we found ourselves in agreement. As the legal-tender notes will be backed, as recommended by the Commission, pound for pound with British securities, it is not regarded as necessary that any limitation should be fixed in the Bill.
Deputies will recall that the Banking Commission was appointed over a year ago. The appointment of that Commission followed a consideration of the position in regard to note issue and legal tender by the Government and it followed certain complaints in regard to the inadequacy of existing facilities for agricultural credit and for certain types of business credit. On consideration of this matter, the Government found that there were certain facts which necessitated action. There was the fact, for instance, that there was, and is, no legal tender in the Saorstát. British currency notes which were issued before the Treaty may be legal tender, but such notes are, perhaps, rare. They are certainly getting rarer in actual circulation and they cannot be identified. Even the least pretentious State might expect to have a legal tender. There was also the fact that British Treasury notes were circulating in this country and that the excess issue of bank notes here was backed by British legal tender. That meant that a certain substantial profit out of our currency was going to the British Government, while this State had as much need for that revenue as any country. Then, there was the position that the fiduciary issue of the banks here referred to the whole of Ireland. The Bank of Ireland had a fiduciary issue of £3,738,000 odd and other banks had amounts which Deputies may have seen. In each case, the fiduciary issue referred to the whole country.
The setting up of the Saorstát, and the establishment of a separate financial, fiscal and economic unit here meant that it was necessary to adjust the position to the new circumstances. We could not have hanks with no defined note issue—that is, defined with reference to the Free State. There was also the consideration that the banning system that existed here, which was simply a limb of the British banking system, had not been in any way adjusted to the requirements of this country for a very long period, and particularly that it had not been adjusted to the new circumstances arising from the setting up of the Saorstát. Other factors which called for action were those I have already referred to—the opinion which was, I think, universally held that the facilities for agricultural credit that existed were not adequate facilities, having regard to the position in the country and the needs of the country, and that the facilities for business credit did not cover the whole field.
While the Government felt that, because of all these circumstances, action was necessary, they felt that action in this matter involved danger. There is, in this country, a fairly general ignorance of everything relating to banking and currency and credit. Then there are, perhaps, more people in this country than in most countries who would be quite willing to create a panic where there was no need for panic. In all countries, at the present time, there is knowledge of the ill-effects that may follow an unsound currency policy. Happenings in certain European countries after the war hove brought home to people the fact that an unsound currency policy must produce very serious results. People here are aware of that, but there is no great knowledge of the principles that should be observed, or of the actual causes that produce damaging results in currency and credit. There is also the fact that we have Republican "die-hards" who might misrepresent any Government action in regard to these matters. There is also another group of "die-hards," of perhaps smaller numbers, who would be as vocal in certain circumstances, and who, because we were departing from the arrangements that had existed in the British time, might also misrepresent what was being done, and, by their propaganda, cause a panic.
Any panic in relation to these matters could cause the country a great deal of damage. You might, if certain ideas got abroad in regard to Government proposals about currency and banking, have a run on some of our banks. You might have people transferring deposits and accounts from banks in the Saorstát to banks outside the Saorstát. You might have even moneyed people transferring their residences from this area to other areas. You would probably, if any panic existed, have greater difficulty in getting money for investment in any kind of enterprise in the country. Because of these dangers which, it was felt, existed, and which might take the form of action which would be very detrimental to the interests of the country, the Government felt it was necessary to proceed quite cautiously. They felt that, in this matter of reform in regard to currency and note issue, it would be entirely unwise simply to conduct private investigations, come to certain conclusions, and then submit the result of those investigations in the form of legislation to the Dáil. It was felt that what we must do was proceed without the appearance of precipitation, give interests immediately concerned an opportunity of putting forward their views in the fullest possible way, and that, where reforms were being carried out, they should, if possible, be reforms that would meet with general acceptance. I do not mean by that that we hoped that the reforms which would be carried out would please everybody, but we hoped that they would be reforms which would not be seriously objected to by any section.
When we determined to move in this matter, we had meetings with representatives of the Banks Standing Committee. We told them what our views were. We explained to them the necessity for change and, I may say, they saw that there was a necessity for change. We asked for their co-operation in carrying out investigations which would precede any action on our part and they agreed to give that co-operation. They submitted to the Government a panel of names from which representatives of the banks might be chosen to sit on the Banking Commission. There was no disposition on the part of the banks to take up any kind of non-possumus attitude. It may be that the measures we are taking go further than the banks themselves would have agreed to. But they have, through their representatives on the Commission and since the Commission's report, accepted these recommendations. In addition to representatives of the banks here, we secured the services of certain people outside. In selecting representatives of the banks —I think I already explained this to the Dáil—we selected representatives of the different classes of banks here. There was one representative of banks having headquarters in the Saorstát and note-issue here. There was a representative of banks having headquarters in the Saorstát and no note-issue. There was a representative of a bank having its headquarters in Britain and note-issue here and there was a representative of a bank having headquarters in Northern Ireland. We appointed as Chairman of the Commission, as Deputies are aware. Professor Parker-Willis of Columbia University. Professor Parker-Willis is a man who has had a great deal of experience, who has had a very distinguished career and who is personally of high standing and repute. In addition to Professor Parker-Willis, we got Mr. Campion— an Irishman who had served in the Commonwealth Bank of Australia. Both Professor Parker-Willis and Mr. Campion had experience of the examination of problems relating to agricultural credit. We had also on the Commission Mr. Smith-Gordon who had done a good deal of research and who had written in an able way on agricultural credit in this country. As I have said, the Commission gave us a report which was practically unanimous. The majority report was signed by all the members of the Commission but one. The member who did not sign the report agreed, I think, with the most fundamental recommendations in it and disagreed on matters which, if not entirely matters of detail, were, at most, matters of somewhat minor importance. A great deal of credit is due to the Chairman and to the members of the Commission for such a degree of unanimity as was achieved in the circumstances. The report, in my view of the matter, is a wise and happy compromise and the Government is, and has been, since the issue of the report, prepared to stand over and give effect to it. The Bill, based on the report, does the things that are necessary to be done, and does them with the least possible disturbance of existing conditions.
The Bill, when it becomes an Act, will give us legal tender in this country. It will give us legal tender which will be backed by British security, pound for pound, and which will not lead to the creation of a visible rate of exchange with Great Britain, and the difficulties that follow from exchange variations. In addition, it will give us a profit which will be of importance to our exchequer. It will give us a profit, as compared with the revenue at present derived from the issue of bank notes, of something between £250,000 and £300,000. The revenue at present derived from the issue of bank notes comes from a tax of seven shillings per hundred pounds on all bank notes issued; at least, it was on all bank notes issued, but since the setting up of the Free State, the position has been that we have got a tax on bank notes which are issued in Dublin, the notes of the Bank of Ireland, the Provincial Bank, and the National Bank. The tax on the bank notes issued in the North by the Ulster Bank, the Northern Bank and the Belfast Bank goes to the Northern Government. The amount we have received heretofore as a result of the seven shillings per hundred pounds tax has been about £40,000 a year. Under the new arrangement we will receive as a profit on legal tender notes the sum of about £240,000. In addition to the issue of legal tender there is a provision in the Bill for the issue of consolidated bank note issue, and on that there will be a tax of thirty shillings per hundred pounds, and that will bring in about £90,000 a year. The total yield, therefore, including profit from legal tender and the yield of the tax on the consolidated bank note issue, will be about £330,000. To get the net profit we must deduct from that the £40,000 that we already get, so that the net-increase in revenue to the Exchequer will be about £290,000.
There will be deductions from that for the cost of working the scheme and the expenses of the Currency Commission. It may be taken that the increased yield to the Exchequer will be between £250,000 and £300,000. The proposals in the Bill do away with the position where there are notes in circulation which cannot be attributed either to the Saorstát or Northern Ireland. There will be Saorstát notes issued and circulated in the Saorstát. and they Will be issued subject to the laws and regulations of this country. In Northern Ireland they will be issued according to the law existing there. A distinct change will be made in the character of the bank note issue. Heretofore, the bank note issue has consisted of two sorts of notes. There was a fiduciary issue which was secured on the assets of the bank. These notes were ultimately charged to the individual shareholders of each bank. The remaining part of the bank note issue was in the form of secured notes, which had to be backed originally by gold or silver, but since the war, by British treasury notes or certificates. The fiduciary issue was fixed in 1845, and has remained as it was then. The secured notes could be issued to any amount provided the banks held backing for them.
The new arrangement differs from that. For the legal tender notes British securities will be held by the Currency Commission, and anyone can secure, through the London agency of the Currency Commission, British money for the legal tender notes he offers. No limit will be fixed to the amount of legal tender notes which may be issued. If the banks, or others, give British currency to the Currency Commission they can receive British notes in exchange up to any amount, and the amount which the Commission receive will be invested in British securities and will come to the Exchequer after deduction is made for the expenses of the Commission. The separate issue of bank notes by the various banks will come to an end. There will be issued a consolidated note issue, the amount of which in the initial period will be £6,000,000. That £6,000,000 will be apportioned to the various banks in the method set out in the Bill and in the Report of the Banking Commission. That £6,000,000 may, in practice, prove to be more or less than the requirements the country demand, but at the end of two years it will be possible for the Currency Commission, by a unanimous vote and with the consent of the Minister for Finance, to alter the maximum limit of the issue and re-distribute the bank note issue amongst the various banks. At the end of three years more it will again be possible, by a unanimous vote of the Commission and with the consent of the Minister for Finance, to alter the maximum limit and re-distribute, if necessary, the issue amongst the various banks. Thereafter, every three years it will be possible for the Commission, by a majority vote and with the consent of the Minister for Finance, to fix the limit and re-distribute the issue. The amount of the issue will depend for the future on the requirements of the country. It will be based on the sound liquid advances of the various banks. It will not, of course, be equal to the sound liquid advances, but it will expand and contract according to the credit requirements of the country.
In many countries there is a provision that the banks must hold certain proportions of cash or other specified assets against their bank note issue. That is not proposed here. It is proposed that there shall always be a rigid maximum limit which shall be altered from time to time as the requirements of the country indicate. But during each three-year period, and always in respect to the entire issue and the amount which each particular bank may issue, there will be a rigid maximum limit. This arrangement is one which will be of great benefit to the country, particularly if there is an expansion of industry and improvement of business and also if there is an increase in the credit requirements of the country. It will enable these requirements to be met adequately as they arise. If the amount of the maximum is raised above £6,000,000 the payment to the Government in respect of the proportion, of issue above £6,000,000 will be at the rate of two instead of one and a half per cent. Of course, the granting of additional issue to a bank gives that bank increased opportunities of making profit, and if the issue is increased beyond the amount set down in the recommendations of the report and the amount that represents, so far as can be found, the present requirements of the country, then it is not unreasonable that some additional sum should be paid into the Exchequer. It may be asked, and some people have asked, why the old arrangement for note issue should not have been allowed to remain, why we should simply have substituted a Saorstát legal tender, or treasury note, with certain backing and safeguards for the British treasury note and allow the existing position in regard to bank note issue to remain. I think it will be obvious to Deputies that once we disturbed the cobweb at all it was desirable that a sufficient change should be made to meet the new conditions, that if we were dealing with the matter at all we ought to deal with it in a way that would meet the requirements of the situation, and would obviate the necessity of returning to the matter at an early date.
The old arrangement meant that certain banks had a fiduciary notice issue rigidly fixed at figures which were determined in 1845 and that other banks had no note issue at all. In dealing with the matter it was not possible to leave it in that way. The arrangements in regard to bank notes in this country and in England have worked out differently. In England, the bank note issue—I am not talking of the Bank of England note issue— if it has not disappeared, has sunk into a matter of very little importance. Here the importance of the note issues has remained. I think the importance of the note issues will always remain here, at least it must remain for a very long time. In the conditions that exist here we are not likely to have the same use of the cheque book and the overdraft as in Great Britain, and the requirements of the country, which are met by overdrafts and the use of the cheque book in England, must be met by the bank note issue here. The importance of the banknote issue has remained here as such, and at the same time it was a privilege which was confined to certain of the banks. It was not possible, when we were dealing with the matter, to leave certain banks in a privileged position and to leave other banks without that privilege.
We might have done what has been done in various countries, created a central bank, and we might have given the entire right of note issue to that central bank. The Commission did not recommend that that should be done, for several reasons. It did not recommend it because the need for such an institution was not as great here as it was in other countries where such institutions have been set up, and there were not exactly the same facilities for successfully setting it up. Again, we had a banking system which, if it was conservative, was a sound and good system and one which had the confidence of the country, and the disturbance that would have been involved in the setting up of a central bank in opposition to the wishes of the existing institutions would have done more damage than it would have been worth while facing. The Commission did not propose, therefore, to deal with the anomalies in regard to note issue by taking from all the existing banks the right of note issue. On the other hand, it could not propose at this time of day to extend to the banks which had not the note issue the right of issue on the same terms as the banks which already had it. That would have been contrary to the whole trend of events throughout the world.
What was determined, therefore, as I have said, was to alter the character of the note issue, to make the amount of notes that might be issued by any bank depend on the advances, the business, of that bank, on the requirements of the community, meantime to fix the amount for a period of two years at this figure of two million pounds and to distribute that two million pounds amongst the various banks on an agreed basis. I believe that this new arrangement which is proposed, the establishment of the Currency Commission and the institution of a new type of note issue, will have effects additional to this of providing in a more scientific and more satisfactory way for the requirements of the country. I believe that there will be a psychological effect on the banks and those concerned with the working of the banks, and that there will be a greater tendency on their part to recognise not merely their duty to the shareholders and their duty to the depositors, but a duty to the community as a whole. I do not agree with the attacks on the Irish banks that one hears from time to time. The vast majority of them are unreasonable and without any proper basis. But I do think that it may be justly said that there has not been a recognition on the part of the banks that they are national institutions, with a duty not merely to their shareholders and their depositors, but to the community at large.
There are provisions in the Bill with regard to gold coinage. It is not anticipated that those provisions will be put into operation for a good many years, perhaps, but they are inserted so that no fresh measures may be necessary if and when the time comes that gold comes into circulation again, and there is a desire in this country that gold should ,be in circulation. There is one matter in the report that is somewhat vague—the speed with which the note reserve fund is to be built up. Deputies who have read the report will notice that there is a slight difference between the recommendation in it and the recommendation in the Note Currency Memorandum. I have not yet referred to this note reserve fund, but I presume that the majority of Deputies have read the report. It is proposed that a note reserve fund equal to one-tenth of the consolidated note issue should be built up. It is not likely that any need for that fund will be seen, but it will do no harm; it may assist in giving confidence to anybody who lacks confidence, and it is one of the recommendations in the report. So far as legal tender notes are concerned, I do not think that there is any possibility at all that the note reserve fund will be called upon, because these notes, as I have said, will be banked by British Government securities, and unless there were to be a collapse in Great Britain in which we did not share, there would be no need to call on the note reserve fund in respect of these particular notes.
In view of the traditionally conservative policy of the Irish banks I do not think that apart from the other safeguards, there is likely to be such an issue of bank notes or such methods of conducting business on the part of any bank that there would be a call on the note reserve fund in respect of the consolidated notes for which any of the banks are responsible. Nevertheless we are establishing a consolidated note issue with a variable maximum limit. The consent of the Commission and of the Minister will be necessary to increase the notes, but it might happen that for some reason a bank might not be able to meet its obligations in respect of its share of the consolidated bank note issue, and there is additional security, if it should ever be called upon, in the note reserve fund. The recommendations of the Commission in respect of the reserve fund might be read as requiring that all the profit on the note issue should be used for the first two or three years to build up the reserve fund to one-tenth of the consolidated note issue. That, however, is not definitely recommended, and I understand that the vagueness in the Commission's report is due to the fact that there was not unanimity amongst the members on the point. The matter has been under consideration right up to the present time, and it has been determined that the reserve fund shall be built up by taking one-fifth of the profits of the investments of the legal-tender note fund until this sum of one-tenth of the total of the consolidated note has been reached. I think that that provision is certainly sufficient. Having regard to the other safeguards in the Bill, I look on the provision of this reserve as a thing which it is good to have, but which is not strictly and urgently necessary.
The only other matter to which I desire to refer at the present juncture is the constitution of the Currency Commission. Its constitution will be criticised from different angles. There will be people who will say that the banks are too strongly represented, and there will be people who will say that the Government is too strongly represented. I think that the middle course which was adopted by the Commission in their recommendations is the best possible course for us to take. On the conduct of the banks the whole safety and success of our currency system, whatever it may be, will depend. It is necessary that the banks should be fully and strongly represented on the Currency Commission. On the other hand, it is necessary that there should be representation of the general community, and I think that that representation can only be got by Government nomination. There will be matters for decision by the Commission which may involve disputes between individual banks. On the question of the re-distribution of the note issue, for instance, acute differences may arise between individual banks, and I think that because of that fact it is necessary that the majority of the Commission should not be representative of the banks, but should consist of people who are not connected with the banks. It is proposed that three persons shall be nominated by the Minister for Finance. One of these always will be, I think—it certainly is the intention -in regard to the first nominees—an official of the Department of Finance. The two others will be people of good repute and standing who are engaged in trade or business in the country. These two nominated representatives will have a three years term of office, so that it will not be possible for any Government which finds itself in some particular kind of difficulty, or which is desirous temporarily, owing to budgetary or other exigencies, of pursuing a particular financial policy, to put anything like political pressure on the Commission or on any member of the Commission.
These nominated representatives will be independent in the exercise of their functions during the term they hold office, and it will not be possible for the Government at a given moment to make a change in, say, half the membership of the Commission. In addition to that, the chairman will be chosen by the ordinary members of the Commission. He will hold office for a period of five years, and will be re-eligible at the end of that period. I think that the provisions which have been recommended in regard to the constitution of the Currency Commission ensure that the views of the banks will have due weight, that the interests of the general public will be adequately represented, and that the Commission will be able to carry on its work in an independent and business-like way.
This particular Bill and the recommendations on which it has been based have been received with very general approval. To some extent they have been attacked from both the right and the left. Some people have made proposals which do not take into account the existing situation, or the difficulties here, and they recommend measures which would be all right perhaps in another country or at other times. There also have been people who have deprecated any change, who feared that the new system would not be worked in a satisfactory way, and that bad results would follow the change. I do not think there is the slightest danger of the system working in other than the most highly satisfactory way. The banks have shown a most praiseworthy readiness to recognise the need for adjustment, and to take their part in devising the changes which must be effected. I believe that for the future we will have the heartiest co-operation of the banks in making the new system work. Bearing in mind the conservative, sound and careful policy which the banks have pursued, we can rely on their seeing that the new system is worked in a safe and sound way.
The Government, or any government, I think, that follows it can be relied on, in so far as it makes nominations to the Commission, to nominate people who will see that the interests of the country are attended to, that no short views are taken, and that rash measures are not adopted in order to get speedy results with perhaps bad effects to follow at a later date. I believe that we have got now what the country requires. We have got a banking system which will meet all our needs, which, is adjusted to the requirements of this country and the requirements of the present day. We also have got immediately a certain revenue into the Exchequer which cannot be regarded as a negligible factor, though I would not recommend any changes of importance in regard to currency or banking merely for the sake of getting revenue. That has not been the primary consideration. What we have had in our minds all along, in moving for these changes and in considering the recommendations, was simply the national and economic requirements of the country.