Tairgím go léighfear an Bille den dara huair. Ocáid tábhachtach é seo—Bille dá thabhairt isteach chun an chéad Bhanc Ceannais sa tír seo do bhunú. Rud nuaaimseardha ar fad geall leis iseadh an Bhancaeracht Cheannais. Ní raibh aon ghá le n-a leithéid sin de Bhainc sa tsean-tsaol sara ndeachaidh an trádáil eadarnáisiúnta i méid agus sarar tosnuíodh ar bheith ag aistriú suimeanna móra airgid o thír go chéile. Is go mall d'fhásadar na Bainc sin sna sean-tíortha agus ní hé gur bunuíodh d'aon ghnó iad de ghnáth ach go dtáinig leathnú ortha do réir a chéile. Tá sé ráite ag duine éigin gurb amhlaidh a bhunuíodar iad féin i nganfhios dóibh féin, ach is mó d'fhás ná de bhunú a bhí ann le ceart. Nídh nach iongnadh d'fhásadar i gcéadóir sna tíortha a raibh margaí foirbhthe airgid ionta agus ina raibh Bainc a mbeadh na feidhmeanna san aca ag teastáil chun freastal ar thuile agus trághadh cúrsaí trádála agus airgeadais eadarnáisiúnta. Sna tíortha san féin níl sé ró-fhada in aon chor o tháinigeadar chun foirbhtheachta. Níor bunuíodh córas an Chúlchiste Chónasctha i Stáit Aonta Ameirice, cuir i gcás, go dtí an bhliain 1913.
Chuaidh an Bhancaeracht Cheannais chun cinn go mór de thoradh an Chogaidh Mhóir. Bhí treoir agus rialú láidir ceannasach ag teastáil mar gheall ar an gcuma ina raibh cúrsaí monaibh tré chéile ar fad tar éis an chogaidh agus ar na headar-bheartanna aimhréidhe a bhí le déanamh de dheascaibh na sean-aonaid airgeadais agus geilleagair, de shaghas Impireacht na Rúise agus Impireacht na hOstaire agus na hUngáire, do thuitim as a chéile agus mórchuid Státa Comharbais do bhunú. D'fhonn riaradh ar na fadhbanna móra práinneacha san do bunuíodh Bainc Cheannais d'iomad saghsanna a bheadh oiriúnach do gach tír fé leith. Ar ádhmharaighe an tsaoil ní riachtanas ná práinn den tsórt san fé ndeara dhúinne sa tír seo banc den tsórt san do bhunú, ach measaimíd gur ciallmhar an mhaise dhúinn ár gcóras airgeadais do chur in oiriúint do réim an lae indiu. Sin fáth an Bhille seo do thabhairt isteach.
Níl ach tamall beag de bhlianta o fuaireamar rialtas dár gcuid féin sa tír seo. Is gearr a bhí an Stát nua ar a bhonnaibh nuair a bunuíodh Coimisiún an Airgid Reatha. Sa bhliain 1927 a rinneadh san de bharr Choimisiún Fiosrúcháin do cheap an Rialtas. Chonnacthas dúinn gur mhaith an rud é cúrsaí airgeadais do thabhairt ar aon-chéim leis an bhfás a bhí déanta againn i gcúrsaí poilitíochta, agus cheapamar Coimisiún Fiosrúcháin eile. Do foillsíodh tuarascbháil an Choimisiúin sin. Toradh moltaí as Tuarascbháil Thromlach an Choimisiúin sin is mó atá i bhforálacha an Bhille seo, ach do chlaonamar o na molta san maidir le puintí tábhachtacha áirithe agus déanfad trácht ortha san ar ball.
Everybody is interested in the question of money from one angle or another. We are all primarily interested in it as we require it to purchase the essential and sometimes non-essential things of life. This interest might be described as the individual one. But, in addition, many people have become interested in the money question from what I might call the theoretical and social aspect. They want to know the nature and purpose of money and how it functions. Such interest has been due to various causes. In our own lifetime, we have seen many spectacular things happening to money. We witnessed the departure of the pound sterling from gold on two occasions and the eventual abandonment of the gold standard in almost every country of the world. We saw the Russian rouble fall in the summer of 1921 to one eighty-thousandth part of its 1913 value. We later witnessed the collapse of the German mark in 1923, towards the end of which year it fell to the nominal value of 50,000,000 marks to the pound sterling. The French franc also depreciated, but not in such precipitate and extreme fashion.
Apart from these striking events, we have heard frequent references to money in connection with rising and falling prices, and with booms and slumps. Those interested in finding solutions for various social problems come to consider the money aspect at some stage or another and concentration on the money aspect of these problems has given rise to various theories and various schools of thought. Interest in the theoretical and social aspect of money has, therefore, been widespread, and I am not unaware of the existence in this country of ardent disciples of various monetary reformers. In view, therefore, of everybody's concern in the money question, be it from the individual, or social, or theoretical angle, a Bill such as the present one which deals with a number of aspects of the matter should be of more than passing interest.
In order to get a correct perspective in considering the provisions of this Bill, it is, I think, desirable to refer to the Currency Act, 1927, many of the provisions of which are proposed to be amended and expanded by the present Bill. The 1927 Act was based on the recommendations of a commission appointed in March, 1926, under the chairmanship of Professor Henry Parker Willis, of Columbia University, New York. In its main reports on banking and currency problems, the commission dealt with three questions: (1) the standard of value; (2) legal tender; (3) apportionment and re-allocation of bank note issues; and it furnished supplementary reports on agricultural and industrial credit. Following upon the recommendations made, legislation was soon afterwards introduced to deal with each of these matters.
The Currency Act, 1927, provided for a unit of value, to be known as the Irish pound, which, in accordance with the arrangements prescribed in the Act, was to be maintained at an equal exchange value with the pound sterling. It provided for the issue of legal tender notes by the Currency Commission. It was prescribed that legal tender notes should be protected to the extent of 100 per cent. by a reserve consisting of gold, British legal tender or sterling balances, or British Government securities, the allocation of the reserve between these categories of assets being left to the discretion of the Currency Commission. The 1927 Act terminated the private note issue of the banks, and provided that the outstanding notes should be withdrawn from circulation under the supervision of the Currency Commission. Arrangements were made, however, for the introduction of a new issue of consolidated bank notes to be made by the Currency Commission to its eight shareholding banks.
The 1926 Banking Commission appreciated that its conclusions on a number of important points could not be regarded as final and that they would require re-examination in the course of time as a consequence of the change in the economic conditions on which they were based and the establishment of a further commission of inquiry after an interval of five years was recommended in a minority report submitted by the commission. Since the 1926 commission presented its reports, we have gained more experience in the handling of currency and credit problems and the community has developed a full sense of confidence in the ability of the Currency Commission to handle such problems.
In the meantime, there have been many developments abroad, in particular the phenomena of a varying standard of value not based on or associated with gold. The trend of development has been to have such problems dealt with through central banking organisations, groups of which have at least endeavoured to formulate an agreed policy in handling foreign exchange and other international problems.
The World Monetary and Economic Conference in 1933 passed a resolution to the effect that, for certain purposes, independent central banks with the requisite powers and freedom to carry out an appropriate currency and credit policy should be created in such developed countries as had not then an adequate central banking institution. This recommendation was implemented in a number of countries and it is of interest to note that between 1921 and 1936 inclusive 23 central banks were established in 23 different States. The result is that at present, with very few exceptions, there is no country of economic importance in the old or the new world which has not set up a central bank of its own. This central banking trend may be attributed to the growing realisation that, under modern conditions of banking and commerce, it is a great advantage to any country to have a centralised banking system with the control of currency and credit vested in one bank which has the support of the State and also has some form of State participation. In such circumstances it was felt that our currency and credit problems should be examined afresh with particular reference to the desirability of establishing in this country a central bank. That was accordingly one of the main problems set for the Banking Commission set up in November, 1934.
The first question which the commission set out to examine in this connection was whether the working of the existing provisions of the Currency Act, 1927, revealed any practical deficiencies in our monetary system. Allowing for the limited functions that may be performed under that Act, the commission came to the conclusion, as a result of its examination, that so far as the stability and safety of the currency and the provision of credit are concerned, our present monetary arrangements have worked in a way that can be described as generally satisfactory, account being taken of the great monetary difficulties through which many other countries have passed in the post-war period. The Irish economy has been spared the upheavals both of wild inflation and violent contraction of credit. In a measure, this was, no doubt, due to the monetary arrangements based on the link with sterling; but there was also the factor that the large foreign resources accumulated in the past have provided a strong reserve without which Irish economy and finance would not have stood so well the test during some of the most difficult years through which the world has ever passed.
The next question examined by the Banking Commission was the need for central banking action here, and what central banking functions might desirably be added to the existing functions of the Currency Commission. This involved a determination of what might be regarded as the essential functions of a central bank since there is no standard pattern for such institutions. Great differences are found, as regards both the organisation and the manner in which individual central banks carry out their operations. Allowing for the various differences of constitution and range of statutory powers and allowing for the fact that many such statutory powers are only rarely used, there emerge, however, certain functions which may be described as being the essentials of central banking.
The principal duty of a central bank is to maintain the integrity of the national monetary unit and to safeguard the credit position. To carry out this task, the central bank has to ensure the maintenance of external stability whether it be in terms of gold or of some foreign currency, to take care of the monetary reserves of gold and foreign exchange and also to have certain means to influence the currency and credit position within the country. These specific functions are, of course, not necessarily independent of each other. The maintenance of external currency stability, which is one of the main tasks of a central bank, is assured in Éire by the Currency Commission, to the extent that that body is bound to exchange Irish pounds for pounds sterling (andvice versa) in any amounts required. Central banks on an exchange standard are usually free to operate in a number of currencies, but this freedom is generally not utilised, for a central bank operates, as a rule, principally only in one foreign currency. It is natural that our monetary authority should operate principally in sterling because our foreign trade is so largely with the United Kingdom.
To ensure the convertibility of the Irish pound, the Currency Commission holds the monetary reserves of gold and foreign assets, which is one of the functions of a central bank. The commission may, if certain defined steps have been taken, hold in these reserves assets in currencies other than sterling.
As regards the right of note issue, which in modern times is becoming more and more concentrated in central banks, the issue of legal tender notes by the Currency Commission constitutes the flexible part of our monetary circulation.
Under the heads so far dealt with, the functions of the Currency Commission coincide in all essentials with those of a central bank. Now we come to an important difference, namely, that a central bank, but not the Currency Commission, is empowered to rediscount commercial and other bills for credit institutions, and to grant advances to them against specified securities. By these methods a central bank is able to supply funds against domestic assets, and in that way assist in the maintenance of the liquidity of the credit system.
Under existing provisions, our commercial banks are able to obtain legal tender from the Currency Commission against the surrender of sterling assets. As Irish banks all possess large sterling holdings, they can readily obtain whatever amounts of Irish currency they may require. That is the reason why the absence of other methods of obtaining funds from the Currency Commission has not created any difficulties for the banks.
I might add here that the central bank will also be able to issue legal tender notes directly in exchange for home Government securities of such kinds as are approved by it under the provisions of Section 3 of the Currency (Amendment) Act, 1930. The Banking Commission recommended the repeal of that section in view of the increased powers which it proposed for the central bank, but that recommendation has not been accepted by the Government. The central bank will, therefore, have adequate powers to provide legal tender notes in exchange directly for approved domestic securities.
It is desirable, however, that, in ad- dition to being able thus to secure legal tender notes from the central bank, commercial banks should also be able to secure accommodation not necessarily in the form of notes but by way of credit in the books of the central bank through the rediscounting by the bank of commercial and agricultural bills and through the granting by the bank of advances against specified securities. This form of credit accommodation is often more convenient than the receiving of legal tender notes to the same amount.
In no country in the world does the banking system normally possess enough cash to meet all its potential liabilities. Taking, for instance, the banking return for the December quarter, 1941, of the eight shareholding banks of the Currency Commission and the National City Bank published in the Quarterly Statistical Bulletin of the Currency Commission, the total of the current, deposit and other accounts of these banks was £194,927,551, while the total quick assets, i.e., cash, balances with London banks, money at call and bills held against these liabilities was £50,264,534, i.e., 25.8 per cent. approximately; a percentage which compares favourably with any banks in like circumstances elsewhere. If all the depositors wanted to withdraw their deposits at the same time in the form of cash the banks could not provide the cash. But normally all depositors do not want to do this at the one time. At certain times of the year, e.g., at the end of the month, when cash is drawn for salary payments, or at the end of the year or half-year when various dividends or tax payments have to be made, or during the holiday seasons or during the period of harvesting and marketing of the principal farm products and large-scale sales of cattle, there is a heavy drain on the cash reserves of the commercial banks. Moreover, in times of intense business activity or when the balance of current payments moves against a country and thus reduces the basis of bank credit, the strain caused by the regularly recurring factors just mentioned is considerably aggravated, and may reach breaking point and thus cause a crisis. In the absence of a central bank each of the commercial banks would have to carry an excessive and unremunerative amount of cash reserves to meet any such periods of financial strain or other emergency; whereas with a central bank to fall back on at such times a substantially smaller cash reserve is sufficient.
In the case of an emergency situation, however, whether arising externally or internally, it would be most advantageous that the central bank should have the necessary powers to meet any currency requirements by an extension of credit against assets other than those normally eligible to be exchanged for legal tender notes. For example, in the event of an international crisis that caused a freezing-up of gilt-edged securities in the London Stock Exchange coinciding with a crisis affecting one or more banks in this country, it would be desirable that the Irish central bank would, in such circumstances, be able to act as a lender of last resort. Banking crises have fortunately been rare in this country, but it is essential to provide for all contingencies. A central bank, therefore, performs the very essential duty of providing the necessary cash and credit against acceptable securities at all times, but especially in times of necessity.
Power to rediscount first-class commercial bills and bills drawn or issued for agricultural purposes or based on live stock is, accordingly, proposed for the monetary authority in this country. The quantity of commercial bills available in this country of a type which would be eligible for rediscounting with the monetary authority is small, the reason being that business here, as indeed in a great number of other countries, is to an increasing extent being financed by bank overdrafts, and not by bills that are repaid at maturity. A number of such bills is, however, available and it is proposed that the central bank should be empowered to rediscount them. In addition to rediscounting such bills, it is proposed that the monetary authority be empowered also to make advances against the collateral of Government securities, large amounts of which are held by our Irish banks. The exercise of the power of rediscounting bills and of the making of advances against specified securities will not necessarily be reserved for emergency contingencies such as I mentioned earlier. The central bank will publish its interest and discount rates, and specify the conditions on which it is prepared to grant accommodation, and it will then be for the commercial banks to approach the central bank if they require such accommodation.
Even when no extensive business is done by a central bank in rediscounting bills or making advances, nevertheless the fixing and publishing of a discount rate is a fact of special significance. The bank rate, as it is generally called, is one of the recognised weapons of a central bank for influencing domestic credit conditions inasmuch as the official discount rate exercises a certain influence on other interest rates. The bank rate determines not only the charge to be paid by borrowers from the central bank, but tends to influence general credit conditions, the use of savings, the flow of capital and the valuation of stock exchange securities and other capital assets. The relationship between the official discount rate and other rates of interest is, however, never a simple or a constant one.
It should first of all be noted that the discount rate of a central bank is, of course, not fixed independently of prevailing conditions in regard to savings and demand for credit accommodation. For instance, a cheap money policy cannot be more or less arbitrarily inaugurated and maintained by a central bank. The experience of many countries seems to prove conclusively that an attempt to force down interest rates when the underlying circumstances are not appropriate does not meet with success. The general rule is that, in periods of business prosperity, when the demand for capital is active, interest rates tend to stiffen, while in periods of depression interest rates tend to decline.
If the bank rate is fixed in arbitrary fashion without reference to prevailing conditions it will not then be an effective weapon, and will not produce the desired results. For instance, if credit is generally very plentiful, and commercial banks are lending freely at low interest rates, the raising of the bank rate by the central bank will not change the situation, as the commercial banks will not in such circumstances be forced to approach the central bank for accommodation. To make its policy effective in such a situation, a central bank would have to resort to what is known as open market operations, which will next be described. On the other hand, of course, if the central bank rate is reduced to such a level that it is cheaper to borrow from the central bank than from other lenders, then the central bank may be flooded with requests for loans, and will probably be compelled to raise its rate again. A central bank cannot, therefore, without incurring dangerous risks, fix interest rates which are altogether out of keeping with the requirements of prevailing market conditions of supply of, and demand for, funds. The weapon thus has its limitations, but it is nevertheless a useful weapon.
When bills are rediscounted and advances against Government securities granted to other credit institutions, the initiative is taken by those who wish to obtain facilities from the monetary authority. When the latter intervenes on its own initiative to purchase or sell bills or Government securities, such interventions are known as open market operations. Intervention of this kind has for its purpose the influencing of general credit conditions. Intervention may be prompted for several different reasons, and the actual object of any particular intervention will depend on the conditions obtaining at the time. As I already mentioned, a central bank may, for instance, so intervene in order to influence interest rates.
There are times—such as a period of depression—when the monetary authority deems it necessary deliberately to expand the cash basis of the whole banking system. It does so by buying securities in the stock exchange market, thus transferring cash to somebody else. If the seller is a bank, then that bank's cash reserve is increased, while its liabilities are unchanged and it is, therefore, in a position to lend more freely. Even if the seller is not a commercial bank the cash received by him is eventually deposited with his particular bank, and thus increases the cash reserve of that bank. The net effect will be that deposits and cash reserves will expand and the commercial bank or banks concerned will thereby be in a position to lend more freely and so set the wheels of trade and industry in motion again. Seasonal fluctuations of business are at times very marked, and there may be a need of central bank intervention to effect an equalisation of conditions at different periods of the year.
The Currency Commission has power to undertake what is equivalent to open market operations with the moneys in the general fund, in relation to which it may exercise the functions of a bank. However, its possibilities are not great, and the resources available are very limited. As a result of the merging of the note reserve fund with the general fund, as provided by this Bill, and of the acceptance of deposits from commercial banks, also so provided, the new central bank will have at its disposal much larger resources as a basis on which to conduct open market operations.
The main significance of such operations lies in the fact that they tend to increase or decrease the cash resources of the commercial banks, and that changes in such under given circumstances tend to bring about changes in loans granted by the banks, the interest rates thereon and, as a result of these, changes in general interest rates and economic conditions. A central bank which has the power of open market operations is equipped with a potent instrument for controlling and regulating credit, and this will be one of the powers of our proposed central bank.
When the commercial banks obtain credits from the central bank directly through the rediscounting of bills, or granting of advances or indirectly through the open market purchase of securities by the central bank, they may request the central bank to give them legal tender notes out of such credits in the central bank's general fund. Thus the central bank may be required to furnish legal tender notes against domestic assets, and not against those sterling assets normally accepted for the legal tender note fund. Moreover, under the Currency (Amendment) Act, 1930, the central bank will also have power to accept securities other than sterling for the purposes of the legal tender note fund. It is clear from these various provisions that in the issuing of legal tender notes there will be no limitation on the central bank confining it to the acceptance of sterling assets only such as described in the Currency Act, 1927. The objection of paragraph (b) of the Labour Party motion does not, in my opinion, therefore, apply. I notice that in paragraph (c) of the same motion, it is suggested that it is not possible for the proposed bank, within the framework of the Bill, to discharge the function and duty of safeguarding the integrity of the currency. I fail to see how such suggestion can be supported. Safeguarding the integrity of the currency implies maintaining its purchasing power at home and abroad. The external position is safeguarded by having a sufficiency of external assets in the legal tender note fund to meet any unfavourable turn in the balance of payments. Almost every central bank throughout the world is compelled to have a minimum of gold, foreign exchange, or other foreign assets to provide for such a contingency. The internal position depends on a variety of circumstances, but mainly on the price level. So far as purely monetary powers can regulate these internal conditions, the central bank will have such powers.
For reasons of convenience, safety and economy it has become the custom for commercial banks to maintain deposits and cash reserves with their appropriate central banks. Among the various other advantages for commercial banks this practice facilitates the settling of inter-bank payments, as such transactions can be settled by a transfer in the books of the central bank. Apart from this, the keeping of deposits with the central bank means that cash reserves are centralised and pooled, and can thus form the basis of a much larger and more elastic credit structure than if scattered among the various commercial banks. It is a fairly well established rule that central banks do not pay interest on deposits maintained with them. As they are not primarily profit-earning institutions it is essential that they should not be forced to devote undue attention to the earning of profits, and in consequence possibly incur risks inappropriate to their purpose.
Accordingly it is provided in the Bill that the central bank may receive deposits (not bearing interest) from any public authority or any banking or credit institution carrying on business wholly or partly within the State. This will allow institutions such as the Agricultural Credit Corporation and the Industrial Credit Company to make deposits with the central bank, if they so wish.
In addition to the numerous cases where deposits and cash balances are voluntarily kept with the central banks, following custom, there are some countries where the holding of minimum cash balances with the central banks is compulsory. Among the countries with such obligatory provisions are U.S.A., Canada, South Africa, India and New Zealand. The main reasons for such obligations are (1) to strengthen the liquidity of the banking system, (2) to provide the central bank with increased liquid resources, and (3) to immobilise a certain amount of the cash resources of the commercial banks and so prevent them from indulging in excessive lending and thus pursuing inflationary tendencies. In some countries where the holding of balances with the central banks is not compulsory, the commercial banks ensure their liquidity in part by voluntarily maintaining balances with their central banks, but more so by accumulating balances in foreign currencies. The position of our commercial banks may be regarded as analogous to the latter, as our banks have maintained a high degree of liquidity by their large holdings of sterling assets. I might add that without any compulsion the shareholding banks of the Currency Commission requested the commission to accept deposits from them by way of advance payments for the issue of legal tender notes which might be required at short notice and voluntarily deposited substantial sums with the commission for such purpose. The amount of such deposits at 31st March last was £3,019,000.
The new central bank will itself have adequate liquid resources for its own functions in the general fund and in the assets of the legal tender note fund and it is, therefore, unnecessary to compel banks to maintain deposits with the central bank on that score.
It is not necessary in the present circumstances of this country to immobilise part of the cash resources of the commercial banks for the purpose of preventing inflationary lending by them. Commercial banks in Ireland are not prone to err in this direction. In fact the opposite charge is sometimes made—that they do not extend sufficient credit. While not accepting this charge as correct, the Government think it desirable that the banks should increase their investments within the State, having regard to their relatively large holdings of external as compared with internal assets.
In considering this problem, it is necessary to inquire how our Irish banks came to possess their large holdings of sterling assets and to investigate whether there is any substance in the accusation that they are unpatriotically exporting Irish money for use in England instead of keeping it for investment at home. The banks' sterling assets came into being mainly in times when exports were in excess of imports, thus producing what are called favourable trade balances. This happened particularly during the Great War, 1914-18. These excess balances accumulated in the shape of credits in the books of English banks in the names of the Irish banks who held them for their Irish exporter-customers. At one time the Irish banks could have demanded gold from the English banks to settle such balances, but even then it was more profitable to buy some English Government or other securities yielding interest. The banks are not, therefore, primarily responsible for their external position. Initially, they are merely agents of the trading and other financial activities of their clients. The amount of foreign assets held by our banks is, therefore, to an extent outside their control.
Whenever the value of our imports, visible and invisible, exceeds the value of our visible and invisible exports, there occurs a fall in our external assets in order to make up the difference. Owing to the operation of various factors in the years preceding the outbreak of the present war, the general trend in Irish banking was in the direction of replacing external by internal assets. A policy of industrialisation, involving large-scale purchases of plant and machinery abroad, accelerates such a trend. The banks contend, however, that it is not their function to make such purchases and that the determination of such a policy is for industrialists and investors generally. They hold that the matter is thus not one which is concerned exclusively with deliberate banking policy.
It is felt, however, that the banks may be in a position, when times are more favourable, to assist further in the repatriation of our external assets where such can be done with benefit to the national economy as a whole. With this object in view, and in order to encourage banks, to increase their investments within the State, the Government have included in the Bill the powers set out in Section 45. These provide that the central bank board, with the consent of the Minister for Finance, may make regulations requiring every licensed banker to make with the central bank an interest-free deposit of a particular amount, or calculated in a specified manner, whenever after a certain date the assets held by such banker within the State fall below a specified proportion in relation to his liabilities within the State.
Following the addition of the various central banking powers described to the existing powers and functions of the Currency Commission, the next question to be considered is whether any change is desirable in the constitution of the Currency Commission. The Banking Commission Majority Report recommended that the same constitution should be retained, pointing out that the Currency Commission has worked with a great measure of success since it was established and during a most difficult period of the world's financial history. There is no uniform pattern of organisation for central banks or no uniform method for the holding of share capital of central banks. For example, in England, France, Belgium, Holland, Hungary and Portugal the capital of their respective central banks is held by private shareholders, though I might add that even in these cases, apart from the Bank of England, the governor and deputy governor of each bank are appointed by the State. In U.S.A. the 12 federal reserve banks are owned solely by commercial banks. The activities of the 12 federal reserve banks are co-ordinated by the board of governors of the federal reserve system consisting of seven members, all appointed by the President of the United States. The board of the federal reserve system appoints the chairman and two of the directors of each of the 12 federal reserve banks. The State owns the entire capital of the central banks in Denmark, Canada, Australia, and New Zealand.
The share capital of the Currency Commission is held by eight shareholding banks (which happen to be the banks named in the third schedule of this Bill) and the total amount of the capital paid up to date by them is £24,000. The accumulated reserves in the general fund of the commission are at least 12 times the amount of the paid-up capital, so that participation by the shareholding banks, in so far as the amount is concerned, is purely a formal one. While the Banking Commission recommended the continuance of such participation, the Government felt that it would be more in keeping with the purpose and function of the central bank that its share capital should be held entirely by the State. The constant and predominant aim of the central bank is set out in the Bill to be the welfare of the people as a whole. While serious differences in regard to implementing policy between the central bank and the commercial banks will, it is hoped, never arise, nevertheless some divergence on various matters may possibly arise, and it is felt that the central bank would be in a more independent position on these occasions and in other contingencies if its share capital were held by the State rather than by the commercial banks. It is proposed, therefore, that the share capital of the central bank shall be held by the Minister for Finance and that each of the eight shareholding banks of the Currency Commission shall be repaid the sum paid up by it.
It is also proposed in the Bill that these shareholding banks will be associated with the central bank for certain purposes, and provision is being mode whereby they will be represented by three banking directors on the board of the central bank. This is the same number as the banks have on the Currency Commission, but the method of appointment will be different. In the case of the Currency Commission three of its members are elected directly by a meeting of representatives of the shareholding banks, while in the case of the new central bank it is proposed that the associated banks will elect a panel of six names from which panel the Minister for Finance will appoint three banking directors. The presence of three banking directors on the board of the central bank will ensure the co-operation of the commercial banks in implementing the central bank's policy and will help to engender a spirit of mutual trust and confidence. The central bank will also benefit by the experience and advice of these three banking directors. The nation's savings are deposited with the banks and they are accordingly entitled to a place on the board of the institution which, by its policy in regard to credit and currency matters, will determine the real value or purchasing power of these savings. It has happened on the establishment of central banks in some countries, previously without a central bank, that the commercial banks viewed the new establishment with suspicion, and for some time kept aloof from it. It is necessary to guard against such a contingency here as the whole-hearted co-operation of the commercial banks is most desirable, if not indeed essential, for the success of the central bank's policy. The presence of three banking directors on the board of the central bank will, it is hoped, ensure good relations between the commercial banks and the central bank.
The Banking Commission recommended that the board of the new central bank should have four non-banking directors as against three in the case of the Currency Commission. The increase in membership would, it stated, afford the possibility of increasing the fund of knowledge available on the board. The Government, while agreeing with this view, felt that such objective would be better achieved by having up to five non-banking directors. It was also felt that a majority of four non-banking directors against three banking directors does not represent the greater qualitative influence of each banking director, especially as the non-banking directors would be drawn from different vocational groups or interests. The changed method of ownership of the share capital of the central bank is a further reason for having a lesser proportion of commercial bankers on the board as compared with the Currency Commission. The Government, accordingly, considered it more desirable that the statutory provisions should permit having up to five non-banking directors, not more than two of whom may be service directors. This will ensure that the various vocational groups and interests, other than banking, will not be inadequately represented. There are ample precedents for having a large number of directors, as is clear from the numbers on the boards of the central banks of the following countries exclusive in all cases of the governor and in some cases of the deputy governor. For instance, Argentina has 12 directors, Australia 8, Belgium 9, Canada 11, Netherlands 15, Norway 15, Portugal 10. It is proposed that the Governor of the new central bank shall be appointed by the President on the advice of the Government.
It is intended that there should be the fullest co-operation between the Government and the central bank. The Government does not, however, propose to interfere with the administration of the bank, which will be independent in the carrying out of its functions. This independence is possessed by almost every central bank throughout the world and is a very desirable provision. I notice that the Labour Party motion suggests that the House should refuse to give a Second Reading to the Bill because it does not provide,inter alia, that the central bank will be amenable to the authority of the Oireachtas. The Comptroller and Auditor-General will, under Section 35 of the Currency Act, 1927, audit the accounts of the central bank, and these will be presented annually to the Dáil. Similarly, the bank will be required to prepare an annual report which will also be presented to the Dáil.
The Oireachtas will be at liberty any time it wishes to amend the provisions of the Central Bank Bill when enacted and to entrust the bank with greater or lesser powers. In that sense, therefore, the central bank will be fully amenable to the Oireachtas. If, on the other hand, the proposers of the motion intend that the central bank should be subject to the Dáil in a manner similar to the ordinary Departments of State, then I must entirely disagree. Such a condition would be most undesirable, as it is essential that the central bank should be free from the apprehension of continual political messure.
Coming to the question of note issue, until the establishment of the Currency Commission the main currency in this country consisted of the notes of the joint stock banks. The 1926 Banking Commission gave full consideration to the question of terminating that system of bank note issue and its substitution entirely by legal tender notes. They favoured the course of authorising a pure bank note issue similar to the then existing fiduciary issue except that it would be freely convertible into Irish legal tender notes instead of, as before the 1914-18 war, into gold or into Bank of England notes. These notes were to be issued by the Currency Commission, convertible on demand into legal tender notes, but without legal tender status and payable by the responsible commercial banks.
The 1926 Banking Commission recommended that the consolidated bank note issue should be based on, and reflect, business conditions as represented by the volume of liquid sound advances granted by the banks within the State. This principle is recognised in the Currency Act of 1927 to the extent that the Currency Commission, in determining both the aggregate volume of consolidated bank notes and the allocation of that aggregate between several banks, is required to have regard to liquid sound advances by shareholding banks to persons within the State as well as other assets and liabilities of the shareholding banks.
The absence of a monetary authority endowed with all the usual powers and functions of a central bank was given by the 1926 Banking Commission as one of the main reasons for their recommendation to establish a consolidated bank note system. That reason will no longer obtain after the enactment of the present Bill. Furthermore, the fundamental basis recommended by the 1926 commission for the consolidated bank note issue was the volume of liquid sound advances granted by the banks concerned, and it has not been found practicable to employ that basis for the administration of the system of consolidated bank notes. Accordingly, the second important reason which motivated the 1926 commission in their recommendation no longer obtains. It has been decided, therefore, to terminate the system of consolidated bank notes and to have only legal tender notes issued solely by the central bank. This is entirely in keeping with the prevailing tendency throughout the world in recent years and in consonance with the widely held view that the issue of currency notes is the prerogative of the State or the duly authorised monetary authority in the State. In many countries ordinary commercial banks have had the right to issue notes but this right was generally subject to various conditions and safeguards limiting the total amount of notes that could be issued and providing secure backing for them. However, for the purpose of uniformity, better supervision and other reasons the general trend for many years past has been to give to the various central banks a monopoly of the privilege of note issue and there are but few central banks throughout the world which have not a complete monopoly of note issue.
It is not intended that the termination of the consolidated bank note system will have a deflationary effect and it is expected that as they are withdrawn they will be substituted by a roughly equivalent amount of legal tender notes. In order to give the banks an opportunity of adapting themselves gradually to the change, it is proposed to extend the process of extinguishing the notes over a 12 year period, sub-divided into four triennial periods. It is proposed that no further consolidated bank notes shall be issued after the 31st December, 1953, and that no bank shall pay out any such notes after that date.
It is inevitable, however, that numbers of consolidated bank notes will be outstanding with the public after 31st December, 1953. Even at present, there is outstanding a considerable number of old bank notes issued before May, 1929. Some of them are still trickling back to the banks and being redeemed at the rate of about £300 to £400 per week. Provision is, therefore, being made for the redemption of consolidated bank notes outstanding with the public after the 31st December, 1953.
In determining the amount of consolidated bank notes to be issued to each shareholding bank which prior to May, 1929, had the privilege of issuing bank notes, the Currency Commission has had regard under Section 60 of the Currency Act, 1927, to the amount of such former bank notes still outstanding. For instance, the maximum quota of consolidated bank notes for all banks was fixed at £6,000,000, but the amount actually issued in December last was £5,179,085, the balance of £820,915 being almost entirely in respect of unredeemed former bank notes which are deemed to be consolidated bank notes. It is probable that a substantial number of these outstanding former bank notes will never be presented for payment owing to loss by fire or some other cause. These notes are commonly described as "dead" notes.
Provision is being made in the Bill to allow the banks concerned to write off from time to time, with the sanction of the Minister for Finance, the amounts of notes estimated to be "dead". The basis to be taken will be the amount of former bank notes outstanding for all-Ireland on the eve of the 6th May, 1929, and the amounts of "dead" notes to be written off will also be estimated on the all-Ireland basis. This method is necessary as it is impossible to estimate how many notes are "dead" in the Twenty-Six County area and in the Six County area, respectively. It is provided that the Minister may attach to any sanction given by him to a writing-off such conditions as he may think proper. He may, in particular, require the bank concerned to pay either to the central bank or to the Exchequer a specified proportion of the amount written off. The object of this requirement is to secure for the State a share in the profits which result because of the non-presentation of such "dead" notes for payment.
The responsible banks are liable for payment of such notes. If, however, they are not presented for payment, they represent a windfall to the banks, as when these notes were originally issued to customers these customers received them in exchange for credits which they held with the banks. It is only just that the State should share such windfall with the banks having regard to the circumstances in which it accrued and as it resulted from the privilege of note issue given to the banks by the State. The shareholding banks of the Currency Commission at present pay a charge of 2½ per cent. on these old unredeemed bank notes. When a writing-off is effected such charge will cease in respect of those notes written off.
Part V of the Bill requires that every banker will deposit in the High Court a sum of £10,000 during the three years beginning on the 1st January next after the passing of the Bill and a sum of £20,000 thereafter. The object of the deposit is to protect the public against (1) persons who might attempt to conduct a banking business on too slender resources, and (2) against the solicitation of unscrupulous persons purporting to conduct a banking business which might, in fact, be of a very dubious nature and have something other than banking as its main objective. For many years our Irish banks have had remarkably sound records, but before the establishment of the joint stock banks (between 1825 and 1836) there had been several failures of small banks—some due to malfeasance and others to unsound policies. These cases, and more recent experience in other countries, demonstrate the need for protecting the public from unscrupulous persons posing as bankers or from persons who through the adoption of rash and unsound policies would jeopardise the funds deposited with them. Insurance companies are required to maintain deposits with the High Court under the Insurance Act, 1936, and a similar requirement has been embodied in the recent Trade Union Act. Following the recommendation of the Banking Commission, it is proposed that every banker should maintain a deposit with the High Court. The adoption of a flat figure for all banks or bankers is proposed, as it is doubted whether any useful purpose would be served by a scale varying with the business conducted by each bank. In order to avoid any hardship from an abrupt change the figure of £10,000 is suggested to apply for the first three years and £20,000 thereafter. It is to be remembered that there are some smaller banking concerns operating in this country apart from the joint stock banks and too high a deposit might inconvenience them.
Part VI of the Bill provides that as from the 1st January next after the enactment of the Bill no person may carry on a banking business unless he holds an annual licence issued by the Revenue Commissioners. Any person may apply to the Revenue Commissioners for such a licence. A fee may be charged for such licence and it is intended to provide in a subsequent Finance Bill for a small annual payment. The main object of this licensing system is to ensure the framing of a comprehensive list of persons conducting banking business. The licensing provision is being kept independent of the requirement to make deposits under Part V of the Bill, but in actual practice it is probable that every licensed banker will also have lodged a deposit under Part V. Every licensed banker will be required to prepare a balance sheet and to keep it posted up in a conspicuous place in each of his offices. He will also be required to furnish on demand to every one of his creditors and, in the case of a limited company, to every member of the company, a copy of the latest balance sheet on payment of a sum not exceeding 6d. The Minister for Finance is empowered, with the concurrence of the central bank board, to make regulations requiring licensed bankers to prepare and publish balance sheets at specified times and intervals and prescribing the form in which the balance sheets are to be prepared. Penalties are provided where a licensed banker does not comply with such regulations or with the requirement to post up the balance sheet in his various offices and branches. At present banks incorporated outside Ireland are not bound by the requirement to publish the financial statement prescribed under Section 108 of the Companies (Consolidation) Act, 1908. Unless they are exempted by the Minister for Finance the new provisions will apply to such banks as well as to banks incorporated in Ireland.
I might add that as well as these provisions for the publication of balance sheets, the central bank will have power under Section 37 of the Currency Act, 1927, to require any banker to furnish such information in regard to his banking business as the central bank may consider necessary or desirable in the due discharge of its statutory functions. Under another provision of the same section, the central bank, through its governor, may have access to the books or records of any associated bank where such course is considered desirable or necessary for the discharge of its statutory functions.
I do not propose now to describe at length the many provisions of the remaining Parts VII, VIII and IX of the Bill and I shall restrict myself to a brief account of main heads.
Part VII deals with counterfeit and unauthorised currency. The forgery of currency notes issued by or on behalf of the Government of any foreign country is to be made an offence under the Forgery Act, 1913. This follows on a recommendation made by the International Convention for the Suppression of Counterfeit Currency, 1929, which was ratified by both Houses of the Oireachtas and came into force in respect of this country on 22nd October, 1934.
Cases have arisen where photographs of bank notes have been published in newspapers or periodicals and again where imitations of bank notes, with various adaptations and changes, have been reproduced for advertisement purposes. While there has been no intention of forgery or deception in these cases, such publication or reproduction is a currency offence. A suitable penalty is provided for such offence, but one more lenient than the penalty for forgery.
It is necessary to safeguard the currency against unauthorised issues of documents which purport to be in substitution or in exchange for lawful money, and, accordingly, the issue of such documents or their receipt is to be made an offence. The issue of coinage and currency is the prerogative of the State. In addition to official currency and legal tender notes, the law and custom of every country permit bank notes, bank drafts, cheques and similar bank documents to be issued and received in payment. The laws of every country, however, set out conditions in regard to the backing of such bank notes and the protection of the public in connection with the issue of cheques and similar bank documents. The Bills of Exchange Act, 1882, and the Stamp Act, 1891, contain provisions designed for the latter purpose. The State cannot, however, allow the unregulated issue of currency with no safeguards or limitations. If every individual had the right to issue documents that could circulate as money, the monetary authority would have no control over the amount of money in circulation and the public could not be protected against depreciation of such money.
At present the responsibility for the issue of token coins rests under the Coinage Act, 1926, with the Minister for Finance. He has, however, discretion under the Currency Act, 1927, to make arrangements with the Currency Commission for the issue of coins through the commercial banks and, in fact, all issues up to the present have been made in this manner. It is provided under Part VIII of the Bill that the central bank will in future issue coins and that profits on the future issues will be paid into the bank's general fund, which will also bear the expenses of issue and redemption. It is proposed to dispose of past profits as follows: to repay advances made from the Exchequer to meet the expenses of the issue of coins in the past; to make £300,000 available to be paid to the Savings Certificates (Interest Charge Equalisation) Fund; and to carry the balance to the currency reserve in the bank's general fund.
The Currency Commission is at present required by statute to keep three main funds:—the general fund, the legal tender note fund and the note reserve fund. The assets of the legal tender note fund are required to be valued twice yearly on the basis of the current market value of the securities therein and any surplus is transferred to the note reserve fund. Conversely, any deficiency in the legal tender note fund is made good by a transfer from the note reserve fund. The result is, in all cases, to leave the assets of the legal tender note fund precisely equal in current market value to the face value of the legal tender notes outstanding. The procedure may sometimes necessitate that the assets of the legal tender note fund are written up to a value in excess of their original cost.
This system goes, however, to unnecessary lengths in reflecting short period fluctuations in the market value of securities and entailing publication of half-yearly adjustments. For this reason the Banking Commission Majority Report recommended that the existing legislation should be amended and that it should be left to the discretion of the central bank to write up or not, as it might think fit, the book value of any asset standing below current market value at the time of a valuation, and to decide whether any resulting surplus should be transferred from the legal tender note fund. Part IX of the Bill makes provision accordingly.
It is further proposed to wind up the note reserve fund, the maintenance of which in its present form is hardly any longer worth while. Accordingly, for purposes of simplification of accounts it is proposed to replace it by a currency reserve within the general fund. It is proposed to transfer part of the assets of the note reserve fund to the legal tender note fund and to apply them in writing down the assets of that fund below their market values at the time of the transfer. The remainder of the assets of the note reserve fund will be transferred to the new currency reserve.
Although no detailed statistical material is available, there is reason to suppose that in recent years the practice of purchasing certain goods on deferred payment terms has been increasing here as elsewhere. It is a matter of common knowledge that such articles as household furniture, radio sets, bicycles, etc., have been largely sold on deferred payment terms. Even though some of the enterprises selling goods in this way may have large resources of their own, the system as such almost inevitably entails, on the part of the sellers, resort to some degree of financing by outside bodies.
Apart from the question of the terms upon which commercial banks are prepared to finance such business, there is another question of wider economic and social significance. Buyers who purchase on "hire purchase" terms are in fact mortgaging future income, and, if the practice spreads, a new element is introduced affecting the general stability of economic life. The result may be to leave too small a free margin of unmortgaged income available for times of depression—with detrimental effects for the industries which are unable to sell their goods on "hire purchase" terms.
For these reasons the Banking Commission Majority Report recommended that the growth of the system of deferred payments should be carefully followed. It is of interest to note that, in August last, the Federal Reserve Board in U.S.A., in order to restrain spending and to help in checking inflation, was authorised to control instalment credit and to curb instalment purchases of consumers' durable goods, including motor cars, furniture and refrigerators. Statisticians estimated that about 6,000,000,000 dollars' worth of debts were outstanding at the time on merchandise bought on the instalment plan, about half of which represented debts on motor cars. Sales of various consumers' goods on the instalment system had been increasing and were estimated to have expanded as much as two or three times the incomes of the purchasers. Part XI of the Central Bank Bill provides that the central bank may demand from the persons engaged in selling goods on deferred payment terms and from persons specialising in the finance of hire purchase all such information as it may think necessary or desirable. The bank may require the persons concerned to furnish the information within a time limit of 14 days, or at three months' intervals.
In times of war and emergency, monetary and banking business becomes affected by the disturbed conditions, just as do ordinary business, trade, industry and life in general. Indeed, a change in any one kind of business has repercussions on all others. Among the general worldwide tendencies notable on the outbreak of war are a contraction of credits and a desire by all for more cash, though after the first shock is over, bank deposits increase. Interest, rates also are generally increased in the initial stage, but tend to fall later. For instance, at the outbreak of the present world war, the bank rates of a number of central banks were increased and some were again reduced within the following six months.
External transport and communications become dislocated or entirely interrupted with resulting effects upon external trade. Warring countries tend to decrease their exports and to look for increased imports. These various disturbances tend to produce drastic changes in the external trading of all countries. The balance of payments is affected and within a short period favourable balances may become transformed to unfavourable orvice versa.
Rates of exchange between foreign currencies suffer severe jolts and it generally becomes necessary to establish a system of exchange control in almost every country, whether belligerent or neutral. As trade and the balance of payments become disturbed, the amount of foreign exchange available for trading with certain countries is not always sufficient to cover the cost of the imports required from such countries. It, accordingly, becomes necessary to ration the amount of available foreign exchange—allocating it to essential imports and restricting the allocations for non-essential imports. A further object of the exchange control system is to prevent a depreciation of the external value of the currency of that country which imposes the control.
The most serious financial danger that is always encountered in times of war and emergency is that of inflation. Prices of imported materials and commodities first increase, producing, in time, increases in the prices of internally-produced materials and commodities. Incomes and receipts of certain classes of the community, for example, exporters and others, rise; there is increased Government expenditure on armies and armaments and the monetary circulation in general increases.
Any one of the disturbing changes which I have mentioned is liable to produce repercussions on a country's monetary system and may demand that immediate action should be taken by the responsible monetary authority. The cumulative effect of a combination of such changes may have far-reaching effects unless strong counter-measures are taken. Such measures usually fall to be performed by a central bank, and, without a central bank, we in this country are not effectively equipped to meet the contingencies which I have described. I may add, as an example, that when it became necessary at the start of the present emergency to establish a system of exchange control the administration of the system had to be undertaken by the Department of Finance—a function which would otherwise probably have been assigned to a central bank, if one were in existence.
I stated earlier that in order to provide for the event of an international crisis causing a freezing up of the external assets of commercial banks and coinciding with a domestic crisis affecting one or more of these banks, it was considered desirable, even before the present emergency, that an Irish central bank should be available to act as lender of last resort. The possibility of such an international crisis occurring is ever so much greater in war time than in peace. As the establishment of a central bank was considered desirable and necessary in normal times, it is doubly so now, and it is, therefore, only prudent that we should be prepared for all possible contingencies in the present critical times.
This Bill is a measure dealing with banking credit, currency and coinage and not one proposing to reorganise the whole national economy. Such an ambitious plan would require a more extensive and elaborate measure, or, rather, series of measures, and it is doubtful whether the resultant effect would mean increased happiness and prosperity for the nation. There is no royal road to these objectives. Some people think we can spend our way into prosperity. They want to reinvigorate the economic machine by Government outlay. The system has been tiled time and again in democratic states, but in no case has it met with success. It is doubtful whether it can succeed unless under totalitarian conditions, or, at any rate, under conditions which we would regard as incompatible with our democratic institutions. This is not to lay down that the State has not made, and should not continue to make, large sums available for the purposes of national development. One need only look at the various items which the State reckons among its capital assets at present to see what has already been done in this respect. We have made large sums available for the development of electricity, sugar beet, industrial alcohol, coal, and other minerals, agricultural credit and industrial credit, aerial development, rationalisation of creameries and last, but not least, all the multifarious activities financed by the Local Loans Fund. The capital sums issued from this fund to local authorities for development works of all kinds are now little short of £13,000,000, and the total value of the assets represented by our cash investments in all the forms of development that I have mentioned exceeds £30,000,000.
If our unemployment problem has so far defied complete solution, it is not, as these figures show, because we have been niggardly in the matter of finance. To find a solution for the problem is most difficult and complex, as the causes are both numerous and elusive. Some people, I think, mistakenly, over-simplify the problem by ascribing it almost entirely to the lack of money. That is a most misguided and harmful attitude to adopt. Money is only one of the many aspects of this involved problem. Among the other aspects at least equally important are, for instance, the character of the works to be performed, whether reproductive or not, the availability of the necessary raw materials, plant and power at reasonable cost, the prospect of the ultimate product or finished article being turned out efficiently and at a reasonable price and the further prospect of such product or article being in demand by would-be purchasers. No worth-while project has been held up in this acountry by lack of money to start it, whether the initiators were private citizens or the State. Sufficient savings have always been available for such projects. So far as central banking action can reasonably enable the monetary mechanism to make its contribution to the national economy, our new central bank will have the necessary powers to assist. But we must not make the mistake of expecting that the central bank will perform miracles or do things that fall outside its proper sphere of action.