Dáil Éireann - Volume 20 - 01 July, 1927


MINISTER for FINANCE (Mr. Blythe): I move the Second Reading of the Currency Bill, 1927. As Deputies are aware, the Currency Bill was introduced into the last Dáil and passed through all stages up to the Report Stage. In the course of the Committee and Report Stages a considerable number of technical amendments were passed. As originally introduced, the Bill was based on the Banking Commission's First Interim Report. [298] As it was necessary in the course of the Bill's progress to elaborate matters which had only been dealt with in a broad and general way in the Report of the Commission it was found that certain details in it could be improved by amendment and so far as possible we met any objections that were raised and we sought any advice that could be obtained. I think in the stage it reached in the last Dáil the Bill was fairly water-tight.

Deputies may be aware that the Currency Commission was appointed about fifteen months ago because it was found amongst other things that there was no such thing in this country as legal tender which could be identified as such. The ordinary British currency note is not legal tender. The only British currency note which would be legal tender in this country is the currency note which was issued before the Treaty. Probably the number of such notes in existence is fairly small and at any rate they could not be identified. Furthermore various joint stock banks had a note issue which appertained to the whole of Ireland and there was no fiduciary limit which had reference to the Saorstát. It was necessary that the fiduciary issue should be divided as between the Saorstát and Northern Ireland because the Saorstát is a definite, fiscal, financial and economic unit. It had also been complained that there were not all the facilities that were necessary in the matter of agricultural credit or business credit. In view of these matters, and in view of the necessity of causing no alarm or taking any action that could cause any reasonable apprehension, it was decided to appoint a Commission to examine the whole question. The terms of reference were:—

“To consider and to report to the Minister for Finance what changes, if any, in the law relative to banking and note issue are necessary or desirable, regard being had to the altered circumstances arising from the establishment of Saorstát Eireann.”

The Commission consisted of Professor Henry Parker Willis of Columbia University as Chairman. He was for [299] some time Secretary of the Federal Reserve Board of the United States. He held other very important positions in regard to banking in the United States, has written on banking and has carried out investigations in regard to banking and currency matters, and in particular in regard to agricultural credit. Other members of the Commission were Senator Jameson, Director of the Bank of Ireland; Mr. O'Connell, Director of the National Bank; Mr. F. J. Lillis, Director of the Munster and Leinster Bank; Mr. Smith-Gordon, Director of the Industrial Trust Company of Ireland; Mr. Campion who had been in the service of the Commonwealth Bank of Australia and who also had experience in connection with questions of agricultural credit; Mr. Galloway, a Director of the Ulster Bank; and Mr. McElligott of the Department of Finance. Deputies will see that about half the members of the Commission consisted of representatives of the joint stock banks in this country. It was necessary that the banks should be very strongly represented on the Commission because reform which had not the concurrence of the banks could not be successfully carried out. Certainly no such reform could be safely carried out. As I pointed out on previous occasions in the Dáil, there is no matter on which the Irish people would more readily take panic than changes referring to currency or the credit of the banks. Mr. Smith-Gordon was Assistant Secretary of the I.A.O.S. and was associated with its work in this country. He has written on various economic and credit matters. Mr. Campion had experience in the service of a State bank, a Central bank, in one of the States of the British Commonwealth.

In regard to this matter of note issue, both bank note issue and legal tender note issue, the Commission were able to come to what was very nearly a unanimous conclusion. One member of the Commission, Senator Jameson, presented a minority report but in a great many directions the minority report is in something like agreement with the majority report. The matters on which it differs are considerations, I [300] think, of a somewhat minor character. By the report of the Banking Commission it is proposed and also by this Bill that a legal tender note issue be instituted here. That legal tender note issue will be issued, controlled and regulated by the Currency Commission. It will be backed £ for £ by British sterling so that no exchange variations can occur as between our currency and the currency in Great Britain.

It is provided in the Bill that at the London agency of the Commission any person presenting legal tender notes must receive British currency in exchange. The British money which is presented to the Currency Commission for legal tender will be held in the legal tender note fund and will be invested as to the main part in interest-bearing securities, and dividends obtained from these securities will go to the general fund of the Commission. That fund after paying the expenses of the Commission should provide for certain reserves. The surplus remaining after paying the expenses will go to the Exchequer. It is anticipated that something like £250,000 a year will go to the Exchequer as a result of the issue of legal tender notes. These notes will take the place of the British currency notes which are at present in circulation, and they will also take the place of secured bank notes. The present bank note issue is of two kinds. although the two classes are not distinguishable to the public. It consists of the fiduciary issues of which the security is the general assets of banks. In addition to the fiduciary issues there are excess issues which have to be covered pound for pound by British currency notes held by the banks or by British currency note certificates, so that secured notes issued by the banks here are practically the equivalent of the British currency.

Our new tender notes will take the place of the actual British currency notes in circulation. At present our Exchequer obtains no profit on that circulation. The profit goes to the British Exchequer. The existing bank note issue will be substituted by a new and consolidated bank note issue. The fiduciary issue of the various banks was fixed in 1845. It [301] was a privilege which certain banks had and others had not. As I have said, it was a fiduciary issue fixed for each bank with reference to the whole of Ireland. No limit is fixed for the Saorstát. That was a matter that had to be dealt with in some radical way. It would not be possible to fix new limits for an issue for certain banks, and to leave other banks without a note issue. It would not have been reasonable or possible to fix a Saorstát limit and say that a certain amount of the existing fiduciary issue of a bank related to the Saorstát, and the other amount related to the remainder of Ireland. It was necessary to deal with that point in a somewhat more radical way than that. It would not have been desirable either merely to have given a note issue to the banks that had no note issue and in that way put them on a parity, for these fixed limits of fiduciary issues had no relation at all to the existing state or requirements of the country. They were simply accidental figures arrived at on the basis of the notes of these banks outstanding, and the limits were fixed in 1845.

The tendency at present is to take from ordinary banks the right of note issue and to confine that right to a central bank. If the Commission here had gone the whole hog in the matter of standing for the modern trend they would probably have recommended the taking of the right of note issue from the banks and would have recommended the setting up of a central bank, confining the note issue to that bank. Instead of doing that they took a course which was something in the nature of a compromise, and which will give us a system something like that which exists in the United States. It is proposed that the consolidated note issue be allocated to the various banks, and that it be re-allocated from tune to time and be supervised and regulated by the Currency Commission, so that while the Currency Commission will not perform the function of a central bank, in a general way it will perform certain of the functions in regard to note issue. It will be an independent Commission on which not only the banks but the general public [302] will be represented. The Commission will consist of six ordinary members and the chairman. Three of the ordinary members will be elected by the joint stock banks, and three of the other members will be appointed by the Minister for Finance.

The chairman of the Commission will be elected by the ordinary members, or in default of his election by them he may be appointed by the Minister for Finance. The ordinary members of the Commission will hold office for three years, so that it will not be possible for a Government which might find itself in budgetary or financial difficulties to put sudden pressure on the Commission to alter its policy for the purpose of improperly helping the Government out of its difficulty. The chairman of the Commission will hold office for a period of five years. I think by the constitution of such a Commission we have got the best balance possible. We have got full representation for the banks and banking interests, and we have got the best sort of representation that could be secured for the general public, because the Minister for Finance in nominating representatives is precluded from nominating more than one State servant. His other nominated representatives must be interested in business or industry in the country. I think by that means we have got a board which will be independent in the exercise of its functions, and which will be sufficiently conservative to conduct the business of the Commission on sound lines, and which will be responsive to the credit requirements of the country. The basis, as I have said, of the new consolidated note issue, unlike the old fiduciary note issue, will not be a fixed amount. There is a limit of £6,000,000 for the initial period of two years, but within those two years, under certain conditions, it is provided in the Bill that the limit may be exceeded, and subsequently every three years a new limit will be fixed with reference to the requirements of the country.

That is a much more satisfactory and much more scientific method of meeting the credit requirements of the country than the system that we have known [303] hitherto of a simply fixed limit of note issue. The basis of the issue of consolidated notes either in general or to the individual banks will be the liquid sound advances of these banks. It must not be taken and cannot be taken that the bank will have notes issued to it up to the limit of these liquid sound advances. The proportion of notes which any bank gets out of the total issue will depend on the amount of liquid sound advances which that bank is making and has made.

I think that because of this new basis of the issue of notes we will have the credit requirements of the country better met than they have been in the past. and I think that the institution of the new system is going to have a very good effect upon the banks. As Deputies are aware, I have never agreed with the popular criticism that one hears of the banks; but at the same time I do think it is a fact that there has not perhaps been sufficient attention paid by the banks to the national requirements of the country. Certainly there has been no such thing as a currency or a credit policy here. There has been no machinery for giving effect to such a policy, even if a policy could have been evolved. Now we will have the machinery for giving effect to the policy. We will have, under the new conditions, the likelihood of a definite credit policy suited to the needs and requirements of this country being evolved. This will turn the eyes of the banks to our own machinery here. Heretofore banks have paid a composition stamp duty of 7/- per £100 on bank notes. We have since the setting up of the Free State got a composition duty on the notes issued by the banks as their note issue at headquarters here in Dublin, including of course in that the National Bank which has its headquarters in London, but which has no British note issue. The Northern Government has got the composition on notes issued in Belfast, irrespective, of course, of where they circulate.

On the new consolidated note issue up to the limit of £6,000,000, we will get a composition stamp duty in future. of 30/- per £100, and, on such portions [304] of the consolidated note issue as exceeds this £6,000,000, we will get a composition duty in place of the old duty of £2 per £100. The new arrangement will bring the Exchequer an additional revenue of something between £250,000 and £300,000 per annum. That is a factor of some importance in a country like this. In addition to that it will provide us with what we have not got at the present time—a legal tender. It will provide us with a more modern and more scientific system of note issue. It will I think lead to the development of a definite credit policy in this country, suited to the needs and requirements of the people.

Professor THRIFT: I interested myself in this Bill in the last Dáil. I do not propose to repeat what I then said, or indeed to say anything which would lead to a mere repetition of the discussion which then took place. I only rise for one purpose. I then did state the opinion, for what it was worth —and I do not claim to be an expert in the matter—that, as far as I could see, the Bill was based on a wrong principle, that principle to which the Minister has just referred, connecting the amount of note issue with what is called in the Banking Commission's Report, the liquid sound advances. In the discussions that took place then or since I have seen nothing to induce me to change the opinion I then expressed. I simply rise to say that I still hold that opinion, but I neither then voted against the Second Reading nor do I now intend to vote against it for the simple reason that it is true as the Minister has said, that the Bill is based on the Banking Commission's Report which was signed with almost unanimity.

Mr. McMENAMIN: I wish to make a few inquiries on the text of this measure. It will be obvious to the House that this is a measure transcendant in its importance and highly technical in its construction. The duty devolves on us here, irrespective of parties, to see that this measure, on which the future of this country is to stand or fall, should pass from this House in as water-tight a condition, so [305] far as the financial security of the nation can be provided for, as it is possible for us to make it. The Minister has just said that this measure when it was left off in the last Dáil, if I correctly understood him, was water-tight. There are now just one or two criticisms, questions or queries that I want to put to the Minister in this respect, merely to test that statement. I only read over this measure last night, because coming in for the first time to the House last week, every day's work was a quite sufficient matter for the time being.

In reading the Bill over it occurred to me that there are two portions of this measure which are not only the foundations of the measure itself but which will be the basis of the future security of the nation. The first part is the backing for the legal tender and the second part is the preservation of the custodianship of that backing when it is lodged. If you look at Part V of the Bill you will see that the issuing banks can issue a prescribed tender and lodge a draft payable at sight in London or lodge with the Currency Commission securities to the amount of the tender issued at the current value of the tender—that is to say, the value of the legal tender issued at the time of the issue of the notes. It occurred to me on reading that subsection that it left itself open to what might be a non-liquidated liability on, behalf of the taxpayers of the country in the future. For example, if the issuing houses purchased British securities in London or elsewhere at par, or at 95 or at 90, and lodged them with the Currency Commission as security for the issue, at the end of 10 or 15 years the market value of that scrip may be so depreciated that it could be got at 50.

There is a provision in the Bill that any deficit that may arise will be paid out of the Central Fund or the growing produce thereof. I would like to ask Deputies, irrespective of parties, are they as representing the people of the country, prepared to undertake that unknown and unliquidated liability? First the scrip purchased is paid for. Secondly, the bank that issues the tender is protected because any deficit [306] that arises in regard to its security is met out of the Central Fund. Are we, on behalf of the nation and acting as its trustees, prepared to undertake that liability in order that these other people should be protected? These are the main considerations. You have first this question as regards British securities and the value thereof.

There is another thing that occurs to me. Let us assume that while these British securities would be absolute security at the moment of purchase, it may well be that the social order in England may be changed and that we would have, perhaps a condition of affairs that we had a few years, ago in Dublin and throughout the country, when German marks sold at a penny a thousand. This is an element we should carefully examine and if possible, protect the taxpayer against.

Part VII of the Bill deals with the reserves of the Currency Commission, and the provisions, as set out, are in themselves quite good so far as they go. In so far as it is provided that the Currency Commission shall hold various securities, it is within their discretion to decide the kind of securities they may hold, but they are bound to hold some securities of this nature. But provided that they do comply with the provisions of the Bill and that they hold these securities, where is the guarantee to the nation that the securities are, at any specific moment, held by the Currency Commission? So far as I can see there is no restriction—I am, as one of the trustees of the nation, putting this to the Minister—and I see no provision in the Bill which makes it incumbent on the Currency Commission to have these securities available for inspection at a specific moment. Is there any provision under which any individual, say the Minister for Finance, may go to the Currency Commission and say: “I want to see now the entire six million pounds' worth of securities”? I think that Part VII ought to be augmented in order that there can be some check, so that the nation can be absolutely sure that the Currency Commission do, in fact, hold the securities that were handed over to them. So far as I see, that is one of the defects of this measure.

[307] If those two things were made absolutely water-tight we would have laid the foundation in so far as the root of the question of sound finance is concerned. As regards the second portion of Part VII, I would like to ask those who represent the staple interests of the country are they prepared to take the future unliquidated liability that is provided for in the measure by making good out of the Central Fund any deficit that may arise on the purchase and sale of these securities?

Mr. O'GORMAN: My contribution to the debate will be very small. The Minister for Finance told us that it was the custom to charge 7s. per £100 on the note issue of the banks, and that the future rate will be 30s. per £100. He claims that that will be a source of profit. I wonder was he serious when he made that statement? It will be a source of profit to the Exchequer, but it will be a source of loss to the general public. Does the Minister or anybody here doubt that the banks will pass on that charge? I believe that instead of being a profit it will cause a loss to anyone who will have to deal with the banks or who will have to borrow. I hope the Minister will abandon the claim that it is a source of profit. Personally, I think that interference with the currency or coinage is a mistake. I was once at a circus, and the funny man in the circus showed the people how to get rich quickly. He said: “Take a pound note, fold it across and you double it.” That seems to me to be the system of our Minister for Finance. The wealth of a country lies in its production and not by juggling with finance. Our flocks and herds, our butter and eggs—in them the wealth lies. Juggling with currency and coinage will not enrich us.

Mr. JOHNSON: It is interesting to hear from Deputy O'Gorman that he is moving towards the time when the basis of currency will be flocks and herds and grain. The criticism that Deputy McMenamin made has, I think, a basis of soundness. The question that he will have to answer, as I have had to answer, is whether it is well that there should be a continuation of [308] the present system in which there is not even the security that is referred to in the Bill. There is no legal tender in the country. There is not the security, as I say, which he refers to. Whatever risks there may be attaching to it, there is at least a formal security. Again, we are faced with the question whether we desire that the credit relations between Great Britain and Ireland shall be on a parity; whether, as a matter of fact, we shall be anchored to London, or shall go forward entirely independent.

If Deputy McMenamin and Deputies generally are in favour of the change to absolute separation in that respect, we are undoubtedly going to create a good deal of doubting and questioning as to the opportuneness of that change. The Banking Commission reported, and their report was generally received with approval, that it was not desirable to make that change, that it was not desirable to make that separation. Consequently, I am prepared now, as I was on the last occasion when this Bill was discussed, to acquiesce in it, because I believe it is not making any radical change, and I do not think this is the last Bill dealing with currency and credit questions. I think, as a matter of fact, the proposals in the Bill, after a few years' experience, will make for a further change—a centralised note issue under the direct authority of the State and no secondary note issue, that is, a note issue which is not legal tender. I do not think the Bill institutes a radical change. Because of that fact, it has not created very much commotion in circle? which are supposed to be chiefly interested in this problem. I think Deputy McMenamin will have to answer the question whether, in fact, he desires there should be a radical change, with an Irish reserve of gold, or whether he is prepared to go on, as at present, with no legal tender in Ireland, with no absolute security and not even with the assurance that there is gold behind the securities which are behind the Irish currency. That is the difficulty I see.

The question has to be answered whether we are to go on simply as we are, marking time and depending even [309] more definitely than we will be under this Bill, on London and the Bank of England, or whether we are prepared to make a much more radical change than is proposed in the Bill. I think the general view of the country is that it is better not to make that radical change. Personally, I am not able to say that the time is ripe for the radical change which I think will eventually come. But as I think some change is necessary, and as legislation is required to have legal tender for this country, probably the scheme proposed in the Bill is as little harmful as any other.

Captain REDMOND: The Minister has alluded to the Report of the Banking Commission. There have been, I think, three Reports from the Banking Commission. I should like to know from the Minister if a final Report has yet been made, and, if so, whether it will be published.

Mr. BLYTHE: The Final Report is being made, and will be published. It is in draft. I do not know whether or not it has been yet signed by every member of the Commission, but it is in the concluding stages of preparation. I do not think I need say very much in reply to Deputy Thrift. The system of basing note issue on or relating it to liquid sound advances is a system which is very widespread. There is a tendency, I think, to adopt it even more generally at the present time. The proposals in the Bill have the backing of our Irish Joint Stock Bankers, who do not err, I think, on the side of rashness. If any criticism could be advanced concerning them it would be that they are conservative. Deputy McMenamin seemed to be under the impression that people would lodge securities with the Currency Commission, that they would get legal tender, but that the securities would remain their property and might be redeemed by them at some future time. That is not the provision in the Bill. In the ordinary way, people will get legal tender notes by paying for them in British currency. The Commission, in certain circumstances, may accept a draft on London, if it approves of the draft, or it may accept direct transfer of securities. If it got cash, it would be [310] obliged to invest that cash in securities. The securities which are transferred to it will be its property, just as if it bought them with the cash it received for legal tender notes.

At present, we are entirely dependent on the monetary stability of Great Britain. If there were inflation to-morrow, whether to a greater or lesser degree, we would be involved in the consequences of it. At the present time, we have absolutely no protection against the effects of British monetary policy. There is no doubt that, under the provisions of this Bill, if the British Government pursued a financial or monetary policy which led to rapid depreciation in the value of British securities, we would suffer or we would, when we saw it about to happen, have to alter the arrangements provided for in the Bill. In any case, the possibility would be open to us of altering the arrangements provided in the Bill and we would have machinery which would at once enable us to escape the effects, to a large degree, of unsound British financial policy. We have no reason to fear that British financial policy will be unsound. There are great advantages in having no variable rate of exchange between this country and Britain, and consequently, until we have some grounds for believing that the British Government is going to pursue some very unsound policy, I think there is no reason for making any changes in the provisions of the Bill.

With regard to the holding of reserves and securities which should be held on behalf of the legal tender note fund, there will be a half-yearly valuation, and the accounts of the Commission will be submitted to the Comptroller and Auditor-General to be audited on behalf of the Dáil. It will be the duty of the Commission to satisfy the Comptroller and Auditor-General that it holds the securities it ought to hold. When Deputy O'Gorman referred to what the increased duty on the notes will be based on he ignored the fact that we are adopting a new and a more elastic system, a system which will be beneficial to the banks, and which will, I think, enable them to pay this additional sum without [311] passing it on. As regards the major part of the profit which this new system will bring the Exchequer, that will be a profit that has heretofore gone and is at present going into the British Exchequer. That is the profit on the legal tender notes which will take the place of British currency notes, or bank notes which were backed by British currency notes. I think that the Deputy underestimated the importance of financial systems and financial arrangements. Perhaps there are other people who overestimate it, but I think if the Deputy believes that our monetary and credit arrangements have little or no effect on production he is misreading the situation.

Question put and agreed to.

Committee Stage ordered for Wednesday, 6th July.