The Evening Star: WITH WHICH ARE INCORPORATED The Evening News, Morning News, and Echo. WEDESDAY, FEBRUARY 7. 1894.

Auckland Star, Volume XXV, Issue 33, 7 February 1894, Page 4

The Evening Star: WITH WHICH ARE INCORPORATED The Evening News, Morning News, and Echo.

WEDESDAY, FEBRUARY 7. 1894.

For the cause that laoka assistanos, Ffir tha wrong that noeds mistancß, For the future In the distance, And the good that va can do.

Among the policy measures foreshadowed by the Premier on the eve of the last general election, none gave rise to so much discussion or created a greater amount of distrust than the proposal that the Government should become the agent between borrower and lender.. Yet, as we pointed, out at the time, so able a financier as the late Governor Stanford, of California, advocated a scheme of a very much more revolutionary character. He maintained that high rates of interest were the chief bar to the progress of the country, by restricting improvement and filching an undue share of the workers' gains, thereby impoverishing him. Governor Stanford introduced into the United States Senate a measure to remedy these evils, embodying provisions of a startling description. He laid down this principle—that the value of a circulating medium is determined by the security at the back of it; that" in the case of the United States, the Government is strong enough to give a guarantee to an issue of paper money that would be equivalent to gold ; that, irrespective of this, a security as substantial and tangible as gold could be provided in the following way : The American Government should is.ue notes of various denominations bearing the national guarantee and made legal tender. These should be passed into circulation thus : Bureaux for the purpose of advancing money upon improved land should be established throughout the country, to which owners of improved farm lands could obtain advances in i these guaranteed notes not exceeding half the value at which their properties were assessed before the passing of the new law, interest to be charged upon these advances at the rate of two per cent. The virtues claimed for this system are threefold.: Ist, cheap money for effecting improvements; 2nd, an unimpeachable currency, backed by the national guarantee and double its face value in real estate, so that no panic could disturb it; 3rd, a revenue sufficient to pay a considerable proportion of the cost of governing the country, thus materially decreasing the burden of taxation on the masses of the people.

Assuming Senator Stanford's scheme to be fiscally sound,— and we confess that we cannot detect a flaw in the reasoning by which he supported it—the enormous relief which his proposals would give to every description of industrial interest, through the cheapening of money and the reduction in taxation; is so apparent that no argument is necessary to support it. To the objection that the paper money would be worthless for foreign exchanges, Governor Stanford said the whole foreign commerce of the United States in a year was not as much as the domestic commerce in a week. Only a small pordon of the foreign, exchange business was done with gold, and ample gold would remain in the country to settle sach balances.

| A proposal so revolutionary arrays the combined power of all the wealth of the nation against it, and even in the United States the adoption of such a scheme is probably very fas: off. In New Zealand, or any other of these colonies, it would be utterly impracticable. Our national credit is too deeply pledged aheady to the foreign creditor, and our chief markets are abroad. Moreover, the total note circulation of all'the banks in the colony is under a million sterling, and if we increase that amount by half-a-million, we reach the maximum to which a paper currency could be forced. Already the Government receives from the banks two per cent, upon their notes, and incurs no responsibility or cost in connection with the management of the issue. It is doubtful if the banks' make any gain out of their note circulation, and whether it be expedient for the Government to take the whole currency into its own _ hands or not, , a question which _is open to discussion, the gain arising from the issue of State notes would be comparatively trifling, and the advances to farmers dependent upon such a fund would be limited to about ,£1,500,000. •

The proposal made by the Premier is of an entirely different character. It is more upon the principle of the Credit Foncier, which enabled the small landed proprietors to maintain their position, and become the most thriving class in France, and the backbone of its prosperity. These institutions on the Continent of Europe are of two classes, associations formed among the borrowers and institutions established by the lenders. The Landschaftsbanken of Germany belong to the former class, and may be taken as a type of all the rest. Their mode of operation is thus described by Mr H. D. McLeod, a recognised authority on banking :

The credit of the associations was always interposed between the lenders and the borrowers. Buring created, as a matter of fact, a species of " land stock," and those who bought bhis stock looked only to the association for payment of their dividends, and tbe borrowers paid all interest,' etc., to the association, which took upon itself all questions of title and security. The whole of these obligations were turned into stock transferable in all respect like the public funds. Such is the general design of these associations. They avoid the rock of creating paper money, while they greatly facilitate the application of capital to the land. They, in fact, do nothing more than turn mortgages into stock. The holder of the bonds has, as security for their payment, the whole capital of the company, and the land specially mortgaged to them. These institutions have had the most marvellous effects in the countries in wkicb they, have been formed. Their obligations have maintained through all crises, war and revolutionary, a steadiness of value far beyond any other public securities whatever, either Governmenb er commercial. In the revolutionary period of 1846, when the Prussian funds fell to 69, the shares of the Bank of Prussia to 63, and the shares in railways 30 to 90 per cent., the land banks funds producing 3_ per cent, interest stood at 93 in Silesia and Pomerania and at 96 in East Prussia."

The great Credit Foncier of France is an institution more of the character of our loan and mortgage institutions, with this very important difference — that it is limited by law to a charge for its advances not exceeding 12s per ;£ioo above the interest paid upon its mortgage debentures. In view of the experience of our own loan companies, borrowing at 4 per cent, and lending at from 6'to 10, we are amazed that a profit could be made, after payment of management expenses and depreciations in investments, upon such a margin. Nevertheless, the fact remains that upon the security of a paid-up capital of ,£6,820,000 and £"657,603 reserves, the Credit Foncier has in circulation debentures amounting to £119,824,444, and realised last year £1,052,602 profits, equal to nearly 15 per cent, on its paid-up capital.

A third class of institution exists on the continent of Europe in the nature of national Hypothecation Banks, which are established by the State or by provincial Governments. These have been worked with very great advantage to the people. They give advances for agricultural purposes on mortgage at about 3}_ and 4 per cent.

In the New Zealand Government scheme, so far as it has been outlined, there are combined elements of the Credit Foncier and the national Hypothecation institutions. The Government will guarantee advances made by English investors and will loan the money out at 5 per cent, to New Zealand agriculturalists. The difference between the price at which the money is borrowed and the rate at which it is lent will defray working expenses and leave a substantial margin to cover depreciations. That some measure of this kind will have to be adopted it any _reat advance is to be made in the improvement of the waste lands of the colony, is steadily forcing itself upon the minds of mercantile men. The severe shock given to confidence in the great loan companies by recent failures is being followed by the diversion of English deposits from channels through which they have, at great loss and waste to the user, found their way to the New Zealand farmers. Under pressure from without, money is being rapidly called up by some of these institutions, to the great loss of borrowers, to whom frequent changes of mortgagees, with all the attendant cost ot procuration fees and deeds, are as ruinous as excessive rates of interest. Probably some years will elapse before money will flow freely again through these discredited channels. We hear a good deal about the superiority' of private commercial management over Government administration, but the disasters that have overwhelmed many banking and loan companies which borrowed cheap money in Great Britain and lent it out at high rates in the colonies gives them little occasion for boasting.

We have on various occasions drawn attention to the fact that, so far from furnishingforeigncapitalforthedevelopment ot New Zealand industries, some of the great and most unimpeachable and ably-managed of the Anglocolonial financial institutions, having their headquarters outside the colony, but "doing business in New Zealand, drain the colony of capita"! to. be utilised elsewhere. Take, for example, the three Australian banks which stood unshaken during the recent financial storm. According to the reurns lor the December quarter, setting the deposits received in New Zealand against the advances, we find the position as between the banks and the colonists to be as follows:

Deposits over Note advances circulation £ s d £ s d Union Eank .. 939,55_ 13 9 .100.709 1 6 Bank of N.S.W. 51.659 110 95,511 II 6 Bank of A'str'lasia 53.676 13 1 67.108 10 0

1,104,891 8 8 263,329 3 0 Note circulation 263,329 3 0

Total .. •- 1,368,220 11 '8 That is to say, that, exclusive of note circulation, the banks have re-j

ceived in the shape of deposits by New Zealand people £i, 104,891 more than they have advanced to them, the money being no doubt used chiefly to fortify their Australian business. These figures are more favourable to the banks than in the three preceding quarters, owing, no doubt, to the withdrawal of deposits and the advances in connection with our wool season. The balance of deposits over advances in the March quarter, • 1893, was ;£i.3°3i3i7; in the June <luarter> ;£ 1,409,505; and in the September quarter, .-£i,343>85 6-

These figures show, we think, pretty conclusively, that so far as the colony trusts to financial agencies not directly identified with New Zealand to furnish capital for the development of its resources, it is leaning upon a broken reed. In the future we shall probably fare no better than in the past. If" for.ign capital at a cheap rate is to be found on any large scale, it will have to be secured in some such way as the Government propose to inaugurate. Whether a scheme of this character can be so safeguarded as to prevent abuse, remains to be seen. It would have to be completely removed from political influences, and the advances be limited to moderate amounts, for the assistance solely of agriculturists, and with a margin of one half, as proposed by Senator Stanford. Until the details of the Government Bill are submitted it would be premature to pronounce any judgment upon its merits, but the proposal is assuredly one which demands the most exhaustive examination and dispassionate consideration.