The Auckland Star: WITH WHICH ARE INCORPORATED The Evening News, Morning News and The Echo. TUESDAY, AUGUST 26, 1930. BRITISH BANKING POLICY.

Auckland Star, Volume LXI, Issue 201, 26 August 1930, Page 6

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

TUESDAY, AUGUST 26, 1930. BRITISH BANKING POLICY.

For the cause that lacks assistance, For the wrong that needs resistanot, For the future in the distance, And the good that tee can do.

Last week, for a great variety of causes, something closely resembling a "slump" was recorded on the London Stock Exchange. This sudden and rapid decline in the value of securities was due chiefly to the demand of the banks for ready money. The banking authorities had decided to call up advances made against stocks and shares, and in their desperate attempts to find cash at short notice many firms had unloaded their securities on the market at ruinously low prices. A rush to sell inevitably brings Stock Exchange quotations down, with a run, and the collapse of the market eventually compelled the leading banks to reconsider the situation.

In view of this emergency, the decision reached by the "Big Five" is of considerably more than local interest. They resolved to reverse their policy of calling up loans ou securities except as a last resource; and though no doubt they will continue to demand reduction of overdrafts and 'the liquidation of other debts, they will not drive "reputable firms" to the Stock Exchange to dispose of their holdings at a disastrously low figure. For one of their chief functions is to maintain the confidence of the financial public. Being "credit" institutions, this confidence is their only solid foundation, and they have practically admitted that, by following out a policy which depreciates securities wholesale, and at the same time shakes the prestige and endangers the solvency of "reputable firms," they are in reality committing financial suicide.

The decision seems to liave been reached rather late in the day, but it is quite consistent with the best accepted traditions of British banking. In that classic of banking theory, "Lombard Street," which is as sound in principle to-day as it was half a century ago, Bagehot insists with the utmost emphasis that, because it is the chief duty of banks to support that mutual confidence between lenders and borrowers on which the whole of modern finance and commerce are based, therefore they must lend money freely when money is scarce. So long as the applicants for loans and advances are "reputable," so long as they olfer good security, and will pay the rate of interest demanded, they should have their wants supplied}. When money is "tight," and people are selling securities to find cash, a panic is always in sight. But a panic, says Bagehot, is a sort of nerve-attack, and the patient should be fed, not starved. In one of the greatest crises of the nineteenth century the officials of the Bank of England publicly declared that the Bank went out of its way to find means of supplying deserved financial help, so as to assist "the City" through its difficulties, and it is highly reassuring to learn that these fundamental principles of sound banking are still honoured by the great British financial institutions to-day.