BANKING SYSTEM.

Auckland Star, Volume LXIV, Issue 84, 10 April 1933, Page 5

BANKING SYSTEM.

DEMAND FOR INQUIRY. FEDERAL HOUSE DEBATE. RESERVE BANK FORECASTED. The Attorney-General of Australia, Mr. Latham, announced in the House of Representatives that the Government was considering clothing the Commonwealth Bank Avith the complete powers of a central reserve bank, and also the separation of the bank's central reserve, and trading functions. .

The Leader of the Opposition, Mr. Scullin, had urged the appointment of a Royal Commission on banking, currency'and finance, and the extension of the powers of the Commonwealth Bank to give it complete control of banking. Mr. Latham, replying to criticisms of the banks by Mr. Scullin, said that in 1928 the profits of the nine leading banks of Australia were 7.93 per cent on capital and reecrves. In 1932 they were 2.75 per cent.

Mr. Latham said that Mr. Scullin's object in seeking an inquiry Avas to obtain material on which to base a policy for the nationalisation of banking. Nothing, he said, would undermine confidence and security more, at the present time, than an inquiry made with that object in view. On September 28, 1931, Commonwealth 5 per cent stocks stood at £35 15/, when there was a strong movement in New South Wales for Government control of banking. On March 27 of this year, the same stocks stood at £106 18/9.

The banks, Mr. Latham added, had advanced £86,000,000 short-term money, to assist the Governments. The nationalisation of credit Avould mean the destruction of credit and the ruin of values. Mr. Scullin's Motion. Mr. Scullin moved the adjournment of the House to direct attention to "the necessity for an inquiry into banking operations and their effect on Australia's economic position."

Mr. Scullin said he wished to make it clear that he had no apprehension as to the safety of Australian banks. Nevertheless, Parliament owed it to the nation to use its power over banking conferred by the Constitution, and that could only be done effectively by inquiring into the whole of the ramifications of"banking and currency. The Commonwealth Bank had been the bulwark of the nation's financial stability during the present crisis, just as it had been in war time. It should be permitted to extend its operations. The present crisis AA'as mainly a monetary one—the monetary machine had failed to meet the requirements of the people, and monetary reform was imperative if any measure of prosperity Avas to return. The part that Australian banks had played in creating the boom and then accentuating the depression by expansion or contraction of credits should be thoroughly examined. The public wanted the facts. Power of Banks. "Those who control the expansion and contraction of credit hold in their hands enormous power over every industry in the nation," declared Mr. Scullin, "and to a A-ery large extent Avield a control over Governments and their policies. This power is too great to be left in the hands of those whose principal aim is the making of profits. There is a growing opinion that banking should be under complete national control, and to that end the powers and activities of the Commonwealth Bank should be examined. The creation of credit is in the hands of the private banks. In good times they inflate to get larger profits. When the wheel turns they deflate for the sake of safety, and by that means accentuate a depression and injure industry and the community, bringing about industrial stagnation."

Mr. Scullin said that an inquiry into banking should be regarded in the same light as investigations by the Tariff Board into the working of manufacturing industries receiving protection. Bankers enjoyed infinitely greater privileges than the most highly protected Australian industries. For too long the people had accepted the .bankers' protestations that they were rendering a great service at a very low price. The cost of banking services- to the community could only be measured by a full disclosure of the rate of interest levied on industries, and the profits made, including dividends paid, profits placed to reserve, and also hidden reserves.

The banks claimed credit for having given assistance to the Government during the past three rears. They were entitled to some credit, but the Treasury bills they had financed were probably the most profitable investment they could have. The Commonwealth Bank had carried practically the whole of the risk, and the private banks had shared in the profits. If the banks ?Duld prove their claim, they should welcome an inquiry. Mr. Scullin concluded: "I urge that this problem be tackled earnestly. It is the outstanding question of the day. We see around us the degradation of unemployment and thousands of families in want, while the country teems with wealth, because the monetary machine has failed us in our hour of need."

Mr. Latham Replies. The Attorney-General said it appeared to him that the holding of an inquiry of this nature would not help to maintain the confidence which the people of Australia had in the general banking system. The inquiry suggested by Mr. Scullin was undoubtedly intended as the first step towards obtaining material on which a policy of nationalisation of banking might be built. The Ministerial side of the House was definitely opposed to that policy. The people of Australia had full confidence in Australian banking. In the difficult time between December, 1930, and December, 1932, interest-bearing deposits had increased from about £193,000,000 to about £216,000,000, which was proof of the fact. There -had also been an increase in the non-i:»terest-bcaring deposits. Advances by the banks in the same period, including advances, to Australian Governments, had increased from £231,000,000 to £295,000,000, although it was well known that the general volume of business had gravely decreased within that period. The Interest Rate. One of the most important points raised by Mr. Scullin was the interest rate, said Mr. Latham. While the price of everything else had come down, there had been a tendency for the price of money to remain high, particularly on long-term contracts, under which money had been borrowed. A definite policy had been followed by the Commonwealth Bank, in co-operation with the Commonwealth- Government, to bring down the price of money, but that could not be done by any form of direct action, which would certainly increase the price of money, because it wouSi destroy confi-

dence. On January 1, 1931, the oA-er-draft rate at the Commonwealth Bank was 6$ per cent, but at present it was i 43 per cent. The rural credits advance I rate on January 1, 1931, was 6 per cent, I but it was now 4| per cent. The fixed I deposit rate for 12 months had declined j from 5 per cent to 2J per cent, and for 24 months from 5$ to 3 per cent. The Treasury Bill discount rate at the beginning of 1931 was 6 per cent. It Avas now 2J per cent. The deposit rate, which had been 4 per cent, Avas now 2A per cent. The priA T ate banks' figures were not aA-ailable, but it was known that their overdraft rates had been reduced. If there Avas to be a further reduction in interest rates, the maintenance of confidence and security was i essential.

There Avere few things, apart from legislation directed against the private bauks, which Avould undermine confidence and security more than a general inquiry into the banking system as a step towards the nationalisation of currency and credit. Reduced Profits. Mr. Latham said that it had been contended that the banks were making enormous profits, but he would submit that the profits of the banks had ehoAvn a reduction corresponding to the reduction of profits in other forms of enterprise. In 1928, the profits of the nine leading bankti of Australia Avere 7.93 per cent on capital and reserves. In 1932 they were 2.75

per cent. Mr. Scullin: What about the hidden reserves 1

Mr. Latham: lam snowing that there has been a large reduction in the profits of the banks. Nationalisation and Credit. In recent years, Mr. Latham added, many persons who had not hitherto been recognised as high authorities had come to think that they were able to solve the problems of the Avorld by the nationalisation of credit. It should be realised that it Avas the method of the control of credit that Avas important. As propaganda had ceased, or had been checked by political events, so national credit had gone up. On September 28, 1931, Commonwealth 5 per cent stock stood at £55 15/. That Avas Avhat the people thought £100 of Australian stock Avas worth, at a time when there was a strong movement in NeAv South Wales for Governmental control of banking. On March 27, 1933, this stock stood at £100 18/9. (Ministerial "Hear, hears.")

It appeared to him that no facts had been adduced Avhich indicated the desirability of an inquiry into the banking system, on the supposition that something was Avrong Avith it. Indeed, the facts showed that it would be well to leave things alone, so that reductions of interest might proceed on sound lines. Commonwealth Bank Functions. Mr. Latham said the Government hoped at an early stage to consider whether some degree of reorganisation of the Commonwealth Bank Avas desirable, in order to clothe it, formally and fully, with all the attributes of a Central Bank. The Ministry proposed to consider the separation of the Central Bank from the trading bank at present conducted by the Commonwealth Bank.

"The resistance to political interference, with the banking system has been a wonderful thing for Australia in recent years," declared Mr. Latham. "I suggest to the House that it would be Avisc to continue that policy. To speak of the nationalisation of credit is to tread on very dangerous ground. If we nationalise wheat or boots, they at least remain Avheat or boots; but if Ave nationalise credit Ave should not be at all sure that avc should have any credit left. The nationalisation of credit will, I believe, mean the destruction of credit and the ruin of values. Therefore, I put it to the House that any action Avhich Avould arouse apprehension and fear at the present time Avould be particularly ill-timed. We should run the risk of destroying confidence."

The First Shot. The acting-leader of . the Country party, Mr. Paterson, said he belieA-ed that good might result from an inquiry if carried out by a thoroughly competent and unbiased body. If the banks were doing everything that might be expected of them, they Avould have nothing to fear from it. Mr. Casey (U.A.P., Vic.) said that this Avas probably the first official shot in a battle of which a great deal more would be heard. The Labour party was apparently seeking the road to universal Socialism. That would be the high-level bridge on Avhich the \~arious Labour factions would come together. Mr. Holloway (Fed. Lab., Vic): I hope that you are a good prophet. The motion was talked out.