STATE BORROWING.

Auckland Star, Volume LXVII, Issue 238, 8 October 1936, Page 10

STATE BORROWING.

TWO ALTERNATIVES.

LOANS AND SECURITIES.

AUCKLAND EXPERTS' VIEWS,

"Apparently the borrowing will he done by raising a loan to be underwritten by the Reserve Bank, or State securities of this amount may lie sold by the Government to the Reserve Bank," said Mr. H. R. Rodwell, acting-professor of economics at the Auckland University College, in commenting this morning on the proposal in the second Finance Bill to borrow £13,000,000 for public works, main highways and housing programmes. "These are both possible alternatives under existing legislation," he added. "If underwriting is adopted, that is, if loans are issued by the Government, then there will arise the question whether the whole of the amount will be subscribed by the public. If the public does subscribe the whole of the amount, then you have an ordinary internal borrowing operation. "If the Reserve Bank is left with some of the loan unsold, then a proportion of the assets will become lixed, and its capacity to control the credit situation will be reduced. If the alternative method is adopted and sale of securities to the Reserve Bank is the means of raising the necessary funds, then the Government securities hold by the bank will be greatly increased, while the advances will also.be greatly increased. "This would be equivalent to a large measure of credit inflation, which would not be the case if the underwriting method were adopted. The fact that an amendment lias been introduced authorising the bank to underwrite a loan raised by the State Advances Corporation would seem to suggest that the loan will be issued and underwritten by the bank. Need for Happy Medium. "The underwriting, of a loan by the State bank is a very dangerous provision in that it may well result in tieing up of bank funds, which would impair efficiency in controlling credit and currency. It is probable that the ad\ ice of the bank will be sought as to the opportune moments for issuing portions of the loan. This could ensure that the loan would be fully subscribed by the public on issue. It is unlikely that the Government would issue the whole amount in a short period of time, and run the risk of under-subscription by the public." Dr. E. P. Neale, secretary of the Auckland Chamber of Commerce, said he would confine any comment to the need of striking a happy medium in borrowings from the Reserve Bank. "If there is "more borrowing from the Reserve Bank, the first effect is to deplete the London balances, which is a good thing, he said. "But if borrowing goes too far, there is a danger of having to raise the exchange or ration it. Such a position arose in 1931."