Economist Discusses Trading Banks’ Advance To Government

Press, Volume XC, Issue 27404, 17 July 1954, Page 8

Economist Discusses Trading Banks’ Advance To Government

The Government’s borrowing of money from the Reserve Bank for housing had the advantage of the low interest rate charged by that bank, but resulted in increased cash reserves for trading banks, necessitating controls. By borrowing from the trading banks for the same purpose the Government reduced the funds available to the public, but the Government faced a higher interest bill. These are the “pros and cons ’ of two methods of raising money lor housing as set out bv “W.R.,” writer of the latest Economic Bulletin issued by the Canterbury Chamber of Commerce. The article begins with a review of the housing situation, and quotes figures showing an increase in the proportion of freehold dwellings in New Zealand from 50 per cent, in 1936 to 61 per cent, in 1951. Government measures to encourage the building and purchase of homes are enumerated, and local authorities' schemes are mentioned. A table covering the period from 1938 to 1953 shows that State housing operations “have fallen absolutely and relatively to prewar.

Loans by State Advances “This survey of the Government’s attempts to foster private and State housing shows that large means will be required to find the finance. It can also be seen that the main burden of this finance will fall on the State Advances Corporation, which during the year 1952-53 authorised £6,200.000 worth of loans for urban house building alone. This figure increased during 1953-54 to £8,000,000. But the State Advances Corporation has also the task to assist people in buying houses and farms. Not less than £23,600,000 was required for all of these purposes during 1952-53. “In the past most of the funds required by the State Advances Corporation came from Post Office . Savings Banks investments and debenture issues to the Treasury. This year the Government decided to borrow £12,000.000 from the trading banks at an interest rate of 3J per cent, for a term of seven years. (The average interest charge on the £96.700,000 stocks and debentures used for the finance of the Corporation at March 31, 1953. amounted to just under 3 per cent.) This money is to be used by the Corporation over a period of two years to finance private housing projects undertaken by the Corporation. “There can be no doubt that in view of the heavy programme of lending outlined in this bulletin additional funds had to be provided for the State Advances Corporation. A discussion hag, however, arisen as to whether these funds should have been borrowed from the trading banks, as has been done, or if the money should have been borrowed from the Reserve Eank of New Zealand.” Theory of Borrowing Without “wishing to take part in this discussion,” the writer gives the following as “the principles to be considered when it comes to borrowing on the part of the Government. “Borrowing represents the withdrawal of purchasing power from one sector of the economy where it is in surplus to another where it is required. If the money borrowed is used it utilises the surplus resources in a corner of the economy where there is a shortage of resources. “The surplus of resources which is being disposed of by lending and borrowing can be obtained by spontaneous abstention from consumption on the part of income recipients. It can also be obtained by Government

induced abstention for consuMnton the part of producers. “It is commonly assumed thnt banks lend money they reduce th lending resources. This is so their advances and deposits riseS '* they lend, but their cash reserve? not rise automatically with it Th? suit is that by giving an advance ’ run short of ready cash and hav? . be careful not to carry on with ♦ process without obtaining additiJ cash. With a view to further r e 1 banks’ ability to lend the Reserve Fh raised the trading banks’ coftimfi J reserve requirements from 20 a n T P. e £.<* nt - of thci . r current and liabilities respectively to 25, fin d k per cent. “Thus it is hoped that the advar K made to the Government w$H red advances made to the private serf In other words, to the extent that advance made to the Government • duces consumption of commodities » services elsewhere in the econon system it is hoped that the GdvenS is taking hold of spontaneous savin of the community for its programs 0 of private building finance. ,n u “The reduction in lending 'which ri the result of reduced free cash r * serves of the banking system when' n lends to the Government or has V compulsory reserve requirements ‘ L, creased can also be obtained by dir! J credit control. If the Governm* , through its Reserve Bank, advised i v trading banks that advance policy fc 1 be on a reduced basis the same rest u will ensue. If the Government th borrowed from the Reserve Rank U resources set free by its instructions ! the trading banks, it could use the n resources without paying interest S the private banking system. 1 Effects of two Methods > “There is one technical differcr P between borrowing from the tradi r banks and borrowing from the Resei ' Bank,” the writer says. “Governmt h borrowing from the trading banks e duces the banks’ cash reserve ratio a P discourages lending. When the Gove -v rnent borrows from the Reserve Ba ) it makes out Reserve Eank cheat ii< which are paid- into the trading ban e account at the Reserve Bank wken i Government disburses the sums. a “These trading bank accounts at a Reserve Bank are considered by id banks to .be equivalent to cash. 1 result is that borrowing from the i -t serve Bank increases—when 11 borrowing from the trading banks i is creases—the private banking systei ie cash basis. Restrictions on the bank! io system must, to that extent, be mi te stringent when the Governmt e borrows from the Reserve Bank.” e After setting out the pros and c< of Government borrowing from t a private banks and the Reserve Ba V the writer says that the Governnw Bi “undoubtedly following popular ® . mands has decided to achieve an aAr bitious housing target. The use of eXs terms of credit has been necessarygin make it possible to reach this tar®g Implied in such forms of finance iaTt certain degree of unorthodoxy. Xe; ‘‘Unorthodox Step” frc 1 ‘‘By borrowing from the tradw e banks money for what is a long-te# ol investment the Government has takfl a step which is unorthodox: it !a|K however, preferred to draw a iin when it came to the decision asfc. whether the money was to be raisfcc from the private system or the Resenfci Bank. Obviously this is a deciswer which is political in nature and ewe 1 -' riot be defined by the verdict of twai academic economist,” the bulletin cAa eludes. lan