PRICE OF MONEY

Evening Post, Volume CV, Issue 140, 15 June 1928, Page 10

PRICE OF MONEY

OVERDRAFT RATES A CONSIDERED REPLY GOVERNMENT COMPETITION We. all wish to see cheap money in the Dominion, but, the banks cannot. bring it about until tho maintenance and cost of their deposits arc firmly established. —Mi-. AVilliism Watson at Bank of New Zealand meeting yesterday. As was expected, opportunity was taken by Sir George Elliot of tho annual meeting of tho Bank of New Zea- • land to deal with criticism levelled against tho banks for increasing the rate of interest on overdrafts, on Oth May, 1027, from a minimum of G* per cent. to. 7 per cent. Sir George Elliot remarked that the banks wcro much criticised when the minimum rate of interest on advance.; was increased —an action rendered necessary by the posifion into which tho banks were getting. "It is true," he said, "that the advances of all the banks in New Zealand had increased considerably; it is also true that tho imports for tho years ended 31st March, 1928 and 1927, wcro much in excess of exports; but neither of these factors, important as they are .from a banker's point of view, was the chief reason why the overdraft rate was raised. The determining cause was the intense competition, Governmental and private, for deposits. "This competition had seriously affected the position of banks, which wore reluctantly compelled to raise the deposit rate, not only in ..order to hold the deposits they already'had but also to stimulate and encourage a fresh sup- ] ply, and so attain a proper and adequate adjustment of deposits in relation' to advances. Tho natural sequence to a rise in tho deposit rate is a rise in the advance rate —this, of course, . in tho pursuit of that .perfect balance so much desired, but never attained, by bankers. NON-BANKING COMPETITION. "Perhaps in no couutry in the world is the taking of deposits, either at call or for extended periods by limited companies and private limit;, carried to such an extent as it is in Kew Zealand. Many of these concerns conduct what is to all intents and purposes a banking business without-being compelled by law, as banks are, to keep liquid reserves against their deposits. This state of affairs, apart altogether from tho danger it introduces to borrower and lender alike, somewhat upsets the banking-position. "It will be readily admitted that banks carry on a highly important function in the community; so woven are they into the woof and warp of a nation's life that anything that affects them aft'ecta every member of that nation, directly or indirectly. It seems, therefore, to mo'of the utmost importtanco that bunks and Governments should be in the closest relationship one with the other; and more especially is this true of the Government of New Zealand and the Bank of New Zealand, because tho Government owns one-third of the capital of tho bank. "Tho position just about the time rates were raised a year ago was as follows:—Advances by all tho banks trading in Now Zealand amounted to £00,501,000, while deposits, free and fixed, amounted t0:£45.529,000. "The position .when the figures were last published was: —Advances, £40,----070,000; deposits,' £49,958,000. It will bo seen that in one year the banking position of tho Dominion has improved by £9,160,000. NECESSARY STABILITY. "During tho past-few months there has been much agitation for a reductißii of the bank advance rates, and. in' view of the figures I have quoted, there would appear to be some justification for this agitation. I would point out, however, that to lower rates before the position'becomes stabliscd might eventually be more upsetting than to keep them for a little longer at the level ruling at present. If, as a result of- such lowering, the demand for advances increased unduly, or deposits were reduced, tho sanfo position as existed a year ago would quickly develop, and the same remedy would again require to bo applied. Rapid fluctuations in bank rates is not a desirable state of affairs for any country, and it; is to avoid such a contingency that tho present rates arc being maintained somewhat longer than some people think necessary. "The banks" are necessarily in the best position to know what the actual present economic and financial position is, and what its future is likely to be; they would be false to their trust if, against their bettor judgment, they allowed themselves to be stampeded into doing something that would not, in their opinion and with their knowledge, be in the best interest of all concerned. "May I emphasise the fact that hifh rates o.f interest arc not of advantage to the banks: borrowing customers may rest assured that their bank director's Mill bo just as pleaserl as Ihey themselves when the position warrants a cs(luction. SLOW RETURN TO NORMAL. "The world is slowly—very slowly returning to normal conditions, and, unless something unforeseen happens, it looks as -if. interest rates everywhere will have a downward tendency in the near future. Heavy taxation rendered necessary by tho war is one of tho prin- j cipal factors in retarding a fall; reduction of taxation would help much towards a more desirable" state of things. \Vith the outstanding exception of the limtod States, which, as a result of the sudden highly lucrative trade that developed during the war, has become tho greatest creditor nation, it would be to \ the advantage of almost every country if a permanent reduction of interest rates were brought about, not only because of the benefit that would accrue in connection with their public debts, but for the aid cheap money would give to their industrial and agricultural activities. "Tho chief auditor has supplied the following figures showing the rato of interest earned by this bank on its in-terest-bearing advances in the Doininion for years "ended 31st March-— 1897 1007 1914 1917 1927 0.513 5.79 G.OO G.OO C.G7 The figures for 1928 have not yet been worked out. * HIGHER OVERHEAD CHARGES. . . "It will bo seen that tho difference between the highest and lowest point is Jess than 1 per cent. Remembering the heavy increase in income tax, salaries, and other overhead expenses of tho bank between 1907 and 1927, 0110 may recognise that tho bank has not passed on to its borrowing customers a proportionate share of its increased - operating charges. . The desirability of cheap money must indeed be emphasised; but in New Zealand, at least, it is not the panacea for all financial ills that many writers and public speakers endeavour to make out. In London tho raising of the bank rate has no doubt a decidedly depressing influence, for while the world may bo on a dollar basis, as tho Bight Hon. Mr. M'Kcnna, chairman of directors of tho Midland Bank, pointed ont -at the last annual meeting of his shareholders, London is still a great, if not the great- ,

est, financial centre, and a rise in interest rates is of vital importance to the- great financial and bill broking houses there—whose huge operations cover the trade of the world —many of which houses work on a margin of an eighth or even a sixteenth of one per cent.; but a rise in interest rates has no such devastating effect on a country like Now Zealand. It may be inconvenient, but it is not vital. . INDIVIDUAL LOSSES. After an investigation into the individual losses mado by tho bank ■during the year, I am satislied that by no stretch of imagination could these losses in any single instance be attributed to the payment by tho borrower of high interest charges. I will go further and say that, had such borrowers paid 4 per cent, for their financial accommodation instead of 7, the result in every case would have been the same. It may have been one of the subsidiary causes of a man's financial downfall, but it was not the primary cause. The primary ' cause may have been a x heavy fall in land values, a drop in tho price of stock, over-speculation on the eve of a falling market, an unforeseen chango of conditions, or the acquisition of a greater area of laud than was warranted by the owner's capital. Subsequently at this meeting Mr. William Watson, director representing1 shareholders' interests in the bank, also referred to Government competition with tho banks for deposits, and to the rise in interest rates. Ik- said ho had seen it assorted that the Gov'eminent was playing into the hands of the banks by reducing the maximum interest bearing deposits in the Post Office Savings Bank from £.5000 to £.2000, notwithstanding the fact that the higher amount was designed to meet the needs of tho financial stringency of 1920-21. "We are also advised from several quarters," he added, that, as tho interest rates were raised owing to tho imports exceeding the .exports, so, now that the position has fortunately been reversed, wo should immediately revert,to the former rates. Tho facts are that tho resources of tho banks wore quite sufficient to cope with the temporary excess of imports without raising tho rates of interest on advances; but, as you were told from the chair hero last year and also this, the increased rates would not have been forced upon flic"1 banks but for the competition of the Post Office Savings Bank by that institution's doparturc from recognised savings bank' business. The savings bank has recently modified its terms, although not altogether to the extent of reversion to the former position. For the correctness of these remarks I have tho authority of the chairman of the Associated Banks." However, Mr. Watson continued, farmers and traders could tako ailvantage of the bank's long-term mortgage scheme at an interest rate of 6 per cent., otherwise-they liavo^to pay tho rates of interest on overdrafts which arc proportionate to the fixed deposit rates. Further, as the chairman had said, salaries and other. expenses of banks had increased enormously of late years. Excess of exports over imports will, of course, greatly help in cheapening the rates of interest all round. "A FANTASTIC THOUGHT." "That tho Government should play, into tho hands of the Associated Banks to the detriment of the rest of tho community is simply a fantastic thought," Mr. Watson remarked. "So far as this. bank is concerned, 1 can assure you that tho Government business is conducted on strict business lines; beyond that, the bank gets nothing, and the Government gets only its taxes and dividends. Shareholders abroad will be interested to learn that the Minister of Finance, the Hon. W. D.ownie Stewart, in a statement made to Parliament last session as to' how far the Government is entitled to influence tho administration of the bank, said that he took the view that he was quite entitled to make representations to tho Government representatives on the directorate, but having made representations, the Government was not entitled to go further. There can be no question that that is the correct attitude. As you know, the Government representatives comprise the majority of the members of the board, and. they necessarily must —and th e y c io_alike with the representatives of the ordinary shareholders., administer the affairs of the bank -in terms of tho Acts of Parliament and Deed of Settlement, and in accordance with established "banking custom." "It must not be forgotten that the Government has a minority, and not a majority, interest, in the. capital of this bank," Mr. Watson concluded.