REPRODUCTIVE LOANS?

Evening Post, Volume CIX, Issue 13, 16 January 1930, Page 12

REPRODUCTIVE LOANS?

As a general rule the Government cannot be expected to answer anonymous criticism, but the Prime Minister was wise to make an exception iv replying to the indictment of the country's financial policy which was presented by "Looking Ahead" in Tuesday's "Post." Sober observers are anxious concerning finance. Probably few would support the correspondent's conclusions, but they fear that we are drifting, and they wonder where the drift will land us. Corrective measures can be introduced only if public opinion is educated to the necessity for them. Frank discussion is essential for this purpose. There need be no panic and no exaggeration. Talk of national bankruptcy is foolish; but it is essential that there should be a greater measure of self-reliance and a more careful examination of the national bal-ance-sheet. The correspondent, "Looking Ahead," as the Prime Minister rightly pointed out, over-stated the cost of borrowing by failing to allow for the return from assets created out of loan moneys. Debt charges are met for the most part from revenue apart from taxation. The deadweight debt, including war debt, is a comparatively small part of the whole.

Making due allowance for this, however, it is reasonable to ask: Is the position improving or is it likely to improve? It cannot be contended that the position has been improved lately. Loan money has been spent and is being spent now principally upon reproductive works. But the term "reproductive" is loose. It is applied to works which will give an indirect return by increasing production, and it is applied to works which will pay 2 or 3 per cent, in several years' time. By no stretch of imagination can it be argued that no part of the burden resulting from recent borrowing will fall upon the taxpayer. With reasonably careful management he may be spared any debit from State Advances. If land settlement is fortunate, it may meet all charges (though the experience with soldier settlement does not encourage optimism). Mr, Coates anticipated in the years to come a surplus, apart from debt charges, from hydro-electric development, but that is not yet assured, if the schemes are taken as a whole. Roads, bridges, and public buildings (except those for trading departments) will give no direct return. There is certainly no immediate hope of a 6 or a 6| per cent, return (the approximate present cost of borrowed money with sinking funds) from new railway development. The issue for the country to face is briefly this: Is loan capital costing 6 to 6-i per cent, wisely spent on works which will give either an indirect return but nothing direct or a direct return amounting to only half of the debt charge?

There is grave and serious need for a new definition of "reproductive." We use the term now in a way that sound private business practice does not warrant. With such loose use of terms, which comes from loose thinking, business-like control of expenditure is impossible. We must try to get down to bedrock and assess more exactly the return from borrowed money. This applies equally'to so-called direct returns (which may be no more than the axle-grease cost of a railway costing millions) and indirect returns (which may be the settlement of land which will give a bare living to the settler only after the State has written down the settlement cost). In the provision of what are termed commercial facilities there must be a similar examination. Motor roads in all directions are undoubtedly a convenience; but is motor transport on the existing scale worth all that it is costing? If one reckons the expense of duplicated transport service, of the heavy rating long bemoaned by towns and counties, and the railway loss through diversion of Iraf-

fie, it must be admitted that a big price is paid for this convenniencc. Because it is not paid direct and in one sum the average citizen does not complain. Instead, he rails against increased rates and taxes without considering why they are levied. Government and local body extravagance is condemned, and in the same breath a demand is made for more of those services in which there has been extravagance.

In a short space we cannot examine in detail the other complaints made by "Looking Ahead," or the answers given by Sir Joseph Ward. But there is one point to which we would draw attention. The correspondent included mortgages and bank advances in our liabilities'. The Prime Minister declined to admit such an item, holding that there were corresponding assets —as of course there are —which cancelled the liabilities. In general this argument is sound. Mortgaging is a business means of bringing the possessor of capital into touch with the user of capital for mutual benefit. If one regarded mortgages as Mr. Holland regards them, and painted every mortgagee with horns and a tail, modern business would come to a standstill. Yet there is another side to the question. When mortgaging goes beyond bounds it is a sign of unhealthy inflation. The smaller the equity of the borrower becomes, the more risk there is of ibis inflation. It is not healthy when users of capital consider it quite normal to be mortgaged to the hilt. The borrowing which is economically advisable and permissible is that which is tapered off—when the mortgagor reduces his liability and steadily increases his equity. Small equities lead to speculation —easy come, easy go finance—and speculation is the father and mother of boom and slump. One may ask how far this speculation on narrow margin mortgages has been fostered by the extension of State Advances beyond, the bounds originally contemplated.