LOWER INTEREST

Evening Post, Volume CXII, Issue 8, 9 July 1931, Page 7

LOWER INTEREST

LOANS AND EXCHANGE

EFFECT ON NEW ZEALAND

(To the Editor.) 'ft.Sir, —The Prime Minister (the.Right lion. G. W. Forbes) and the Leader of tho Opposition (the Right Hon. J. G. "Coates), by their public statement's, both appear to have achieved unanimity On the point that a reduction' of interest rates is overdue and necessary to tho restoration of national pros- : '.'.■parity. Presumably any Administra'fttion representing Tory, Liberal, or ft Socialist political thought which "tackles this problem can assuredly [count on having tho whole nation ftsolidly behind it in tho carrying into of any sane measures leading to /this end. There, however, appears to '.'be a hiatus as to whether action would ;bost be achieved initially by the Government reducing its 1 'loan interest ;i'ato or by tho associated "bank's making •the first move'by reducing their over,.draft rates. There arc, however, other "•'factors which in reality arc of primary importance, as these indicate that it is mot the method but the principle which is at fault. In England allotments of: Treasury bills have been recently mado on au average discount rato of just under £2 .. per cent. In 1922 the rate touched £1 ,13s per cent., and in tho lato 'nineties .the discount rate touched 10s per cent. Bankers in Now York and other ''Federal reserve centres have more money than thoy know what to do with. .They cannot lend it all on call at li /•per cent.; thoy cannot get enough dis- ■'.. counts at under 1 per cent. Six weeks • ago in England thcro was an agitation .for the purpose of" forcing tho tradiug .banks to reduce overdraft interest rates , from 5 per cent, to 3$ per cent. In Now Zealand, owing to the abseuco of any machinery which would ensure ■that money rates would respond to the •'availability of rnonoy, bank rates to all ■ftintents and purposes arc artificially • •'.'maintained, irrespective of that factor. It would not be an over-statement of j fact to suggest that in this country the banking system is in the village pump .stage and constitutes a grave hindrance to the revival of prosperity. Tho need f for the immediate installation of a 'central banking system is vital, as only \, in this way can the price of ' money r react and the interest rates rise and ,fall in sympathy. Also, only thus can j -.the 'exact needs for inflation ordeflar] tion be made to respond to the exigencies of the moment. ' ■ .', The operations of the Bank of England are of a purely impersonal and .-scientific nature, and tho value -of • ;monoy automatically responds; to cou- ■. ditions obtaining. It might well appear, that New Zealand should have r'adopted the gold standard and central _ banking contemporaneously with the re-institution of the gold: standard by -Groat Britain in early post-war years. ;"It has been suggested in certain, quarters that New Zealand is-too ft small • for tho functioning of a central bankf ing system. This would not'appear, to be in accordance with. . fact; It .is ; ; anticipated that its adoption would .ensure a saving of approximately 2 per , cent., and an empirical ; . calculation based on the total national production would show a saving estimated at ■£2,500,000 per annum to the over'--r head, and consequently the , primary "producer would bo this amount better {- off. '

• > Tho ultimate aim of New Zealand ,'• should be to make its money rates cor-j ■/irespond with London parities, and.the -~*.only way in which I can sec,this being" .made to happen is by arranging ;-. that , the Bank of England .; establishes an .agency bore'us and in lieu of a local centre bank. This would'be entirely ' free from bojh political'influence'and the control of the trading, banks. The Bank of' England might send out an executive to act as chairman, and the Government appoint one director, and . a third could be appointed by .the Bank. j- of England from am'png distinguished' , New Zealand citizens. :• The Bank of; ; England could', easily....provide ; ,the r ' nucleus. .of { the" technical ■ staff to put' ] tho system, into operation and could' .' appoint its ' own The' functioning of a central bank would beneficially affect the exchange; posi-: tion and would make' unnecessary the, retention of the "holding of shares in '. the Bank of Now- .';Zcalaiid by tho -.Government, whicjr.-cpuid.be. disposed >'■ of at a sound profit.' This would be f in. accordance with tlie resolutions ._ adopted by tho International. Economic „ Conference held at Genoa in 1922. In regard to the problem raised, by ] Mr. J. T. Grose's reply to-the. Govern- ' ment on behalf of tlie Associated *'' Banks in regard to tho prior reduction ' of interest either by tho banks or the Government, I would take leave to refer to the precedent created by a late Prime Minister, the Bight Hon, Eichard Scddoh, Whp,>.when faced by tho twin problems- of his Administration's need' for loan money' and the inadvisability of --.-raising 'the interest rate, borrowed ■■' (though .rumour, is, exciting as to the arguments -ho,.employed) the needs of his.-Administration,, direct from the banks'.th'emselyes so as not to disturb . their deposit;accounts, and the amount was raised pro rata among the banks according, tofttheir capital. . No rovi'cw, however, of the financial problem confronting the nation is adequate without a competent and un- : biassed analysis of .tho world position and its probable future reactions on New Zealand's loau requirements or conversion wid rofunding operations, '. aiid I would therefore ask 1 readers to bear with mo while I try briefly to cover the present position and pros- ,. pects.. The recent course of financial events, demonstrates with great force the unpleasant truth that tho present depression differs not at all from those of thp past in the sense that it must worlv-itself.out in tho classic, cyclo i of high: pripes; dear money—falling prices, cheapen i money—cheap money, rising bond prices, and, finally,* rising com-modities-and equities. Severe falls in all securities—except gilt-edged stocks of •unimpeachable stability—to almost unbelievably low levels, have dissipated what shreds of confidence were left to the holder of "Wo are not concerned here as to the justification for' this loss of confidence, that is a ■ debatable point, .but rather with the influence it has already exercised and, as it seems, will continue to exercise •' on the gilt-edged market. ft Two years of liquidation have freed enormous masses of funds, this being ' reflected in the reduction of "brokers' ' loans" in Wall Street from tho peak of 8,549,000,000 dollars in September, ': 1029, to 1,651,000,000 dollars in April, 1931, and in Groat Britain in the rise in bank deposits from £.1,601 millions ; in January, 1930, to £1,674 millions in January, 1031. Tho fall in commodities greatly reduces the working capital requirements of industry, as does also the low level to which business activity has fallen. Thus tho. balance- •'• sheets of many industrial companies ' in England show a largo increase in cash and Government securities, owing *' to the' impossibility of employing tho money profitably in industry. There- ■ suiting plethora of funds seeking employment in a restricted field is seen ■ in falling discount rates, a progressive reduction in bank rate, and in rising ' prices for , gilt-edged securities. Tho ' effect on tho last-named is greatly on- " haneed by political and financial diffi- •' culties in India, in Australia, in the '■ Continent of Europe, and in South America, which have rendered unsuitable a great body of securities that would otherwise have competed for • the investor's attention. - would be an

early revival of confidence which cannot at present bo foreseen. It is only a/matter of.. time—probably a short time—before tho conversion of the 5 per cent, war loan can bo attempted with every prospect of success. Hopes of an early trade revival have been abandoned. The British Budget imposed uo new taxation and-showed that Great Britain has so far weathered the "economic blizzard "in a manner comparing favourably. with ;any mother great nation.; ■ The; ; exchanges; . have uioved in our favour, the do.llar , rate boing 4.86| and the franc 'exchange 124.36, comparing with 1 4.851} aiid 123.60 respectively, ft the average rates in December :last. In consequence our gold position has improved, an amount of. £2,362,785 having been added to -tho Bank of England's reserve this year. The net efflux from the Bank of England since the return to the gold ! standard is now reduced to £14,120,----000. Our. relative financial position is thus considerably strengthened. Finally, tho entire effort of international banking collaboration is now believed to bo directed to promoting a rise in bond, prices, i.e., a fall in long-term interest rates, as was indicated by the reduction ;first in the Federal rediscount rate and subsequently of bank rate following Mr. Montagu Norman's visit to the United States. In drawing attention- to the foregoing we do not, of course, forgot that political uncertainties, over-lending abroad, and heavily reduced exports have, tended to weaken the position .of-•sterling, which is supported to a certain extent by the maintenance of higher short-term money rates in London than in tho other principal monetary centres.

There is vow £2,095,952,270 of the British 5 per cent, war loan, 192947, outstanding, an amount many times larger than that of any of tho other British Government issues and representing by far the largest single loan issue in the world. As wo have indicated above, it. is.iibw probable that the loan will be repaid or converted at any' early date under, tho option contained in the prospectus'of the issue, which states: "If not.previously redeemed, tho loans will.be repaid.'at par as.follows: 5 per. ceut./War Loan, 1929----47, on Ist June, 1947; 4 per cent. "War Loan, .'.-1829.-42,-: .'on .the:nlSth .October,: 194.2, but-H.M. Government'reserve to themselves .the-right: toft redeem , the loans,or either of them, at. par,, at any time _pn , or.- after, tho. undermentioned elates, on giving throe calendar months' notice in: the- London -'.Gazette: 5 per cent. : War Loan,' 1929-47, ,at any time on ,oi" after Ist .June, 1929.'.' There is nothing in-this clause to indicate that the Government has the right to piecemeal repayments; and it would appear that if.this operation is initiated it must apply to the'entire loan, a fact which naturally makes tho proposition one of great difficulty. A further important 'point is that the dead weight of the present enormous issue, giving a .substantially, higher yield than comparable : longer-dated, securities, has acted, as,a considerable check, to the realisation of au entirely lower yield basis for British credit.

• The .value of money, like that of any other .commodity, depends on what it will fetch. If the supply is greater than the demand, then the interest rato will continue to fall. There is no fixed .minimum interest rate, and even past experience is only useful as a guide, indicating that rates can fall to much lower levels than those now prevailing. The French War Loan is now.on a 4 per cent, basis, and the "United States of America's is on a Z\ per cent, credit level. It can be anticipated that at the appropriate time the gigantic British refunding operation Can be carried out on a 3i per cent, basis. It is hoped that this operation jvjll be effected on :'an international, scale- and that investors in America will-subscribe for at least £1,000,000,----000. This will have the most telling effect on world prosperity of-any postwar, factor. It would enable the immobilised gold stocks now hold by the;U.S.A. to be liberated and to be put into active use by London tv restore international, credit and purchasing power. New Zealand's ability to refund her present heavy and highpriced outstanding overseas loau commitments obviously depends on- the success of the refunding of the British War Loan.

~ lii spite of.the foregoing, it must not be taken that there are not still very/grave difficulties ; tp be overcome before the restoration of international financial equilibrium is adjusted. The first factor is the one of confidence, aiid it must be clearly visualised that national loans must not be regarded as eoniiug from one common source but that'the enormous totals arc col-lected-from tens of thousands of individuals who each contribute small sums from their savings. It is apparent that the ordinary John Citizen is exceedingly, doubtful as to whether Great Britain under her present fiscal system can profitably employ capital, and considers that the more likely happening would be tho further dissipation of now capital by the State in uonreproductivc, social services and by the further increasing of competitive imports which would confer no benefit on the general position of Great .Britain in tho world markets, and which would simply have the effect of strengthening the position of Britain's commercial rivals at her expense. It would therefore appear that the political situation in England has a most important bearing on the possibilities of loan conversion. This seems to be borne out by a letter dated 11th May. at New York, ■ which I received from an .American'banker of international reputation. 'He writes to mc: "Under tho present disturbed -economic conditions throughout the world the underwriting of-new, issues ,of .foreign ''.Government bonds'in' the American market is impractical. If such issues could be floated now, which is doubtful, the price level would necessarily have to compare favourably with prices on similar bonds already outstanding in this market, and the cost to the borrower would be so great as to make such borrowing inadvisable."

Other factors arc, of course, the questions of -war debt settlement and the world-wido ring of tariff barriers against British goods. Unless America is prepared to revise her tariff policy the position will be even more accentuated whereby the U.S.A. and other nations will be virtually maintaining a,mutual, commercial blockade. The unchecked natural : sequence to this would be the international breakdown of the rgold standard owing to the exhaustion, of istocks outside America and the. inevitable substitution of some other unit of exchange. His Royal Highness the Prince of Wales, when opening the British Empire Exhibition at Buenos Aires recently, made the greatest contribution of .this gencra.tion to international thought on commercial relationships when he remarked that in the Spanish language their interpretation of the good old 'English word "trade" is "intercambio commercial," which means "a mutual exchange of goods." '

• In regard to the exchange position !of New Zealand, I would : quote ' the following definition ' by 'Professor Gregory, which must be the guide Xo 'all;future," Administration's .national policy on this;subject. < "We may put the position iii theso terms.'- If the price level: of dne country is higher than the price levels in other countries, then the condition for export from that country to the others is that the rate of exchange between its currency and that of the others should be such that the fall in the exchange should compensate for the rise in the internal price level. If the fall in the exchange is less than sufficient to compensate tho rise in the price level, exports will fall off; if the price level is more than '«*mpcnsated by the fall in the exchange; rates, exports will be stimulated, for -, the. time ■ being. But

tho stimulus to exports will raise prices inside tho country still more, and thus cause the-domestic price level and the exchange-rates to correspond, Iv the other case, when imports are stimulated, tho price level in other countries will rise, and thus again causb tho price level all oyer the area to correspond to tho exchange rates established. | In. other words, the theory asserts [.that, not the balance of trade but the relative price levels'- ultimately determine, tho, rates .of exchange. It. follows tliat the maxim' that p countries Should eipo'rt more t-haV thoy import, in order to increase the'foreign value of their currency, sets -up an : impossible demand if the internal price, level is higher than the price level in the rest of the world. The condition for increased exports in such a ease is a depreciation of tho exchanges at least great enough to compensate for. ttie difference in price levels, otherwise it is impossible to export at all." lii conclusion, indubitably pure economic law suggests thitt Parliament shall concentrate ■ its whole political force and the national genius on the development of primary production aiid export trade, and I would crave leave to sum up the position that llio future prosperity of New Zealand 'is bound upon the f'olloVing corollaries, which arc axiomatic and indivisible. (a) The first < and most direct method of stabilising rates of exchange is to stabilise price level. (b) Deflation in the better-oft' countries worsens tho : position In countries with inflated values. • (c) That for economic purposes this country must generally be taken to be under the control of all those factors which move London or arc influenced' by monetary movements, originating from that .centre. . ,ft • I trust • that this , contribution to | .your valued publication,: .which by reason of its impartial editorial policy! makes, your, influence outstanding in Now Zealand, -.may serve as a focus point, for the 'initiative of action, by the New Zealand Parliament.—l am, etc., ..,,-,.. " ' ' CONRAD B. LOCHNEE. Auckland.

Though the shipyards seem to Have accustomed themselves quickly enough to the_motor-vessels, the passenger still.lags behind. He continues to-think in terms of steam and—at least so the designers think—demands that his ship shall have an imposing number of funnels. One is useful euough even in a motor-ship, for it can be used to house silencers and the- exhaust piping, but a second is a luxury conceded to the landsman's taste. There are various ways of turning the passenger's \yhim to useful ends, but the most attractive is certainly that employed on the Britannic. There the extra funnel has been turned into a smoking-room for the engineers.