BANKS AND PUBLIC

Evening Post, Volume CXVI, Issue 35, 10 August 1933, Page 14

BANKS AND PUBLIC

DEPOSITORS RANK FIRST

DANGERS OF INFLATION

"Evening Post," August 10. "Lending money deposited by people in all walks of life, and often representing all they, possess, is a serious busiriess," said' Mr.. Jackson Dodds, general uianager of the Bank of Montreal, in the course of ;a recent address before the "vVinn.ipe^ Board of Trade. Much of what Mr. Dqdds has said in the course of his address -In'ay aptly be applied to New Zealand conditions, and his remarks may therefore be of particular interest to the Dominion. . Mr. Dodds explained that in their double duty to depositors and borrowers bankers are criticised by applicants for loans for feeing niggardly, and by those having difficulty in repaying advances bankers are blamed for haying been too liberal. ■ v "Loan' rates "vary according to the risk involved, the liquidity of the advances, and rtHe cost of handling the business. There <must also be a margin of profit, which, however, is infinitely less than is generally supposed. It-is a curious tact that the very people who rail at the banks for making a profit are the first to stir up siispicion and doubt if profits decline. "The reference to profit," said Mr. Dodds, "may suggest that banks are chiefly concerned about the welfare of shareholders. There is a widespread belief that bank shareholders receive an unduly large return on their investment. lhis misconception arises from the fact that dividends/are declared on the par value of the stock, whereas the dividends arise from the earnings. of a much larger sum, namely, ,the Capital and reserve funds, which constitute the investment of shareholders,..who are also, under double liabilSpeaking.of loans' and deposits,, Mr. Dodds pointed but :that it> is a matter of importance: to:the banks and-the country that these, should be maintained, for it is on notice or sayings deposits that banks depend for fluids to lend to borrowers for the legitimate additional requirements of their business. This obvious relationship would not be admitted'by, those' whose minds work in reverse only and who contend "that instead of growingl out of deposits loans really create deposits. LIMIT TO BANKS' POWERS. ''Now, ' Banks are given' well-defined powers under• the Bank Act (of panada); 'continued Mr. Dodds, "but the power to .create something, out of nothing is not one pi them;"- Mr. Dodds referred to successive- revisions of the Dominion Bank Act since, it was, passed in 1871— "Any changes that have been made in the Act at the varioiis revisions have been the result of experience in the working of it, and the growing needs. ■ Great ■ care lias been exercised to preserve inviolate the fundamental features, namely the protection afforded in-logical, sequence, first to note holders,, who- are involuntary creditors, second to. depositors, who are voluntary creditors,- and third to shareholders.'. ' '~,,'■ • ' i. "The agitation which has arisen at each/ Teyis\ony"; said Mr. Dodds, "has naturally, been chiefly on the part of those who would-like, to get the loan of the savings -of thrifty workers, deposited ,in the::banks. '•• ':• ' •■ ■■ ' . ■ \,- -•"Tftere is also the glib-professional agitator. ' But neither of these has ever offered any constructive criticism of Canada's banking system."- ■■■■-. Turning to the subject of currency inflation, 'Mr. Dodda remarked that the endof unlimited .inflation is worthlessness of currency, and to,*eyidepce this he fixhibited the: envelope of an ordinary registered letter posted in Danzig on October 23 1923, "addressefd. to the general, manager of the Bank of Montreal. The envelope bore: twelve postage stamps, each of 500 million marks, a total of 6000 million marks,,which at the old par would have been equivalent 'to something like £30O,OOO,96o! : . . ' DEPRECIATION CONDEMNED. Mr. Dodds added that no country ever sets out deliberately to issue unlimited fiat, money, any more than would a sane person set out, to become, a drug addict. The-first dose-is an attempt to overcome a comparatively small evil, and by progressive stages the poison-eats out the vitals of the victim. But still some people contend.that inflation would enable debtors (to, pay off what they owe and all could then make a fresh start. Experience shows that it does-not work out that way—on the contrary, inflation promotes 'speculation and encourages people to go int6 debt. ■■ "■' - ■ ' . ~ Cogent reasons were given by Mr. Dodds against currency depreciation. He showed that the maintenance of national credit is not only a matter of common honesty and national pride, but ,of hard cash. He showed .how' in the later post-war period Canada was able to borrow in the United States-at" about 5 per cent, when Germany, Brazil,- and Poland, whose credit standing-was lower,- paid 8 per cent. To indicate the significance of the difference in rates Mr. Dodds took as an example a'forty-year loan; a L000,000,000-dollar loan to Canada at 5 per cent, would have required an aggregate of 2,331,000,000 United States dollars through the term to retire it (i.e. interest and sinking fund), while the other countries mentioned, borrowing at 8 percent, would have had to pay 3,354,000,000 United States dollars, or an additional 44 per cent.—a practical instance of'the cash value of sound credit. <'To adopt deliberately a policy of depreciation of our dollar would be indefensible," said1 Mr. Dodds. t "It would profit us nothing in the long run arid in the end would cost us dearly. It would force our competitors whose currency is depreciated by impairment -of credit to depreciate still further, and if we followed them down and down our exports would finally be given away. Meantime, we would be obliged to pay more for our necessary imports. . . THE ONLY WAY. "There is a strong conviction in some quarters," he went on to say, "that the_depreciation of our dollar would raise prices of primary products in Canada. But this has not' worked' out in' practical experience; for example, the price of wheat did not rise and fall with the- rate- of discount on our dollar; on the contrary, on more 4han one occasion prices fell when the discount rate. rose, and vice versa. In the Canadian House of Commons, Mr. E. J. Young, member for Weyburn, effectively exploded the idea that Australian wheat growers had1 benefited from the depreciation of the Australian pound by almost fifty per cent, of its par value. He proved that they experienced the same difficulty in paying debts, and actually received, measured in terms, of gold or of Canadian currency, less per bushel than the Canadian farmer. ' "The-present sorry plight of the world, said Mr. Dodds, "is attributed mainly to lack1 of confidence and courage to face the facts.as they are. "Before better'times can come, competition in depreciation of currencies must cease;. international debts must be adjusted; 'tariff barriers which have been erected beyond' peace-time needs must be lowered reciprocally, permitting^ of excliangesvof- goods, and payments in goods; Government expenditures and taxes must be decreased, and budgets must be balanced.".