LOW-PRICED MONEY
CAPITAL IN POOR DEMAND
THE BANKS OF AUSTRALIA
Interest rates is the subject of the latest issue of the Bank of New South Wales's informative circulars. The subject is dealt with in a full and able manner, both theoretically and practically. It is shown that bank interest rates on advances in Australia having been reduced by 2 per cent, since the beginning of 1931, are now lower than I hey ever have been. A short and simple statement of the theory of interest is made, after which the situation in Australia during the last three years is reviewed. The Premiers' Plan came at the light moment, it is shown, and it was very successful in respect of interest reduction as in other respects. The conditions- making for success are tet out in the following paragraph:— "There had been some fall in. most prices, and a sharp fall in 6ome. While the supply of new capital was probably very low, the depressed conditions made the demand for new capital, except by Governments for unemployed relief works, practically nil. The stage was therefore set for a reduction of interest, but undei normal conditions such a reduction.*would have been very slow, owing to the existence of the old long-term contracts at high rates. Legislative interference was, therefore, not calculated to reverse an upward trend, but to hasten the tendency to fall, which was already present." CONFIDENCE OF INVESTORS. There was only one danger, namely, that legislative measures to reduce interest would shake the confidence of investors to such' an extent that no future contracts would be made, or that future contracts would be made at even, higher rates owing to a feeling of insecurity among investors. That considerable uneasiness existed was shown by the low prices and extraordinarily high yields on Commonwealth bonds both before and • after the compulsory conversion. But it was a tribute to the success of the plan that these high yields went as soon as the conversion was over, giving an average rate of less than 5 per cent, by the end of the year. Dealing with the bank-rate and interest, it is shown that in making it possible to reduce rates they had three) possible avenues: —(1) To reduce the cost of deposits; (2) to reduce working costs; and (3) to reduce profits and/or incur losses. DEPOSITS AND ADVANCES. The article discusses the difficulties in the way of reducing the cost of deposits. It is shown how new lower rates take some time to become effective owing to old deposits etill current at the higher rates,' and the further complication during a time of uncertainty owing to the growth of the proportion of interest-bear-ing deposits. Thus while the quoted rate on twelve months' deposits has fallen from 5 per cent, to 2% per cent., the actual fall in the cost of deposits to the banks is shown. to be in the vicinity of 1 per cent. The remaining 1 per cent, reductiou in rates on advances is shown to have been accomplished through reduction of salaries, reduced profits, and extra earnings on Treasury bills. Reduced profits account for more than hah' of- this (about 12s per cent.). Treasury bills have formed an excellent medium of aiding the banks to reduce rates on advances, since they form a liquid investment for part of the'cash reserve, and a reduction of about \i per cent, is attributed to tliis aid. But it is pointed out that with the decrease in both the rate of interest on the bills and in their volume the banks are now hampered in making further reductions. THE FUTURE. The following paragraph sums up the possibilities for the future:—"The extent to which further interest reduction will be possible in a large measure will be dependent on the continued use of Treasury bill*. Their usefulness to the banks in this direction has been diminished by the continued fall in the rate of discount at which they have been issued, and the decrease in the volume held by the trading banks. : F.rom Ahis source, there is, however, now no hope of a further reduction in rates on advances; rather one would expect a reversal of the present downward trend, unless there is a further fall in coats of deposits to the banks, or an increase in the volume of Treasury bills available' for discount, or a sufficient revival to bring present unproductive advances into the productive class." . The article compares! interest rates _in Australia with rates in other countries, and finds a fairly favourable comparison, but it is stressed that comparisons are difficult, since it is almost impossible to get accurate information. One fairly safe conclusion is1 that the difference between rates charged on advances and rates paid on deposits is smaller in Australia than elsewhere.
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Bibliographic details
Evening Post, Volume CXVI, Issue 147, 19 December 1933, Page 14
Word Count
799LOW-PRICED MONEY Evening Post, Volume CXVI, Issue 147, 19 December 1933, Page 14
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