THEIR RELATIONSHIP

Evening Post, Issue 56, 7 March 1934, Page 11

THEIR RELATIONSHIP

SOME EXPERT OPINIONS BANK POLICY EXAMINED Following on the presentation of the statement of the Associated Banks before the Parliamentary Monetary Committee today Mr. E. C. Fussell, on behalf of the banks, made a state- - ment embodying the opinion that the present economic situation ' was not due to any fault in the banking system, but to more deep-seated causes. ■ [The ;irionetary system was simply a reflex of the existing economic con.'ditions. He did not think that normality could be restored by monetary measures. The matter arose in the course of the examination of the banks' representative by the committee. ■ . Dr.'Sutch said ho felt that the Asso- , ciated Banks had given tho Committee a very clear statement. He asked if ' there was an ample supply of credit in New Zealand, and Mr. Harle replied "Yes." Dr. Sutch: Would it not be advantageous if the price of this credit were lowered to accommodate itself to some demand that is not showing itself now? Mr. Fussell: It most certainly would. The desires of the banks are on the 'lines: of cheaper credit. Do advances exceed deposits generally?— Generally speaking tho policy of the banks is to have a certain ratio; — not a, fixed ratio—between ' advances and deposits. x i Dr. Sutch pointed out that' when prices were falling even, a nominal rate ,of interest did not attract borrowers. 'Mr. Fussell agreed that if prices were falling borrowers would be reluctant to borrow* as the fall would increase their liabilities. '. Dr. Sutbh: Do the banks exceed deposits generally? ' Mr. Fussell: As a general policy there is a certain ratio—not fixed—between deposits and advances. In New Zealand it has been the general policy for deposits to be slightly in excess of • advances. V INCOME TAX. In answer to a further question Mr. Fussell emphasised the point that the ■ income tax levied on the banks was not really an income put on the difference between assets and liabilities. It was not a tax on income. Dr. Sutch: Do the banks suffer from this? •• - •Mr.Fussoll:.They are certainly suffering at the .present time. How?— The banks at the present time are- not earning the estimated average income of 30s per cent. He, added that .the shareholders suffered through loss of dividend. In normal times the issue of Treasury bills was detrimental to the, granting of overdrafts for industry, but' in stringent times there was niouey available for all those who could trade with it on a profitable basis. Dr; Sutch: You quote the chairman of ; the Associated Banks as saying, "Were •the overdraft rates to bo reduced without adequate adjustments in .the.method, "of taxing1 incomes . .". the result Wouldbe j.o curtail the banks' means of assisting the community." How would that op'erate? ( '.. . . ... ~ Mr. Fussell: The banks, would be unable to quote rates which: wduld enable the use'of credit by the community. -He stated in. answer to' a further question that the note tax made the issueof notes unprofitable. 'V;"^" ' ■ ■:■ THE NOTE TAX.: ■"'; Dr." Sutch: Whea the "Beserve Bank comes into operation the'banks -will'be free from the note tax. -'-WjUr they "then reduce the charge for keeping customers'accounts? ■. .v .-..:-... :.- Mr. Fussell: That is -a' matter ,of policy. -■ ■ -'-'■ :■ ■■ •' Mr. Harie: Do you consider the £1 feharged for keeping ■ customers' ac- ; icounts unreasonable? Dr. Sutch: I think that if^the banks charged for all the services they carried out the customers would be. inconvenienced. Mr. Harle said that in England- there was no set rate for keeping custpaners1 *- accounts, but the charge was: based on the amount of "work involved. Mr. Harl'e asked Dr. Sutch if he con-, sidered £1 was an unreasonable charge for bookkeeping. Dr. Sutch said he did not know, be- . cause ho was not familiar with the administrative side of banking. He however, that if the banks / charged for every petty service they diet it would be- an inconvenience: ■■•r Mr. .Harle said that that -was very .true. He would like- to explain that while so far as English banking .was concerned there waß no fixed charge, charges were made according to the quantity of ■work done, so that it might bo quite possible to have a .charge of 15 guineas made for the keeping of an account. Dr. Sutch: "What other "economic factors affecting trade conditions'? liave operated on the volume of advances? Mr. Fussoll said he should say briefly the fall in pric.es"of overseas produce. Were the high, overdraft rates of good years an indication that borrowers were willing to let the banks join in their prosperity ?—Yes. Replying to another Question, by Dr. Sutch, Mr. Fussell said it was correct that the individual, banks competed for business.' — Dr. Sutch: Is the amount of legal tender-issued by a bank determined by "the amount of advances?. Mr. Fussell said it was not necessarily determined by the amount of "advances. i ■ Could a bank force more bank-notes into circulation?—A bank could not force more bank-notes into circulation. If a; bank gave you £.1000 in bank-, notes now, I am willing to guess thise notes would be in. some bank before the day was over. ' BENEFIT TO COMMUNITY. Dr. Sutoh: If the Government stamp duty on cheques was reduced or removed,, would the extension of the -cheque-using"habit be a benefit to the community!—l should say so. Are there any stock and station firms in. Now Zealand doing as large a banking; business as the smallest trading bank? —It is impossible for me to say, but I should think not. Mr. Harle: It is difficult to answer that question. One must appreciate the fact that Dalgety and Company is a large institution in Australia as well as in New Zealand. Dr. Sutch: Now that the Reserve Bank is to- take over the issue of notes there will be less to distinguish stock firms from trading banks? Mr. Fussell: No essential further distinction. The issue of notes is not an essential or fundamental banking • function. Do they do a different type of banking business*—They go further than the banks do in inspecting properties and stock. Under the Reserve Bank Act tlie ..trading banks must keep a proportion of their deposits with the Reserve Bank. Will this give a. differential advantage to tho stock and station agents!—My own personal opinion is

that there will be an-advantage because the banks will be parting with somo of their assets and stock aud station agents to tho extent that they issue cheques and will carry on with that part of their business. Was thp right of note-issue of any advantage to the banks, or aro they relieved that they no longer will have it?—At the present time the note-issue of banks is entirely unprofitable. Dc Sutch asked whether tho reducing of the exchange rate by 5' per cent, would do more harm than the raising of it by 5 per cent. "I do not think so," Mr. Fussell replied. He added that • the question would depend in a measure on tho amount of. stock held.by importers. He agreed that it would bo folly for the Government to announce its exchange policy in advance, as it would encourage speculation. The banks endeavoured to discourage exchange speculation, but when a person had credit funds in London he could do what he liked with them. Tho banks had control only when persons had to go to them for funds. Dry Sutch: Would Australian conditions affect the New Zealand exchange rate in" normal times?— Yes, I should say it would be impossible to adopt a policy of isolation. A- - BANK RESERVES. Replying to questions by Dr. Sutch on the subject of bank reserves, Mr. Shaw said that bank reserves were largely: held in London because of the better means of investment, and also the better market and the better nature of the liquid security obtainable. Dr. Sutch asked if it was possible that the banks in New' Zealand had been, too cautious in accumulating reserves. Mr. Fussell said 'he thought it was quite impossible that the banks had been too cautious. . ■ Dr. Sutch pointed/out that New Zealand seemed to havo hoarded gold almost as much proportionately as Franco or the United States of America, but for different reasons. He asked what the reason was for. the ""dead" gold- Now Zealand had. It was stated in reply that there was a provision that gold could'not be /exported.without the permission of the Minister of Finance. Dr. Sutch:, But why have that huge amount, of gold,.because it was'a-hugc amount?— Currency was covered pound for pound by gold, y ."Was that tho reason for it—that they wanted the. currency.covered? Mr. Shaw: In my mind there was no real need, in view of the fact that New Zealand.was on'the exchange standard and holding, that gold here. Mr. Fussell: There is this aspect of the matter: you are never so sure of tho gold as when you have got it. Dr. Sutch: You say that the banks have .no monopoly of credit in New Zealand? ; y i Mr. Fussell:-That is so. The total mortgages .in the : country are £200,000,000,. and the banks' mortgages and advances are :only a fifth of this amount. METHOD OF TAXATION. Mr. Ash win: You. say that you are taxed on income not earned? , Mr. Fussell: I did not put it quite in that form;, we are taxed on the assumption of certain income. ' • Mr.Ashwin pointed out that the tax applied in good times as well as bad, and asked whether the banks had really suffered over a period of years. Mr. Fussell: As a matter of fact, I do, not think so, Abut the banks would rather bo placed in a position of paying heavy taxation in good times and obtaining .the' necessary relief in times of stringency. A A ''" "7 Mr.Ashwin: Do you think banks are suitable institutions for taxing in the same way;ls other conipanies?A' A ''Mr,,. Fussell said..that: banking taxation.differed Aih various countries, and he did not Know-of any other country : adopting a method exactly similar to that in New Zealand. ,; ~ Mr.Ashwin said that, the banks were originally, taxed yon a company' basis, and disclosed, little profit. .The present basis of taxation was actually suggested by one of the banks in operation at .the time.,.'.... Mr. Fussell:, The banks ' consider today, that the present system, is.not as equitable as .taxation on income. ; Mr.Ashwin: YoU are aware that tho banks are not the only businesses which have an arbitrary basis of taxa? tion?Mr. Fussell: said that he was not criticising the Government's policy, but putting the view that the banks felt it would be more equitable to be taxed on income. " ;■"-■■ •Mr., Ash win A. You also admit that there would- be considerable difficulty in obtaining the domicile of profits earned by the, banks and other factors? ...Miy Fussell replied that there were certain difficulties, but they were not insurmountable. ■ Mr. Downie Stewart said that about five. years . ago the Government Statistician had taken out figures which had shown there/was no difference between the two, methods of income. 'In some years the assessment helped them and in other.years-it did;not. ADVANCJES "AND. DEPOSITS. I Mr. Ashwin asked, whethej an excess of x advances ever deposits, was a reflection of "external conditions. Mr. Fussell: I would not go so.far as to say that that was the only'factor, althoughit is a big one.: Mr.-Ashwin: /Are the banks at the present time embarrassed by the volume of fixed deposits? Mr. Fussell: You are asking me to say what tho banks feel about the matter. Mr. Ashwin: When fixed deposits rise it means that . there .arc less freo deposits and the banks have to pay interest on fixed deposits. Wouldn't they prefer to, have a greater ratio of free deposits? Mr. Fussell: To "put it on a human basis, the banks would far rather have deposits free than have to pay for them. (Laughter.) , - Mr. Ashwin: Is it not true that there is a greater proportion of fixed deposits at the present time than there is normally ?—Yes. To what do you attribute this abnormal rise? LACK OF INVESTMENTS. ; Mr.. Fussell said that to a iarge extent it was duo to the lack of avenues of profitable investment. People preferred to have their money on a giltedged security basis at a moderate rate of interest rather than risk it in other, enterprises. Even those who had small amounts on free deposit showed a tendency to place them on fixed deposit in order to obtain tho benefit of the interest. Mr. Ashwin:. Do you think it would benefit the country if there was a lower rato of interest on fixed deposits? Would it not make more money avail-, able for use? Mr. Fussell said that it was desirable to keep interest rates as low as possible in order to induce people to use money, but the banks could not set a lower rate than their competitors, such as tho Government departments. If their competitors subscribed to a policy of lower interest rates ■he thought the banks would do tho same. However, they had to keep in line with other financial institutions or there would be a tendency, for them to lose their funds. In answer to a further question as to the exchange policy of the banks in normal times, Mr. Fussell said that the rato of exchange was kept at par with England so long as there was no maladjustment between New Zealand and London funds. Mr. Lyo asked Mr. Fussell if 'there was a great shortage of credit. "There is no shortage of credit as such," replied Mr. Fussell,'"but if a. person has nothing to give in exchange

he cannot have that credit expressed in tho form of money." Mr.-Lye said some people claimed that the velocity of currency was not a factor in monetary transactions, and that the money available should equate production. Mr. Fussell pointed out that the velocity of circulation was a tremendous factor. For example, one shilling could purchase a pound's worth of goods by circulating twenty times. "COSTLESS" CREDIT. Mr. Lye: The statement has been made that tho banks crttite and destroy credit at no cost. I wbuld like you to define what is this costless credit. Credit is the use of wealth made available by one person to another, said Mr.' Fussell. As to whether credit is something made out of nothing I would reply that all credit has a tangible basis. If a person comes to a bank for an overdraft ho gives a basis of value for it. If I was a farmer I would say to the banks: I have several thousands of pounds in property. Will you give me credit on a portion of that property in order that I may spend it? The essential point to notice is that for every credit that is made there is a corresponding debit. Mr. Lye: Do the rates of deposits for advances really influence the amount of credit available? Mr. Fussell:- The do facto position is that when deposits aro not in sufficient volume the'balance is restored by increasing the rates on advances. That has always had the effect of restoring balances, but-if people wish to take credit at a higher rate thero is nothing to bar them from doing so as long as they give a security in return. , In answer to a further question by Mr. Lye, Mr. Fussell said that the practice of making advances in New Zealand was different from that in England, where, once a customer,had been given credit, that amount was credited to his account. In New Zealand accommodation was granted by way of overdraft and interest was paid only on the amount that was drawn. PURCHASING POWER. Mr. Lye: Do you agree that purchasing power should be given to people with no security at all? . Mr. Fussell: No. That would be giving something for nothing. He added that the value of money varied in inverse ratio to the quantity, and the more money, there -was the less it was worth. There wasAno cure through the indiscriminate printing of money. . Mr. Lye: Do you think' there is a lack of purchasing power? Mr. Fussell: I consider the real difficulty in New Zoaland at the present time is a lack of confidence. There is no shortage-of purchasing power. The total amount of deposits in the trading banks, the Post Office Savings Bank, and other institutions is about seventy millions, but the people cannot be induced to purchase goods with it. Mr. Lye: Could you briefly relate some of the principal factors that'have been responsible for. the fall of purchasing power, not only in New Zealand but in other, parts of the world. •Has the fall in purchasing power been due to tho,fault of the banking system? Mr. Fussell: No. Economists say that the troubles at the present time are not monetary and cannot be restored by monetary measures. They are more deep-seated. I do not think that the monetary system has anything to do with the situation. The monetary system is a reflex of the position. (Proceeding.)