OPINIONS DIFFER

Evening Post, Volume CXVIII, Issue 121, 19 November 1934, Page 11

OPINIONS DIFFER

OPEN BILL MARKET

LOW RATES

EFFECT ON LONG-TERM

The question-of establishing an open bill market is* agitating Australia .as well.as New Zealand. : , '.

"Tho whole question of tho future of Treasury bill finance (stated the "Sydney Morning Herald" recently) has been raised acutely by "the definite refusal of tho Commonwealth Bank Board to arrange any further short-term accommodation for deficits beyond the present year. ITroni the beginning of tho next financial year tho Federal and State Governments, on this aspect of their finance, will be compelled to rely upon their own resources."

What is the Commonwealth Bank's policy in tho matter? Some time ago the Governor of that Bank, Mr. E. C. Eiddle, "urged that the Bank's control of monetary conditions would be strengthened if there was an open market for Treasury bills in Australia, as in some other financial centres. It has been explained that this represented Mr. Riddle's porsonal view. Nevertheless, it has been widely accepted as representing the view of tho Commonwealth Bank board as a whole.'?

Tho above indicates .that the Commonwealth Bank probably prefers an open bill market, and certainly refuses to continue tho present system of providing short-term accommodation for the Governments. Putting the Commonwealth Bank's position in detail, the "Herald" adds:—"With the need of the Governments for further shortterm accommodation after the present year, and with tho desire of the Commonwealth Bank for a change, there is overy likelihood as tho outcome of discussions that a start will be made next year with v the organisation of a billmarket. The conditions attaching to tho issue of new Treasury bills have undergono considerable change as compared with 1931. At that time the Commonwealth Bank undertook to rediscount Treasury bills at a fixed rate. At tho same time the Commonwealth Bank guaranteed the payment of tho Treasury bills at" maturity. Both- the undertakings given by the Commonwealth Bank have now been withdrawn, and that Bank will in future determine from time to "time the rate at which ,it will rediscount Treasury .bills, although this would not jiecessarily mean an increased rate." Notwithstanding the Commonwealth Bank's withdrawal; of these guarantees, the Bank still prefers that the present system'be'replaced by an open bill market. • ' OTHER BANKS PREFER PRESENT METHODS. Do the trading banks hold, the same view as tho Comornnwealth Bank! It seems not. "Opinions differ as to the desirability of establishing an open bill market for future ' short-term , finance. The trading banks, would prefer the presont system to be continued, while tho Commonwealth Bank would, it is believed, wcleoino an open market for the strengthening, of control of monetary conditions," which would thereby^ be given to tho;Central Bank."

Do thc| Governments want an open bill market? Some do, others perhaps do not., < -"Tho Commonwealth and Now South Wales Governments havo .in open mind on the question; whilo the. Labour Governments would wolcomo thel ending' of the present- system and tho organisation of a ' bill market, which, as they declare, would free tho Governments from the 'dictation' of the banks."

In fact, it was the Labour, Premier of Queensland, Mr. • Forgan Smith, who forced tho matter at the 'last meeting of tho Australian Loan Council, lie thinks that the Governments, faced with the limit of short-term help fixed by tho Commonwealth Bank, must act for themselves and will do better for themselves on an open short-term market. It - is. commented that, if this view ;obtains, "the Loan' Council will invito' tenders for a loan at call and accept the lowest price tendered. Tho present Treasury bill discount rato is 2 per cent., to which it has been reduced from about 6 per cent, in; 1931. In London the rate is said to bo 11s 6d per cent." (Later reports indicato that the Loan1 Council did not actually make .a decision on the Queensland proposal, or has not yet disclosed it.) . v REACTION ON LONG-TERM MARKET. In editorial comments on October 30, tho "Sydney Morning Herald" points out that the problem touches not only short-term londing (including the Commonwealth Bank's • moro conservative policy, and the general advantages or disadvantages of an open bill market) but also long-term .lending. "Theoretically, the short-term bill market and the long-term market attract quite difforent classes of capital for investment; but theso are days when experience of tho'.past is apt to*prove an unsafe guide. Two weeks' ago a rumour that an open bill market would be provided for the Treasury bills caused some easing of prices of Australian consolidated stock, and though the lost ground has been regained, it is worth whilo the - Loan Council considering whether an open market for bills would increase the cost of new issuos of consolidated stocks to the Treasurers of Australia.. Banks, too, may be pausing in-falling in with the desire of borrowers fpr lower interest rates on advances, ,in view of the ■ possibility of an open bill market operating. The earning powor of the funds i used would* be adversely affected, and so the ability of the banks to reduce interest rates charged to producers—now a maximum of 5 per cent, in the case of New South Wales' banks—would be impaired."

Tho "Herald" therefore wonders whether, with an open bill market, any gain tho Governments would make by paying a lower discount rate for bills would bo lost (on long-term loans) through taking some of tho competition out of tho long-term market. In short, would cheaper short-term mean dearer long-term? NEW FOURTEEN YEARS LOAN. Ooincidently it happens that, according to our cablegrams, tho Loan Council will tomorrow place on the Australian market a fifteen millions 3 par cent loan, issued at &99. 155, - with a currency of' fourteen years. On October 31 the •„'Herald" stated that "the.new loan, of £15,000,000 to bo (floated'on-terms not less favourable thail 3p per cent, issued at 99, embodies tho lowest rate of interest for many years. - It is over £ 'per cent, less than the last loan. Four or five years ago Governments "were paying GJ per cont. for loan .money." It will bo noted that the' more recent cablegrams fix the issue price of £99 15s instead of 99.

As this is the ago of Budget deficits, and tho deficits of the last four years liavo been- .met by tho Governments mostly by Treasury bills, the question is vital to the' Government^ as tho age of deficits is not yet over. It is significantly reported (October 30): "Tho loan will be underwritten by tho Commonwealth Bank, and an important outcome is a reduction in the underwritten charges from 10s per cent, to 7s 6d per cent. For loans used for tho funding oi' Treasury bills, the