Evening Post. TUESDAY, JULY 23, 1935. SOUND FOUNDATIONS

Evening Post, Issue 20, 23 July 1935, Page 8

Evening Post. TUESDAY, JULY 23, 1935. SOUND FOUNDATIONS

■_ At one time the banker was ■ a member of the community whose opinions on questions of finance were accepted without question. The banker- seldom spoke publicly. A tradition of his business was that it was highly confidential. Under no circumstances could the affairs of clients be discussed, and silence was preserved even upon the general trends of commerce and banking. When the banker did speak it was to make an ex cathedra pronouncement which was seldom, if ever, disputed. This implicit'trust in the wisdom and integrity of banking policy—we refer to British countries —was one of the foundations of the great edifice of Empire 'industry, development, and trade in the late nineteenth and early twentieth centuries. But it must be recognised now that a change has come. There are critics of the banking system, and though many of them may be' ill-informed and some not disinterested, the criticism cannot be ignored. In justice to themselves and for the salvation of the trade and industry which would be severely shaken by any damage to the banks, bankers must meet this criticism. A mass opinion is being formed that there is something essentially wrong in the-credit and currency system, that this 13 the cause of our troubles, and that everything can be corrected quite simply if the people will just support a political party or group that is to perform the miracle—not of making two and two add up to five, but, of creating five from nothing. It is necessary that the bankers should check the formation of this misleading and dangerous public impression by showing clearly that the essential principles of their business are as firm and fixed as the rules of mathematics and can no more be altered.

The address delivered by Sir James Grose at the Dunedin Chamber of Commerce last night was a most valuable contribution to public discussion of depression and recovery problems.because it set forth clearly the policy and the principles by which the banks are guided. In an address part of which was devoted to a review of trade prospects Sir James could not, of course, make a detailed examination of the theories and proposals of those who would revolutionise banking, but he spoke of two of the most dangerous ideas—that credit could be costless and that recovery would be secured by nationalisation of banking. The banks, he affirmed, were very will-; ing to lend to any credit-worthy borrower who submitted a sound business proposition, but the credit they gave could not be costless. They were the trustees for their depositors and they received and passed on to depositors and shareholders the earnings of the funds advanced to borrowers. If the credit were made wholly costless then there would be no earnings. This, we may point out, would not be limited to banking funds. A costless credit system could not be thus restricted in its scope. Logically it Avould entail the abolition of a return upon capital in any form—in land or the improvements made thereqn, in buildings, in businesses, in small savings, and in shares. It would be a revolution for which we are sure the prudent people of New Zealand would not be prepared—if they understood it. They are attracted to it now only because it is presented to them as k something to be mysteriously achieved in a. domain of which they know little and at the expense of somebody who has for long been deriving profit without a good title. ' The other danger, nationalisation of banking, is equally to be guarded against, as Sir James pointed out. because it would be destructive of confident

Politics and banking do not mix, said Sir James, for the basis ol all banking is confidence and confidence is apt to wilt away very quickly under the blight of political expediency. A political banker would be burdened with many political responsibilities, and would be influenced by many motives that are unsound from a banking point of view. If it is argued that a nationalised bank would do more than the present trading banks are doing in providing credit for industry, then I say that, to do so, safety must be sacrificed.

It is worthy of note, as a commentary on the demand for nationalised banking, that Mr, Lloyd George's "New Deal," admittedly radical in many respects, does not include any such plan. While criticising the Bank of England harshly, and declaring that it should be directed so as to assure closer contact with the Industries and commerce of the nation, Mr. Lloyd George made it

clear that the Bank should not become a Government Department like the Treasury. "It must be in a position to give independent advice." Referring to the position of the trading banks, he said:

I am opposed to proposals for the nationalisation of our joint stock banks. It is neither necessary nor desirable. I would seek their co-operation in the carrying out, of these schemes; and utilise their marvellous organisation to the full In their operation.

The strongest argument against nationalised banking, however, is that summed up in Sir James Grose's statement that "politics and banking do not mix. 3' As we pointed out recently in commenting upon the Farmers' Union advocacy of national control of currency and credit, national control which is open to political manipulation would destroy confidence. It would make monetary policy an issue at every election. The politician would be tempted to seek favour by promising manipulation in the interests of any group or section sufficiently well organised to command attention. In place of established banking principles there would be ' pernicious bargaining. Nor would this stop after one change. Once the present basis of confidence and stability was destroyed, the structure would have no firm foundation on which to rest. A Government which smashed the system so as to remodel it on a plan favourable, say, to the farmers, might be succeeded by one which had attained office by promising free credit to. traders, or house-builders. Such possibilities would cause uneasiness among depositors to become 'alarm and even panic. It is because the public have faith in the integrity of the bankers that they entrust their funds to them, knowing that no political motive will lead the bankers to betray that trust. We have seen how political action in setting agreements aside has contributed to the flight of funds from farm- securities, once deemed wholly safe and sound. Destruction of the foundations of banking, public confidence and certainty, would be just as harmful to the commerce and industry which depend upon the stability and independence of the banking system. •