EASING BURDEN

Evening Post, Issue 20, 23 July 1935, Page 10

EASING BURDEN

PRODUCERS' DEBTS LOSSES BY LENDEES BANKS UNDER CRITICISM (Special to the "Evening Post.") DUNEDIN, This Day. Reference at some length to the legislation of the Government for the relief of borrowers was made by Sir James Grose, at the dinner of the Dunedin Chamber of Commerce last 'night. In, the main, he said, efforts made to aileviate the burdens of the boppwer in New Zealand by way of lowei? interest rates and writing down capital indebtedness would benefit most the primary producer. As primary production was the foundation of the Dominion's economic' life, he said, its preservation was a matter of utmost importance.

"Relief has of course been given to private borrowers of all classes through the sharp fall in interest rates," Sir James admitted, "and the present period of abnormally cheap money is •no doubt lubricating the wheels of industry to some extent and easing the position of many long-term borrowers. "With regard to the legislative interference in private money contracts -.with, a view to the reduction and cancellation of debt," he went on, "my -experience has been that the majority •*of lenders have appreciated the difficulties with which borrowers have .been faced during the past few years and have dealt sympathetically with their debtors in negotiations for readjustment of commitments.' In many .cases they have written down principal, greatly reduced interest, and even .waived it altogether for substantial periods. Therefore it would seem very doubtful whether legislative interference in this direction will facilitate the adjustments which are so desirable, and. which I feel would be more satisfactorily achieved by friendly consultation and agreement between the parties concerned. "Certain it is that if repudiation of honourable obligations is to be ' encouraged, a disservice will bs rendered the pastoral and agricultural sections of the community and rural mortgages ■will be rendered ah unattractive field of investment for private investors." As regards the future, Sir James said one could not but view with con- ■ cern the growth of insidious and harmful propaganda advocating the socialisation of credit and the nationalisation of the Dominion's banking system. In : commenting on this dangerous develop- ■ ment in thought he was amazed at the- ■ limited knowledge of ordinary business principles exhibited by the protagonists of these revolutionary proposals. BANKS ANXIOUS TO LEND. "The inclination to blame financial institutions for the various social ills is common in times of depression, and is the fashion of the moment1," Sir James continued. "The most common of the charges levelled against the banks is. probably that of "restricting the issue of credit," and in this connection one hears much of 'idle money in the banks' and 'costless credit.' Let me say at the outset the banks are very willing to lend to any creditworthy borrower who submits a sound business proposition. The greater the amount >of sound advance business a bank is able to attract to itself (subject always to its primary duty to safeguard the deposits entrusted to it) •the greater are its profits, and this simple fact should create a very serious doubt in the mind of any thinking person who has been asked to believe that the banks are deliberately restricting credit. I repeat that the banks are anxious to lend where the nature of the customer's application justifies their doing so, and proof in the form '■ of bad debts contradicts any suggestion that they have been over-rigid in the past in their requirements for safety and security. "You as business men fully appreciate the necessity for ordinary prudence in the granting of credit to your own customers, and the banks, as trustees for their depositors, must necessarily exercise prudence in their lending operations. It is an axiom that banks do best when other people do best. ■ "A bank has a duty to its shareholders to earn a reasonable profit from its operations, but its primary ' duty (before its duty to its shareholders) is to its depositors, and this primary duty consists in. caring for the 'funds entrusted to it in such a way as to ensure their return intact to the depositors when called for, together with what interest may have accrued . thereon. Any attempt by the banks to adjust themselves to the Socialist requirements of a free and indiscriminate issue of credit would result in ' swift and inevitable disaster. LIFE BLOOD OF BANKING. "A bank's stock in trade consists firstly of its own resources, which have been supplied by a large number of shareholders whose average holding is far from large, and secondly of its deposits which represent funds lodged by : its customers for their own use at a later date. When money is lodged with a bank on deposit the depositor becomes the creditor of the bank, and the deposit is a debt due by the bank, and the banks are unable to create credit out of 'thin air' as some persons would ask the public to believe. Deposits are the life blood of banking, and, together with a bank's own capital resources to which I have referred, they provide the wherewithal for loans to agriculture, industry, and commerce, ■and allow me to state that this source of credit is not 'costless,' despite the easy assurance with which some people speak of ■ 'costless credit.' The banks in New Zealand annually distribute a ,very large sum of money -by way of .interest for the use of deposit money, 'without which they would be unable to carry on business, and they also pay heavy taxation on all assets and liabilities. "If those people who advocate the freer use of other people's money— which in effect is the essence of the complaints—would but give equal pub:licity to the comparatively recent experience of the United States of America, where over-daring and unsafe banking was the cause ■of thousands of bank failures which swept away the life savings of millions of industrial workers, then I feel sure the people of this Dominion would promptly say 'Hands off the banks!' In Australia also not long "ago political .interference led to the closing of a ■large, sound, and well-managed Government Savings Bank, and it is well to remember that the advocacy of nationalised banking was subsequently rejected at the quite recent Federal ■ elections. MOMENTOUS QUESTION. "The question is one of security and service and may be submitted in these words—under which system of banking, private enterprise or Government monopoly—is there greater safety for the people's savings and a sounder system of assisting trade and industry? Or to put it another way, the issue is this:—Shall the banks with all their deposits be turned over to politicians for manipulation or shall the experienced officers of the banks in j

every community continue as the responsible trustees of the earnings and savings of the New Zealand people? POLITICS OR SAFETY? "The political banker, that is, the Minister at the head of a nationalised j banking system, would owe his position to the fact that he was a politician, and to retain his position he must necessarily be a politician primarily and a banker secondly. Now politics and banking do not mix, for the basis of 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 1 many motives that are unsound from : a banking point of view. If it is argued 1 that a nationalised bank would do , more than the present trading banks . are doing in providing credit for in- ' dustry, then I say that, to do so, safety 1 must be sacrificed. i "A national policy for reconslruct- ■ ing industries has its appeal, but if that policy is to be financed through a ' political banking system then that in- • volves the introduction of investment. • into banking, and in times of crisis ' the bonking system would find itself overweighted with large frozen assets, ' necessitating Government support " which could not be continued indefinitely without recourse to . unsound i finance and inflation. Experience has , shown that once a country is misled . into a policy of inflation, it becomes ; involved in a vicious spiral of more j and more inflation until its currency . becomes worthless. Summing up the , position from this angle, I could per- \ haps not do better than agree with '. Lord Snowden (Socialist and ex-Chan-j cellor of the Exchequer), who, incom- . menting on proposals for the national- ■ isation of the British banking system, ■ observed that:— " 'If the banks were nationalised they ' would have to be managed as they are "' now if their solvency was to be main--1 tamed.' "Gentlemen," said Sir James, in con- . eluding his speech, "I submit that the , trading banks of this country have i done and will continue to do their - duty. In the past they have granted . liberal assistance to the Government . in times of national crisis—they have retained the confidence of the people '. —through keen competition they make . available their many services throughi out the Dominion at a cost which is lower than in many other countries , and which produces a very low return on the capital employed.. The trading ' banks have in no way. failed in the exercise of their obligations to the 1 people of this Dominion, and if cer--1 tain political forces were to direct-their ' energies towards restoring international trade instead of attacking a : sound and efficient monetary system, • they would sdon discover that there ■ is little wrong with the latter. THE RESERVE BANK. "Especially is this so now that the ', Dominion has established its own ~ central bank, for I am glad to say I have an appreciation of the benefits likely to accrue from the effective centralised control of our banking system which is now vested in the Reserve Bank of New Zealand. That institution has primary control over the monetary circulation and credit in New I Zealand, and has a full sense of its responsibilities in the direction of • maintaining stability and regulating the flow of credit.' . "I am definitely of opinion that, with i the Reserve Bank of New Zealand '. welded as the central link in its monetary system and the trading banks ; continuing to offer security and effi- ! cient service to the. public, this • Dominion has a worthy financial strucl ture which the people will refuse to !■ allow to become the plaything of i monetary theorists. "I wish to make it perfectly clear i that my remarks are not directed against anyone who may propound a i sound and constructive scheme calcu- ■ lated to benefit the Dominion; but : theories are being advanced in New i Zealand which have been examined by • the world"s highest authorities and i judged to be fallacious and dangeri bus to the welfare of a country, and i it is essential that the people of this ; Dominion should be warned against ■ mch unsound proposals."