Evening Post. MONDAY, NOVEMBER 16, 1936. THE CONVERSION LOAN

Evening Post, Volume CXXII, Issue 119, 16 November 1936, Page 8

Evening Post. MONDAY, NOVEMBER 16, 1936. THE CONVERSION LOAN

The conversion and new-money loan, of which preliminary results were announced on Saturday, cannot be pronounced either a marked success or a failure. The Government offered £13,930,000 lo the public and applications dealt with so far account for £10,968,530— £2,961,470 less than the required amount. The new-money part of the loan, £1.530,000, has been over-sub-scribed by more than a million, but holders of maturing stock for over £4,000,000 have elected to take the cash rather than renew on the Government terms.' The announcement of preliminary results does not state how the applications are divided between the two classes of stock offered —3i per cent, maturing in 1953-57 or 3 per cent, maturing in 1939-41. Nor is it explained what arrangements have been made to cover the balance of the loan. The Prime Minister's statement is simply that "this will be found from other sources."

The first point to be noted from theI figures is that the Government evidently whittled down the terms of the loan a little too finely. Only twothirds of the present holders chose to renew, though their reluctance was countered in a measure by the offer !of new money. The terms were made lower than the existing loan in order-, the Government stated, to maintain low rates of interest which are of great importance to the community. But we must remember how those low rates were introduced, first by the threat of a penal tax of 33 1-3 I per cent, and next by the repayment in one transaction of all the Treasury bills taken by the banks in payment for exchange. This latter transaction greatly and suddenly increased the volume of money seeking investment, with the result that the banks were not prepared to offer attractive terms for deposits. On this occasion, the Government has not had the club of compulsion by threat of a penal tax to hold over investors who failed to convert. It has, however, the power, to issue new credit through the Reserve Bank to replace part of the maturing loan. Use of this power means that the money and credit, either in circulation or awaiting investment, will be increased by the amount of the new issue. If this amount is large there will be a distinct tendency to inflationary effects. The Government policy, as expounded by Mr. Nash, allows for the issue of new credit; but not for an issue in such volume or on such terms that there is inflation. New money, Mr. Nash said, would be balanced by newly-created assets. This is the Government's plea in justification for the issue of new credit up to £5,000,000 for Government and local body housing. The same argument may be applied to justify the issue of about £3,000,000 to redeem private money invested in Government stock, but the argument holds only if the private money thus released can find investment in productive enterprise leading to the creation of new assets. If the released money merely adds to the volume awaiting investment or is used in the competitive purchase of existing stocks there is no real communal benefit—and the inflation danger is ever present. This, it appears lo us, is what will happen now, unless it is intended to issue the unsubscribed balance of the loan to the banks or the Government's financial departments. If this is not done and the balance is covered by a new credit issue, up to almost £3,000,000 of new credit (including the proposed housing issue) will be put out in a year. This will be apart from the release of money formerly used by the trading banks in financing the marketing of dairy produce. The Government may say that it gave investors the opportunity in the conversion offer of accepting new terms, and their failure to accept shows that a further issue of credit is needed. But were the terms reasonable? If we consider that only a few years ago 5| per cent, was considered a reasonable interest on giltedged securities, and that this was reduced by compulsion, was it wholly reasonable to demand a further reduction of i to 1 per cent, even though Stock Exchange sales (representing only a very small percentage of holdings) suggested these terms? Again, the Commonwealth Bank of Australia only nine days ago agreed to underwrite a loan of £7,500,000 on much better terms —3| at £97 10s for fifteen years giving an effective yield of £3 19s 4d per cent. Low rates of interest are admittedly of benefit;, but they are not everything. There must be confidence which will promote productive use of the cheap money. Confidence can best be built up on a basis of reasonable satisfaction for the investor, and absence of any clement which may suggest inflationary trende.