SOME ANOMALIES

Evening Post, Volume CXXX, Issue 78, 28 September 1940, Page 6

SOME ANOMALIES

LOANS AND INTEREST

MR..W. D. STEWART'S VIEWS

(Special to the "Evening Post.'.'l DUNEDIN,' September 26. "The Minister of Finance has expressed the hope that there will be a i generous response to the invitation to ! subscribe to his war loan," said Mr. Downie Stewart in an interview. "There is no reason to anticipate that his hopes will be disappointed. ' "The public fully realise the need for the maximum war effort and that any financial sacrifice they are called on to make is not comparable with the contribution made by our sailors, soldiers, and airmen; yet it is difficult to understand the principles- which, guided the Minister in framing- his loan proposals. , .'• "In the Budget he said .the-..Joan would be a compulsory one;, he, now says ■it is a voluntary one, but that compulsion will be applied ■ where people who ought to contribute; fail to do so. This seems merely a curious play on words, and the loan is compulsory. "Probably, however, no one objects to compulsion if it is to catch .. the shirker, more especially as we have applied conscription to the army. But the real reason for compulsion probably arises from the fact that the loan is free of interest for three years and thereafter bears interest at 2J per cent* SETTING A PRECEDENT. "Will not this practice of compelling the public to lend money without interest involve Mr. Nash in serious difficulties with his left wing critics like Mr. J. A. Lee? Has he not in effect sold a pass to the enemy? For by this precedent he weakens his case for continuing to pay interest to the Reserve Bank. That bank, as keeper of the centralised reserves of trading banks, has the use of big blocks of free money; moreover, as it is a moneymaking authority, it can, if ordered to do so by Mr. Nash, lend money at a nominal rate of interest or free' of interest, as in any case its profits go to the Government. Therefore, if trie free of interest idea is sound, it is far more applicable to the Reserve Bank than to loans raised from the public. "Nevertheless," Mr. Stewart said, "we must assume that the Government has no desire to challenge or abolish the institution of interest on loans, as it still continues to pay interest to the Reserve Bank and on Post Office Savings Bank deposits, etc. In my view it is wise to do so, for otherwise the bank will be robbed of one of its most useful functions. For if money becomes so plentiful as to threaten inflation the Reserve Bank can sell securities to the trading banks and thus curtail the volume of money in circulation; but if its Government's securities carry no interest, they will hardly be saleable in the market. In a like manner, if the war loan carries no interest for three years, will not the bonds at once drop to a heavy discount and thus create a bad impression of Government securities? '"The argument used by Mr. Nash in his Budget is that, as some people have already; lent money free of interest to the Government, it is not right that other people equally able to assist should escape. But if this argument is sound, might he not equally well argue that, as some people have made j straight-out gifts of money" 'for " war, {therefore, compulsion should be ap» i plied to others to do the same? I DIFFERING PRINCIPLES. "It is clear that the Minister is seeking to apply different principles ( &o •the savings" of the publicj Jaccording *Jta whether they belong to large or sm|ll investors. For in the Budget he says interest-free loan contributions are £0 come from the material assets of those with property;. at the same time he continues to pay interest: on Savings Bank deposits in the post office and he has frequently declared that he desires to encourage saving. If that is so-1 think it would have been wiser to pay interest on the war loan throughout the j term of the loan in order to encourage saving and to keep war bonds saleable in the market. "For if saving is discouraged the Government may find, as time goes oh, that .there are no savings to borrow. Yet borrowing from the public is the only safe form of borrowing a Gov» ernment can pursue, for thereby its debt increases only at a pace equal to the demand for gilt-edged securities arising from current savings. "One statement by Mr. Nash seems to require explanation," Mr. Stewart added. "He says that he hopes to raise in New Zealand some part of the amount necessary, to meet expenditure overseas, thus relieving, as far as possible, the drain On the British Government. But how can money raised in New Zealand be used overseas? If it could be, we need never have had any import restrictions. It is only overseas. funds that can be used for overseas payments. Indeed Mr. Nash knows this, for' at one point in his Budget he urges that we should reduce imports to preserve our London funds. But how can he increase those funds by raising' loans in New Zealand? "No doubt public patriotism will make a success of his war loan, but taking the long view I think compulsory interest-free loans are of doubtful value."