BANKING NATIONALISATION

Evening Star, Issue 22193, 22 November 1935, Page 16

BANKING NATIONALISATION

AN ANSWER TD ITS ADVOCATES POLITICAL BIAS IHEVITABLE The following bulletin on ‘ Nationalisation of Banking’ has been issued by the Associated Banks of New Zealand : It has always been observed that periods of prolonged depression have the effect of concentrating critical public attention on economic institutions, and notably on the mechanism of currency and banking, which at ordinal j times is taken for granted, and, because of its technical nature, is not closely understood by the general public. Notwithstanding that the balance of authoritative opinion considers that the present depression has in the mam been caused by fundamental factors mainly of a non-monctary character, there is a tendency to hold that the difficulties of the time can be adjusted 1 by some manipulation of our banking and credit system, a view which overlooks the fact that our troubles are initiated from -abroad, mainly by the fall in world prices. The depression undoubtedly has led to a widespread if uncritical tendency _ to blame the banks for enconomic difficulties which the banks have done nothing to cause, but are doing all in their power to cope with; and the prevalent sentiment in favour of nationalisation of coramer- , cial banking in some quarters is in the main attributable to this cause. It is important not to confuse this issue with the general problem ot Socialism as contrasted with a system of private property and free enterprise, subject to social control such as prevails in New Zealand to-day. It is, of course, admitted that in a Socialist State the banking business would be socialised along with all.other ' types of business. This, howeveris not the point at issue. The question v is whether in a country whose institutions are based on private enterprise, the business of commercial banking should bo left to operate as it does at the present time, or made a function of State and run under a State' department ' on the / lines of other economic functions that have been assumed by the public authorities. Advocacy of this course, it is important to notice, does not come from the business classes of the community who make most use of the facilities provided by the banking system, and tor whose service commercial banking mairily exists. It usually springs from politically minded persons, and the motives behind it are political and not ■business motives. ‘ Nationalisation or State control of commercial banking, in other words, is desired as a rule, not by those who from practical experience appreciate the benefits of the banking system, with a view to improving the service, but rather by those who see in control of the bank- . ing system a convenient and powerful tool for bringing about a larger measure of State control over economic life in general. They do not say: “ We want State control of banking in order to improve the banking service or to protect the people from monopoly,” -but rather “Wo want State control of banking to employ it to bring about State control in general.” This- attempt to project political objectives into a service that should re-, ma’infquite clear "of political- considerations, .if it is to function with efficiency, is the most fatal objection to nationalisation of the hanks, instead of being a factor in its favour. CURRENCY, THE STATE’S PREROGATIVE. Apart 1 from this dominant political objective, and the usual considerations that are adduced in favour of State assumption of economic activities, there is a special line of argument relating to State control of the banking service, which recent developments have deprived of all weight. It has been contended that in present conditions, now that standard metallic money has ceased to circulate, the standard money- of - the country is the bank note. As it is the prerogative and function of the state to determine the volume of money and the conditions of its issue, this should not be delegated to the commercial banks, which, since they are traders in money and credit, have a pecuniary interest in_ the matter. There is force in this contention, but it has no application to New Zealand commercial banking at all, .the point having been met. by the establishment of - the Reserve Bank of New Zealand, _ which is the sole noteissuing authority in the country, and is in effective control of the basic money and credit conditions of the Dominion. As the issue of notes and control of the credit basis are now in the hands of a central institution oyer which the Government has effective power, this argument for nationalisation has no relevancy to commercial banking in New Zealand at all. COMMERCIAL BANKING NOT OPPRESSIVE. Tfao case for State control or- operation of commercial banking must therefore rest on other grounds. To establish it* it must be shown that sound reasons exist, based on the public interest, for . such a transfer and in a society based on free enterprise the burden of proof must rest in the first instance on those who advocate a widening of the economic functions of the State. It must be shown that the present system is inefficient, .wasteful, or costly, that it is oppressive to the people, and that transfer to the State will remedy these defects. It is impossible to establish any of these points, and indeed they can be definitely refuted. TECHNICAL EFFICIENCY. It is contended that whatever controversy there may be on the banking question, no complaints have been made as to the technical efficiency of the banking service, which is admitted to be high even by advocates of nationalisation. It is, however, suggested that the present system involves waste by duplication of service owing to the existence of competing branch banks. This line of thought, the elimination ot duplication and ’ wasteful competition, is invariably raised when a programme of nationisaiion is advocated in any direction, and it cannot be ignored._ In the case of commercial banking in the Dominion, however, it is of trivial importance, since the amount of unnecessary duplication is small, much smaller than is represented by opponents of our present system, who usually speak without much knowledge of business psychology or business requirements. PUBLIC CONVENIENCE. Even if there were only one large trading bank in the Dominion it would not be possible to close many existing branch banking offices without causing serious public inconvenience, and impairing the quality of the service now rendered to the business public. I he mere fact that in the larger, centres some of the banks find it necessary to

have several branches shows that existing agencies are not more than, sufficient to cope with the volume of business, while in almost all centres, large or small, public requirements demand several offices at least for convenience and ease of working. Even if banking were nationalised, the great majority of banking offices open to-day would require to be kept open, if serious inconvenience to the public is to be avoided. INTER-BANK COMPETITION. Even it there were some unnecessary duplication, this- is much more than compensated for by the added efficiency and higher quality of service that springs from the active competition lor business existing among the banks today. Within the limits of professional ethics, and the canons of sound and prudent banking, the banks have always competed eagerly for customers, and never more so than to-day, when their investible funds are large and credit-worthy borrowers are relatively fewer in number. From this competition bank customers have reaped considerable benefit; and they have enjoyed the advantage of knowing that, if they, could not enter into arrangements with one banker satisfactory to themselves, it has always been open to them to negotiate with another. If competition among the banks were eliminated by nationalisation this spur to efficiency would be lost, bank customers would enjoy much less liberty of action than they possess today, and any saving by the elimination of "a few insignificant branches would bo a very inadequate compensation for such a loss. It is for reasons such as these that business sentiment is opposed to nationalisation of the trading banks. NO BANKING MONOPOLY. It is obvious that nationalisation of banking cannot bo advocated on the ground that it will protect the public from monopoly. There is no monopoly in the banking business to day, but on the contrary incessant competition among six S9und institu tions to increase their business by com petitive service to customers. Na tionalisation would not protect the pub lie from an existing monopoly, because such does hoi exist; it would eliminate existing competition and impose a monopoly where none existed before, and that monopoly would be hard to deal with, because it -would have, in addition to its economic power,, the backing of the State, which could hardly be invoked to protect the public against oppression by its own agency Under a State monopoly of banking the public would be entirely in the hands of the bank, with no means of redress and no alternative service to turn to in case of oppression or dis satisfaction. POLITICAL BIAS. Another fatal objection to nationalised banking is its unavoidable political bias. Being a Department of State, it, would be subject to political influence and control: and while that does not necessarily entail personal corruption, it means that it would certainly bo employed directly or indirectly to give assistance to projects, policies, and persons in favour with the Government of the day, and to refrain from assistance to opponents of the dominant political party. This tendency could hardly be avoided under a system of democratic party government swayed primarily by electoral considerations; and it would speedily undermine confidence in the bank, alarm depositors, cause withdrawal of funds, and impair or even paralyse the economic utility of the, bank. If political influence or party’ considerations took the place of credit worthiness or soundness of investment policy, bank deposits would not be safe, as they are now, nor could the bank long remain solvent if this policy were persisted in. It is, of course, possible' that no such influences would be exerted, but politics as they arc to-day, and in the light of past experience with financial functions taken over by the State, it is impossible to resist the inierence that political considerations, to a greater or less extent, would influence the policy of the nationalised bank. The primary loyalty of a banker today is towards his depositors, and his motives are economic and financial to the exclusion of political or other irrelevant considerations. He would not be allowed to retain this attitude under a nationalised system, especially as the open objective of most advocates of nationalisation is the employment of the banking function for the attainment of other social objectives, such as the redistribution of wealth or the inauguration of general Socialism. Under nationalisation, the banker would invariably take on the mentality of the head of a Government department, and that mentality is of necessity political rather than economic. At the present time the banker has no dual loyalty, hnd is not distracted by basic duties that might draw him in different directions. Under nationalisation he would have to consider not only the interests of depositors and the soundness and security of liis advances, but the policy of the Government of the day, which he would be bound to carry out, and which might easily run counter to his economic obligations as a banker. This would make sound commercial banking impossible, impair the safety of the banking business, and undermine the confidence of depositors. It would also have the further fatal effect of destroying or seriously undermining the relationship of confidence and trust that subsist under the present system between the banker and his customer. Not many business men would care to enter into their present confidential relations with, or make their present intimate disclosures to, a public official who. might be under obligation to disclose such matters to other departments; It is not possible to reconcile the duties of a commrecial banker with the duties of a transferable Civil servant. It is conceivable that a political banker would prove popular when pursuing a policy ot credit expansion, but when sound control dictated a restriction of credit tins duty might prove impossible to carry out in the face of an outcry calculated to embarrass the political authorities, and the banker could not, if he were a Civil servant subject to political instructions, prevent the use of the banking system for electoral or political purposes, either in general or as regards specific individuals or organisations, if the political authorities were determined to employ it for that end. FOUNDATON OF CREDIT.

Banking is founded on credit, and credit on confidence, which is very liable to dissolve under the corrosive effect of political expediency. ‘Honesty,” says Lord Bradbury, “is a better foundation for credit than the most adroit finesse.” It is not hero suggested that politics are dishonest, but they certainly are characterised by finesse, more or less adroit, and this would be an atmosphere in which sound commercial banking would be stifled. Political machinery is guided by sectional pressure, comparative voting strength, .and temporary expediency, rather than by technical competency or long view of social and economic welfare. It is fundamentally unfitted to control so delicate a mechanism as commercial banking without a serious diminution in efficiency ot service, and a derogation from sound commercial standards that might bring banking to a standstill by destroying public confidence in its integrity.