THE DOUGLAS SCHEME

Gisborne Times, Volume LXXX, Issue 12200, 12 March 1934, Page 3

THE DOUGLAS SCHEME

BANKS IN REPLY

"DAMAGE TO COUNTRY.”

1 , -..••• " .j/ .. ’ : V-' . ■' * ' DEPRIVATION OF RESERVES,

\ : A reply to certain, sttafemchis snbniittcd to the Monetary .Committee hy Majclr G. J.. ’Douglas’ was. ma flc ‘bv i the : -,associated: banks of . - New Zealand; in ...a ,menipriuid : uni : road. .at; n' session, of - the committee ( iu Wellington..-, The memorandum . stated tliai. the associated haiik s - were convinced, that the carrying out °y Major .Douglas’ssuggestions in. New Zealand .would’,- retard improvement here - and do the country real damage. / ; ... ; < ,//.'■//

/The-memorandum states two of y Mujory Douglas’s . suggestions concerning .the., hanks of New Zealand might, be briefly outlined asi undoi • (a) A .'limitation of bank dividends hi -respect ;of ■ pperaUcns carried on within . New Zealand fa ,0 per, cent, per; anniun on- the.-.sub,scribed cf,i pi" tAI-f-fhb amount 'represented hy the 'hi,ifplu>; above .thfit figiiro to be ap'■plidd- (in. .the manner, doyc'ribod hy him) to reducing • interest rates. . fb),.That- the banks he deprived 'of file; ..difference between - the, balancesheet, value and the. estimated mark'dfc value of, hank assets, and. that .fits;’ apiounfs' represented' by such ditference ho .transfoVrod hy way -of .gift (.ip J the manner described by him), to ..the accounts, of- .customers having-overdrafts. , l ."Both those,, suggest ions are. inherently .unsound,, and are, in .effect, an pnjjiis.tifiable. -raid on . assets and 'reserves'. essential to .the efficient, cotir dijct. of banking husiness,” the memorandum. states. ■ Z.Tho . suggestion 'that, .dividends be limited , to 6 per ■oenf. per annum on. the .subscribed capital.- ignores the fact -that, in the 'case of • som e banks, the .subscribed i-apital represents, several times the prfid-un capital., wfiole in the, case of ether, banks.subscribed capital is n f » greater, than, paid-up, capital.

"LACK OP . KNOWLEDGES

{."Apart from this anomaly, which pefljrays. a lack, of knowledge by Mn{qr! Douglas of the subject unde' l ' discussion, the suggestion entirely fails to take into account, the tact that dividends nrUe from the earnings of a much, larger sum than the capital of banks, namely, the capital and reserve funds,, which a,re the investment and the property of shareholders and the reserve funds, arg often built up very largely from direct contributions by the sharchokl-c-rq in the way of premiums on new subscriptions of capital, as; well as from undistributed profits. Thus, though the dividend l.q quoted as being at a certain ratg on paid-up capital, that dividend repre-puts the earnings of a much larger investment of shareholders’ funds. "Furthermore, there is an important point, which hay already been, .stressed bv tlie • chairman of the Parliamentary Committee; namely, that the market value of bank ■shares is greater than the nominal value, so that if Major Douglas’s suggestion were adopted a shareholder who had paid a. market value of £4 for a share, with a nominal value of £l, would, find the, maximum return on his investment- reduced to If per cent. This would have the effect of inequitably reducing the .incomes of members of the community.

"In his evidence before you'r committee. Major Douglas, referred to the Bank of England dividend as being. 6 per cent., and mentioned that; as a well-known precedent, for Tlie’” 6 per - omit. ~ mnximVini ■ dividend, he proposed in respect of the hanks in New Zealand. Wo would point out to the committee that the Bank of England dividend rate is 12 per cent, per annum, a fact which again indicates Major Douglas’s! inaccurate knowledge -of the matter under discussion. "INEQUITABLE IN THE EXTREME.’’ "Major Douglas’s suggestion ; that the hanlcs ho deprived of their Winer reserves is inequitable in the extreme.--It is a sound principle of banking to build up reserves to enable banks to cope with difficult economic conditions with unimpaired stability and to maintain and retain confidence. The effect of such wise trading can he seen by 'comparing the--splendid , record of , the hanks 01 British countries with tho fate ot hanks of other countries which have not' .paid sufficient attention to making .proper provision for r'uch conditions. Major Douglas proposes t° try the experiment of depleting bank reserves at the very-time when the policy -of maintaining adequate re-serves-has been abundantly justified.

"On-ihlis own “showing Major Douglas links part of his,.: fantastic ' suggestion with his entirely unfounded and unwarranted assumption .that 'As things are going on at present there is no possibility whatever of . the present hanking system continuing for any considerable, length of . time, even- three, four .or five years, without a complete ;catastro-phe-—-complete breakdown of the present system.’ Sp he would deprive banks" of an important part of their resources and bank .shareholders of an- important '.part of 1 thei r income, and would ’make a present of the proceeds lof", his sluggosted confiscation to. customers'.with 'overdrafts —» many, ’of whom 'a re - much ' morewealthy -than' many' bank shareholders; ■ "As To nik’asspmjftidn -of a breakdown ’c-f ■ the. ipresenT system, at an ea'rly’. date', on tfie ~way things .are going at .present-" Tve would point out tbat/Ther’e' ig '..at tho, present time encouraging eyideuco, ; that..Rrita.iin is* making a ; dcoisiye recovery, from .tho effects), of the depression.?’