AGRICULTURAL BANKS.

Hawke's Bay Tribune, Volume XIV, Issue 276, 1 November 1924, Page 3

AGRICULTURAL BANKS.

IV. now IT WILL AFFECT THE STATE. (Contributed by the N.Z. Welfare League.) We commented, in our last article, on the absence of two safeguards without which no such bank, as proposed, could carry on—namely, adequate paid-up capital and a strong reserve of “liquid” assets to protect depositors and support a note issue. In reply to this the advocates of the scheme will probably point out that they have provided special concessions and State aid to meet this deficiency. It ih true that they have suggested that the State, and the public generally, shall practically carry the whole risk, but is this a fair or reasonable proposal? The question is one which concerns every person in the Dominion, and must bo examined from that point of view. The proposed bill provides, as we stated in our first article, a cash advance from the State. A Government guarantee of the bonds so that any liability shall be paid out of the Consolidated Fund, also the exemption from Income Tax of all the bonds and of the profits of the bank itself and, lastly, exemption of the bonds from Stamp Duty. This is a fairly “tall” proposition that requires examination in detail. STATE AID AND GUARANTEE. Firstly the State is to advance £lOO,000 in cash —without security—without participation in profits, and without charging interest. This sum may be a total loss, or unpaid for several years. At 5 per cent this will cost the Dominion £5OOO a year and is a cumulative loss. Then the State has to pay the salaries of two director-nominees for two years. No banking expert could bo found to “give his whole time” under £l5OO to £2OOO a year, so this entails the expenditure of from £6OOO to £BOOO by the State which will not be refunded in any case. In addition to this, the State is to guarantee the whole bond issue which, as we shall explain later may run into many millions if the promoters visions are realised. Assuming for one moment that the State agrees to such a guarantee, it is, by so doiilg, admitting the preposterous principle that public bodies, industrial, commercial, mining, banking and other companies, and. indeed, every individual, has the right to ask the State to back their securities by a guarantee if they want to raise money. You cannot limit such a concession to one section of the community. This Dominion’s welfare and prosperity depends almost entrely on primary products, and for this reason we can understand some justification in proposing that the State should grant certain special privileges to assist in financing the small and struggling farmer. Mr Polson’s proposal, however, goes much further, ho asks that the large landowner also should receive these extraordinary privileges at the community’s expense, for his scheme allows maximum advances up £20,000. The suggestion of a Government guarantee under’such a scheme is so obviously against the public interest that it stands condemned. Not only is it wrong in principle, but it would gravely affect our credit in London. EXEMPTION FROM TAXATION. In America the land bonds are exempt from Income Tax, but there, we understand, that most local body loans carry the same privilege, and if the result is examined carefully it wijl be found that the concession will act as a boomerang to farmers. Actual mortgage statistics are difficult to obtain but, exclusive“table mortgages,” there was in New Zealand on 31st March, 1923, about £130,000,000 secured by mortgage on rural lands. Now, if the promoters’ ideals are realised, the bulk of these mortgages will gradually be absorbed by the proposed bank and bo covered by land bonds— Let us assume that only £65,000,000 came into the scheme — this would withdraw from taxation at least £4,000,000 of income. These bonds being also free of Stamp Duty would decrease the revenue by over £160,000 over a period of years, and we have already noted above the less of £5OOO a year on the £lOO,OOO cash advance and say £BOOO over two years for directors’ salaries. The deficiency must be made up from other sources, and a large part of this extra burden on the community is bound to be paid eventually by the famer, so the little he may gain by reduced interest will go in his share of the extra taxation. AMERICAN EXPERIENCE. There are various systems both of long and short term credits in the United States, these are somewhat complicated and cannot be discussed within reasonable space. The administration is most carefully constituted, yet widespread disaster has occurred in the North West States, and was precipitated by various causes, which have proved that these artificial schemes on a large scale cannot stand the test of actual practice, Au American paper of high standing says, that in four States alone “more than 500 banks are shut up because the farmers cannot pay their notes. ’ ’ The ruin caused is summed up thus:—“ln Montana one-third of the banks failed equaling a quarter of her entire banking capital and one-fifth of her total deposits; in Dakota one quarter of the banks failed involving one-fifth of the tc-tal banking capital and one-tenth of the deposits.” South Dakota and Minnesota suffered to a slightly less degree. Seeing that this occurred under sound control, under a system of small loans limited to £5500 and a 50 per cent margin for cover, what should we expect here under Mr Polson’s scheme, with weakly constituted control, a maximum of £20,000 and only 34 per cent margin? TO SUM UP. We do not wish any casual reader to misunderstand our attitude on this important matter. Our comments have been confined to Mr Polson’s proposal, which has obviously been copied from some American institutions after superficial examination and without properly studying the relative conditions in this and other countries. To these now limited schemes have been added several variations which are patently unsound. The whole proposal seems based on the delusion so prevalent amongst a certain class of theorists, namely, that credit is substance. It is a fallacious doctrine and any business founded on credit unsupported by substance must lead to disaster. It is significant that no policy like our “Advances to Settlers” exists in any country where “farm credits” are in operation. In this Department we have the system already at work in New Zealand on a fairly large scale and, we believe, that it could be widely extendded. In any case there should be no difficulty in devising a system of farm credits to advantage, based on the introduction of fresh capital into the country. It must confine its operations to small loans up to, say, £5OOO on real security and smaller short loans on stock and produce with a conservative margin for cover. Such a scheme, like many others abroad, might help the man on the land who most deserves help, but an extension in the direction of full banking operations of note issue and deposit, combined with largo £20,000 limits for loans, must lead the farmer, and indeed the Dominion, into deep water. But whatever scheme is adopted we must protest against the principle 4f a State guarantee which w© have shown to be indefemible,