CAUTIOUS INVESTORS.

New Zealand Herald, Volume LXVI, Issue 20229, 13 April 1929, Page 12

CAUTIOUS INVESTORS.

MONEY LEFT WITH BANKS. REDUCTION OF RATE URGED. AIDING BUSINESS EXPANSION. NEW ZEALAND SLOW TO REACT. In the accumulation of deposits revealed by tho banking figures for the March quarter Auckland commercial men see tho need for a lowering of the bank rate to encourage the flow of surplus capital into business channels. They claim that, not only would a reduced rate fructify funds now idle and relievo tho position of struggling business houses, but also it would stimulate industrial expansion and assist in relieving the unemployment situation. Invited to comment on tho banking position, Dr. If. Belshaw, professor of economics at the Auckland University College, stated that tho tendency of fixed deposits to rise was common in a period of depression or falling prices, and was indicative of lack of confidence in other new avenues of investment. It showed that investors preferred to accept tho lower rate given on fixed deposits rather than to look for tho lossibility of a larger return by investing their surplus capital in business in view of tho greater risk tho latter appeared to present. Improved Economic Situation. "In New Zealand tho community is slow to appreciate changes in business conditions," said the professor, " and tho present lack of confidence, as evidenced by tho largo volume of fixed deposits, is due to failuro to realise that all present indications point to a much improved economic situation. The holding of funds in tho form of fixed deposits is a factor which, in niy opinion, is tending to retard recovery from the recent depression. While there seems to bo every likelihood of a tendency for world prices to fall for some years, yet there should be grounds for sufficient confidence to warrant business expansion in New Zealand in tho immediato future.

"The recent rise in the'bank rate in England has been taken in some quarters as a warning of a possible decline In prices and industrial conditions in Great Britaip, which would, of course, react on New Zealand," continued Dr. Belshaw. " A recent issue of the Economist, London, appears to suggest that this fear is unwarranted, while tho latest issuo to hand points to a welcome improvement in tho gold position, and there appear to bo reasons for believing that tho bank rate may soon bo reduced. "As far as New Zealand is concerned, the primary industries have just had an excellent season, tho trade balance is good, and other indications, such as the volume of real estato transactions and tho traffic handled by the railways, show an improvement. These conditions seem to point to la'ck of confidence as tho important factor, dependent largely upon a declining price-level. If tho funds held on fixed deposit were liberated, this might be an important factor contributing toward recovery. ' Experience Teaches Caution.

" As long as the present rates offered and charged by banks continue there will be a disincentive for the liberation ot such funds. A lowering of tho rates offered and charged by the banks would bo conducive to a freer use of funds, and tho only reasonablo excuse which could be offered for a continuance of the present rate in New Zealand would be the existence of appreciably higher rates in other countries to which New Zealand investments might be attracted." Tho chief cause of the increase in tho volume of fixed deposits was undoubtedly tho greater caution being displayed by tho investing public, following tho experience of previous periods of depression, said a city banker. The public were not prepared to risk their money in doubtful investments, but would touch only giltedged securities, such as bank and insurance shares. That accounted for the fact that very little money was offered for mortgage purposes at present. Tt was difficult to predict when tho public would feel more confidence in investing in more hazardous but more profitable avenues. That problem was more, psychological than economic. The banker agreed that a lowering in the present rates on fixed deposits would stimulate investment in commercial and industrial concerns. but, speaking without any inside knowledge, ho did not anticipate there would be any early move to reduce the rates which had stood since last July. The present rates on fixed deposits are as follows:—24 months, 4.1 per cent.; 12 24 months, 4 per cent.; 312 months, 3-2 per ( r or itCheaper Rates of Interest. Reviewing the position at a meeting of the executive of tho Auckland Chamber of Commerce yesterday, tho president, Mr. 11. T. Merritt, drew attention to (hp present general tendency for prices to fall, a movement bringing in its train a decline in profits, especially in view of the slow adjustment of overhead charges to lower price-levels. The high rates of interest which had prevailed since 1914 were, in Mr. Merritt's opinion, largely accounted for by the increased demand for capital for the non-reproductive purposes of war, followed after 1918 by further demands in connection with reconstiuction.

The capital shortage thus created had been reflected in high interest, rates during the past 13 or 14 years. But, as the conditions of (lie Avar and post-war periods receded further into the background, the shortage of capital which brought about the high interest, rates was gradually passing, and a slow but steady fall in interest rates could be anticipated. To the business man carrying 011 under the burden of post-war taxation, high overhead charges, and diminishing or vanished profits, a lower rate of accommodation would be trebly welcome. z A graph in the current issue of the Chamber of Commerce Journal shows that, the accumulation of deposits in the ban Us is greater in relation to advances than has been the case at any previous time within the past nine years. The chamber argues that the figures call for a substantial reduction in the bank rates, and that, the onus is on the banks to justify the "continuance of the present high rates.