THE New Zealand Herald AND DAILY SOUTHERN CROSS. SATURDAY, JULY 2, 1932. BRITISH LOAN CONVERSION.

New Zealand Herald, Volume LXIX, Issue 21224, 2 July 1932, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS. SATURDAY, JULY 2, 1932. BRITISH LOAN CONVERSION.

The British, conversion scheme i affecting the great 5 per cent, war loan of more than £2,000,000,000 is . described as the largest operation of its kind ever undertaken in Great Britain or any other country. There need be no dispute about its title to that description. Financial transactions in which thousands of millions are handled in this fashion arc not to bo found recorded in any history. The enormous operation has been contemplated fot a considerable time, and power to launch it has been possessed by the Treasury since September, when, following the emergency.-' Budget then introduced, the necessary legislation was passed by the House of Commons,, But the germ of the conversion scheme can be found much furl her back than that; for when the loan was issued in January, 1917, the possibility of it must have been envisaged. Its term was for 30 years; but the Government was given the option of redeeming it after 12 years, that is, any time after 1920. Even in the hectic days of war finance the cash redemption of such a sum could scarcely have been contemplated; tho condition, written into the bond, j meant that conversion was foreseen, j It needs to be realised clearly that ! what is now being undertaken was one of the terms of K-sue, and that those who do not wish to have their stock converted into the new 3j per cent, war loan have the option of cash repayment on December 1. The comparisons sometimes made between this scheme and the Australian conversion of last year are quite erroneous. London comment in September, when the legislation was under review, was pointed and emphatic about this. There is no variation of the terms of issue, and there is not the slightest flavour of compulsion about the operation. Despite the right of cash repayment, which it is open for every holder to exercise on giving written notice to the Bank of England, it has generally been assumed that the great majority of holders will elect to accept new stock. The rate of interest is a considerable reduction on that of the original loan, but there are circumstances favouring conversion. Those who demand cash will require to reinvest the proceeds of redemption, and money is cheap in London at the present time. Thursday's reduction of the bank rate to 2 per cent, is illustrative of this. The loan had certain attractions as issued, and the chief of them has been retained. This is | the condition that income tax shall i not be charged at the source. | "Where this is done with British Government loans, it is charged at the highest rate, and those who, by reason oil exemptions, are not, liable for income tax at the full rate require to apply for refunds. "With this loan the interest will be returned as part of ordinary income for taxation, and all complications avoided. For that reason the 5 per cent, war loan was popular with the small investor, and the conversion loan isi likely to be also. Besides its convenience, people of moderate means and probably limited experience of the stock markets are less likely than large holders to accept the task of reinvestment imposed by the demand for repayment in cash. This again reinforces the prospect of a. very general conversion. The Government has waited for the opportunity and launched its scheme at a favourable time. Vi hen the emergency Budget appeared in September and tho pending conversion was first given definite form, there was discussion of it on the assumption that the interest on the redemption issue would be 4.1 per cent. By waiting, a reduction of another 1 per cent, has been found feasible, and the possible saving in the annual interest bill has thus been trebled. I A London message estimates the relief to the Budget at £32,000,000 a yoar. One and a-half per cent on £2,000,000,000 is £30,000,000 a year, but the loan was issued at £95 in 1917 and the cost of the redemption bonus has to be considered. Then there is uncertainty about the number who will want cash repayment, and about the cost of the £1 bonus to those who give early notice of their intention to convert, while the expenses of the operation have also to be counted. The Treasury has power to borrow for these purposes and the cost of the loan must be set off against the gross saving. The £32,000,000 mentioned is no doubt a rough approximation, and probably means the saving will be not less than that sum. In addition, the Government obtains an extension of the term of the loan and obtains the option of repaying it in instalment;', after the earliest redemption date. This is important, for tho prospect of a debt of more than £2,000,000,000 maturing at one date could not be accepted equably by any Government, though that date were many years ahead. Apart from these details there is inspiration in turning to the general circumstances of the great, moment. In September, Mr. Snowden, as he ■ then was 3 said there had been some

disappointment that the Government had not carried out the operation earlier in that year. Money rates were favourable lor the time being, he said, but even then there was the threat of disturbed conditions in Austria and Germany. How the threat materialised, how Britain left the gold standard and tlio bank rate rose to 6 per cent, is now history. The favourable monetary conditions disappeared. Their return as a reward for the gigantic effort Britain has made to put her financial house in order is also history. Tho results are accruing and the launch of this conversion scheme, with confidence that it will succeed, stands high among them. To iu spire this confidence has been a result of the cheapening of money. Another consequence most, ardently desired is that the low rates should revivify stagnant industry and commerce, and thus set, in motion the forces leading to a general economic recovery. The courage with which this great conversion operation has been essayed is a, -wonderful nupitry of such further benefits to come.