THE New Zealand Herald AND DAILY SOUTHERN CROSS THURSDAY, JULY 27, 1933 THE REGULATION OF CREDIT

New Zealand Herald, Volume LXX, Issue 21554, 27 July 1933, Page 8

THE New Zealand Herald AND DAILY SOUTHERN CROSS THURSDAY, JULY 27, 1933 THE REGULATION OF CREDIT

No subject is of more moment just now than that dealt with by Lord Bledisloo in his address to the Creditmen's Association and Club—the control of credit. Its importance is emphasised in the difficulties met in these days of business dislocation and anxiety. It is intimately related to this experience of confusion: the abuse of credit has played no inconsiderable part in producing the distress, the readjustments needed have greatly to do with a heritage of hampering obligations, and among the propounded remedies are various projects based on new creations of credit. In its widest scope, the subject is almost coterminous with the problem thrust into the notice of all the world by happenings that have come to practically every door. That credit has performed great iservice in the development of modern business is too evident to need much • verbal proof. ! Using the tern in its broadest and ! most fundamental meaning, credit is i the basis of the chief devices that j have expanded production and I trade, such as the increase of cur- ; rency beyond metallic coinage, the furnishing of loans for new or enlarged enterprises, and the provision of facilities for distant transactions. In some form or other, it 1 has mainly ministered to industrial • and commercial advance. It is diffiI cult to imagine a future without it; I the alternative is retrogression to ; severely crippling limits—to payi ment for labour the very moment it is performed, to "cash on the | nail" for every purchase no matter i how complicated, to interest in ad- ! vance before the capital loaned has i had time to earn. Credit can still ; play its part in production and j trade. But with the possession of | this useful instrument has come an I undoubted temptation to misuse it, j in the buying of commodities bej yond reasonable hope of paying for them, in the entry into promissory obligations on. a wildly speculative basis, in the carefree squandering of loan money, and in the general discounting of a future that may never materialise. In every financial crash this peril has admonishing record. The trust that presupposed the existence of intelligence and virtue has often been abused by folly and ethical laxity. In His Excellency's aphorism, "long credit undermines sound business," is a truth for all times. Credit is ever dogged by fluctuations in value. Fixation of so important a factor as price—to say nothing of other factors—is beyond achievement. Even though the margin of alteration be narrowed by governing contrivance, the margin of possible alteration will always be there and it will tend to break 1 away from any restrictions artificially imposed. Short-term credits can cope with this shifting condition j fairly well, but the longer the credit l the more difficult it is to plot the ' possible alteration of value at a; forward date. There enters with j long credit, consequently, an increase of hazards, working to the likely detriment of either buyer or seller, borrower or lender, as the ( case may be, and no contrivance can wholly remove this risk. This elemental weakness of long credit is everywhere, in transactions small and great. It is the presence of baneful uncertainty. And the effect is to undermine confidence *in making advances of any kind, especially of time to pay. The inevitable effect is the very, opposite of that intended in making advances, whether of commodities or money. Credit implies confidence; this increase of uncertainty in long-term credit, no matter how the arrangement arises, reduces confidence. Some consequences are obvious, among them an increase of price to other than cash purchasers, a raising of general retail price to allow for bad debts, and an addition to overhead costs; and the outcome of all such means of self-protection against risk is restriction of trade, not its expansion. That is, while credit reasonably managed will promote and justify enterprise, its loose and indefinite employment must react prejudicially.

The cure for the evil is not the total abandonment of credit, good as is the practice of paying as one goes. Prompt settlement of dues, strict observance of the sanctity of contracts, and scrupulous honouring of every ordinary business obligation, have clear commercial as well as ethical merit; yet there remains the dqsirability of credit so regulated that it may aid sound business. How to regulate it is the practical problem. Tn some countries the risk in credit has been covered by a system of insurance against, bad debts, and evidence exists to show that sucTi a system, while safeguarding the insured, can make profits for the underwriting companies. But obviously this experieftce, although it points a way to the mitigation of the evil, neither justifies long-term credit nor eliminates the restrictive effect of it on trade. Instead of participating in credit insurance, some big businesses employ "credit managers," whose sole task is to watch the risks of bad debts and ward them' off. This precaution, however, has limits of application; between the small retailer, knowing his customers personally, and the largescale business, capable of engaging an expert, is the general mass of business folk without either advantage. Nor does this method wholly obviate the increase in overhead costs arising from credit. For voluntary organisations of the type of the Creditmen's Associations much more can be said ; these can deal with the problem of localities, keep in close touch with current conditions, and serve as a sort of "outside conscience'' for their members as well as their commuriitirs. After all. it is the ethical sense that is supremely vital. These times will have failed to teach one of their chief lessons if | the inherent wisdom of honest business be not widely learned.