AGRICULTURAL BANKS.

Otago Daily Times, Issue 19317, 1 November 1924, Page 7

AGRICULTURAL BANKS.

lIL—HOW THET MAY AFFECT THE PUBLIC). (Contributed by the N.Z. Welfare League.) Onr first article shortly outlined Mr Poison’s proposal. Before the supporter* of that proposal can insist _on legislation to bring it into actual practice, they must clearly show that it is not only gomg to benefit the farmer, but at the same tune that it will not prejudice the public as a whole. Our second article showed that it was very questionable whether it would materially assist the fanner owing to the peculiar conditions attached to the loans and also to the fact that tho advent of a new borrowing institution on a market already short of liquid cash must raise the rate of interest. The farmers aa a whole, wo believe, earnestly desire to see some scheme wluc.i will provide long-term loans in order to avoid tho constant and expensive renewals of short-term mortgages. This ideal is quite natural and sound, _ and should be easily realisable provided it combined tho introduction of new capital into the country, and sound management. It is already in operation in the Government Advances Department, and is capable of extension. But this is not the plea advanced by the advocates of the proposal. They allege that a farmer finds it hard to finance himself at all, and yet they have never shown that a man with proper security cannot get credit. A bank wliich confined its operations to lending money on long-term mortgages on some such terms as proposed would be a boon to the small and medium farmer. Such an institution, limiting its loans to, say, £3OOO or even £SOOO, is a fair proposition. Tho £20,000 maximum proposed is ridiculous. But the advocates of Mr Poison’s scheme do not want an institution of this description. They have distinctly stated that they aim at a bank to carry out all the business of farmers usually performed by bankers, and stock and station agents—a very ambitious proposal. FULL OF PITFALLS. "if this is examined from the community’s poipt of view, which, after all, ia the crux: of the matter, we find it full of pitfalls. In fact it breaks most rules of sound finance. The first and best established principle in stating a bank ia adequate paid-up capital. No institution should accept deposits unless it has strong reserves of “liquid” assets in order to meet demands and protect depositors. The neglect of such a safeguard must result in disaster, as wo saw in this country recently when Farmers’ “Co-ops” and other bodies had to seek the protection of a moratorium because the deposits in their hands were not supported by “liquid” reserves. Even if covered by real property securities, a bank is not safe, because land is notably the least “liquid” of all assets. The 1893 crisis in Australia was due to a too free creation of credit on land which caused a boom in prices, and when the fall cams the banks found their cosh tied up and could not meet demands. These are truisms and cannot be disputed, yet Mr Poison proposes to establish a bank of deposit and issues on borrowed money instead of paid-up capital, and literally no assets. The very essence of the scheme is to borrow money to start with, to lend this out on land and then to repledge to their full value all the securities m hand to obtain further sums to advanceTho depositors in hia bank would not be protected even by land assets. As a bank it starts in debt and intends to try the impossible task of trading on its indebtedness by passing its risk on to the public through its issue of bonds. It is true that a 34 per cent, margin is provided for, but still the risk is a grave one owing to tho fact that land prices are even now too high, and a fall in produce values would easily swamp up this margin of safety. Under normal conditions it would be safe enough, but the very factors which have caused the troubles complained of make the proposed remedy a very risky experiment. Wo shall probably bo told that the scheme does provide for share capital in as much as the borrowers have to subscribe 5 per cent, of their loans in cash to take up shares. This means that five millions must be borrowed before even £250,000 share capital is accumulated, and even then it is not real share capital, but a loan from tho borrowers, as it must bo repaid to them in cash as the loans mature. NOTE ISSUES. The scheme includes the right to issue notes, and here again is a grave danger to the public. Notes, or any form of negotiable paper, should be based on “liquid” reserves, and we have seen that this proposed bank has none. Therefore its “paper” would be of less value than the notes of joint stock- banks, which are properly secured by law. As such they would bring Gresham’s Law into operation, and drive good money out of circulation, for everyone would pass them as quickly as they could. If the bank failed it would bring disaster to every section of the community, because the people would hold more of this bad “paper” than good. This creation of paper credits, unsupported by actual capital, can only have one result—namely, dearer land, whereas the real need of the farmer is cheaper land and more liquid cash in the conn try for his use, MANAGEMENT. Sound banking necessitates the study of almost a lifetime, and even experts of long experience make mistakes. What, therefore, can bo said of the proposal before us, when the management is considered? Five out of seven directors are to bo elected by members from their fellow members, one from each district. The only qualification insisted! on is that he be a borrower from the bank of which he is a director. That is regarded in other companies as a disqualification. This board, therefore, am only be drawn from a limited group, and yet it has power to commit the country to a banking policy wliich may bring ruin .on thousands. Amateurs, whether fanners or commercial men, cannot run these special operations, even when properly stated with paid-up capital. How, therefore, can they run a bank whoso very existence depends on credit, which only exists to give credit, and whoso credit is backed, not by paid-up capital, but by debt for borrowed money. An institution, based on such a foundation and under such management, must inevitably involve the whole farming community, as well as other sections, in financial disaster. Even under most careful constituted management a similar scheme to this has caused rain to hundreds of farmers and others in the north-west States of America. We propose to deal with this more in detail in our concluding article, and shall at the same time comment on the proposed Government guarantees.