BANKING POLICY

Otago Daily Times, Issue 22630, 23 July 1935, Page 7

BANKING POLICY

PRESENT SYSTEM DEFENDED DANGERS OF NATIONALISATION SAFETY OF PEOPLE’S SAVINGS “As regards the future one cannot but view with concern the growth of insidious and harmful propaganda advocating the socialisation of credit and the nationalisation ofi the Dominion’s banking system,” said Sir James Grose, general manager of the National Bank of Now Zealand, in the course of an address at the annual meeting of the Dunedin Chamber of Commerce last night. “In commenting on this dangerous development in thought,” he added, “ 1 must say 1 am amazed at the limited knowledge of ordinary business principles which is exhibited by the protagonists of these revolutionary proposals. “ The inclination .to blame financial institutions for the various social ills is common in times of depression and is ■ the fashion of the moment. The most common of the charges levelled against the banks is probably that of ‘ restricing the issue of credit,! and in this connection one hears much of ‘ idle tnoney in the banks ’ and ‘ costless credit.’ Let me say at the outset the banks are very willing to lend to any credit-worthy borrower who submits a sound business proposition. The greater the amount of sound advance business a bank is able I

to attract to itself (subject always to its primary duty to safeguard the deposits entrusted to it) the greater are its profits, and this simple fact should create a very serious doubt in the mind of any thinking person who has been asked to believe that the banks are deliberately restricting credit. I repeat that the banks are anxious to lend where the nature of the customer’s application justifies their doing so, and proof in the form of bad debts contradicts any suggestion that they have been over-rigid in the past in their requirements for safety and security. You as business men fully appreciate the necessity for ordinary prudence in the granting of credit to your own customers, and the banks, as trustees for their depositors, must necessarily exercise prudence in their lending operations. It is an axiom that banks do best when other people do best.” DUTY TO DEPOSITORS A bank had a duty to its shareholders to earn a reasonable profit from its operations, but its primary duty (before its duty to its shareholders) $-as to its depositors, and this primary duty consisted in caring for the funds entrusted to it in such a way as to ensure their return intact to the depositors when called for, together with what interest might have accrued thereon. Any attempt by the banks to adjust themselves to the Socialist requirements of a free and indiscriminate issue of credit would result in swift and inevitable disaster. A bank’s stock in trade consisted first of its own resources, which had been supplied by a large number of shareholders whose average holding was far fi’om large, and secondly of its deposits, which represented funds lodged by its customers for their own use at a later date. When money was lodged with a bank on deposit the depositor became the creditor of the bank and the deposit was a debt due by the bank, and the banks were unable to create credit out of “ thin air ” as some persons would ask the public to believe.

Deposits were the life blood of banking, and, together with a bank’s own capital resources to which he had referred, they provided the wherewithal for loans to agriculture, industry and commerce. This source of credit was not “costless,” despite the easy assurance with which some people spoke of “ costless credit.” The banks in New Zealand annually distributed a very large sum of money by way of interest for the use of deposit money, without which they would be unable to carry on business, and they also paid heavy taxation on all assets and' liabilities. FAILURES IN AMERICA “If those people who advocate the freer use of other people’s money—which in effect is th 6 essence of the complaints —would but give equal publicity to the comparatively recent experience of the United States of America, where overdaring and unsafe banking was the cause of thousands of bank failures which swept away the life savings of millions of industrial workers, then I feel sure the people of this Dominion would promptly say ‘hands off the banks!’ Sir James added. “In Australia, also, not long ago, political interference led to the closing of a large, sound and well managed Government Savings Bank, and it is well to remember that the advocacy of nationalised banking was subsequently rejected at the quite recent Federal elections.

“ The question is one of security and service and may be submitted in these words—‘Under which system of banking—private enterprise or Government monopoly —is there greater safety for the people’s savings and a sounder system of assisting trade and industry?' Or to put it another way, the issue is this: ‘Shall the banks- with all their

deposits be turned over to politicians for manipulation or shall the experienced officers of the banks in every community continue as the responsible trustees of the earnings and savings of the New Zealand people?’ INFLUENCE OF POLITICS “ The political banker, that is, the Minister at the head of a nationalised banking system, would owe his position to the fact that he was a politician, and to retain his position he must necessarily be a politician primarily and a banker secondly. Now politics and banking do not mix, for the basis of all banking is confidence, and confidence is apt to wilt away very quickly under the blight of political expediency. A political banker would be burdened with many political responsibilities and would be influenced by many motives that are unsound from a banking point of view. If it is argued that a nationalised bank would do more than the present trading banks are doing in providing credit for industry, then I say that, to do so, safety must be sacrificed.” A national policy for reconstructing industries had its appeal, he added, but, if that policy was to be financed through a political banking system, then that involves the introduction’ of investment into banking, and in times of crisis the banking system would find itself overweighted with large frozen assets, necessitating Government support which could not be continued indefinitely without recourse to unsound finance and inflation. Experience had shown that once a country was misled into a policy of inflation it became involved in a vicious spiral of more and more inflation until its currency became worthless. Summing up the position from this angle, he could perhaps not do better than agree with Lord Snowden (Socialist and ex-Chancelior of the Exchequer), who, in commenting on proposals for the nationalisation of the British banking system, observed that “ if the banks were nationalised they would have to be managed as they are now if their solvency was to be maintained.” POSITION OF TRADING BANKS He submitted that the trading banks of the Dominion had done and would continue to do their duty. In the past they had granted liberal assistance to the Government in times of national crisis; they had retained the confidence of the people; through keen competition they made available their many services throughout the Dominion at a cost which was lower than in many other countries and which produced a very low return on the capital employed. The trading banks had in no way failed in the exercise of their obligations to the people of this Dominion, and if certain political forces wore to direct their energies to-

wards restoring international trade instead of attacking a sound and efficient monetary system they would soon 'discover that there was little wrong with the lattep. Especially was this so now that the Dominion had established its own central bank, for he was glad to say he had an appreciation of the benefits likely to accrue from the effective centralised control of the banking system which was now vested in the Reserve Bank of New Zealand. That institution had primary control over the monetary circulation and credit in New Zealand and had a full sense of its responsibilities in the direction of maintaining stability and regulating the flow of credit. A WORTHY STRUCTURE “ I am definitely of opinion,” Sir James Grose added, “that, with the Reserve Bank of New Zealand welded as the central link in its monetary system and the trading banks continuing to offer security and efficient service to the public, this Dominion has a worthy financial structure which the people will refuse to allow to become the plaything of monetary theorists. “In conclusion, I wish to make it perfectly clear that ray remarks are not directed against anyone who may propound a sound and constructive scheme calculated to benefit the Dominion, but theories are being advanced in New Zealand which have been examined by the world’s highest authorities and judged to be fallacious and dangerous to the welfare of a country, and it is essential that the people of this Dominion should be warned against such unsound proposals.”