INCREASED INTEREST RATES.

Otago Witness, Issue 3823, 21 June 1927, Page 25

INCREASED INTEREST RATES.

REPLY TO CRITICISMS. THE STATE BANK FALLACY. Dealing with the rates of interest m. the course of his speech as acting chairman at the annual meeting of the Bank of New Zealand, Mr Richard W. Gibbs said: The reduction of the Bank of England rate has had a wholesome effect on the London market, and colonial securities promptly appreciated. Unfortunately, with our adverse trade balance to contend with, this reduction has not been reflected in New Zealand, and an increase in local rates, long deferred, became inevitable. The banking figures for the past quarter, as compared with those of a year ago, show a shrinkage in deposits ..f nb less than £1,773,667, whilst advances jncreaseo by £2,515,668, representing an adverse novement of £4,289,335. To meet the situation it has been found necessary to offer more attractive terms for long-dated fixed deposits, with tho usual corresponding increase of i per cent, on advances. This increase in the minimum rate of interest on the advances, consequent on a similar increase in the rate paid by the banks on fixed deposits, has aroused much adverse criticism. The increased rate does not apply to all advances; most accounts which have hitherto been charged more than 6i per cent, will not be affected. The increase was net decided on without the fullest consideration by the banks and with a full sense of responsibility. What was the position which the banks were called upon to face? The banking returns for the quarter ended March 31 last disclosed a considerable excess of advances over deposits as previously shown, and indications point to a steady increase in these figures. No competent critic will say that such a position could wisely be allowed to continue. The banks had to choose between an endevour to attract additional deposits by offering a higher rate of interest or demand repayment of a considerable volume of advances. There can be no question as to the disastrous results to many traders and producers had the latter course been deemed the better. The rates of interest offered by tl e Post Office Savings Bank have for years past had the effect of attracting .to that institution considerable funds which would more properly have been placed on fixed deposit with the joint stock banks, in whose hands they would have been available for ordinary trading purposes. The. growth of deposits in the Post Office Savings Bank as compared with the joint stock banks is indicated by the following figures:—

It will be seen from these figures that between 1915 and 1926 deposits with the joint stock banks increased by £15,680,000, whilst the deposits of the Post Office Savings Bank increased by £25,745,000. In 1920, an Act was passed enabling the Post Office Savings Bank to increase the amount of any deposit on which it could allow interest from £lOOO to £5OOO. It will be gathered from these figures that the deposits of the joint stock banks increased 52 per cent, between 1915 and 1926, whilst those of the Post Office Savings Bank increased 116 per cent. Whilst the joint stock banks are obliged to keep large unremunerative cash reserves, the Post Office Savings ank pays none, whole of its deposits. The joint stock banks are further handicapped by having to pay heavy income tax, whereas the Post Office Savings Banks pays none. With one exception, where interest at a low rate on an additional £3OO is allowed, the Post Office Savings Banks in Austra-. Hu allow no interest on individual deposits m excess of £lOOO whereas in New Zealand interest is allowed up to £sooo—- — figure altogether beyond the scope of the generally recognised functions of a savings bank. It is safe to say that the amount of individual deposits in excess ot £lOOO held by the Post Office Savings Bank in the Dominion runs into millions. If these deposits, in excess of £lOOO were in the hands of the joint stock banks, the recent increase in rates would not have been forced upon them. It is also erroneously alleged that the six joint stock banks doing business in the Dominion have a monopoly. The savings bank, as well as every other institution, joint stock company. or person that borrows and lends money between themselves is a compatitoi of the joint stock banks. Further, there is nothing to prevent new banks being formed, provided the banking laws of the Dominion are complied wth. The wave of prosperity which set in towards the end of the ’nineties and continued almost without a break until near the end of 1920, enabled the banks, through prudent management, to work into their present strong position. In bygone days they had their reverses, the losses of our institution alone running into millions, and since 1920 our own losses have not been inconsiderable. In times like the present all traders—including banks, who are traders .in money—require, when fixing the selling price of their commodities, to make adequate allowance for bad debts, more so than, in normal times. We question very much whether, at the end of our current financial year, after allowing for bad and doubtful debts, we shall average as much as per cent, on our advance business in New Zealand. The advance business is. however, but one ci many branches of our banking ramifications.

It is argued that a State Bank would meet all our monetary trials. Well, there is a State Bank in the Commonwealth, and for the guidance of those who desire to know what effect the establishment ot a State. Bank would be likely to have on finance in. this Dominion, a reference to the operations of the bank mentioned may prove interesting. The Commonwealth Bank commenced operations in 1913. At that time the advances of the joint stock banks in Australia totalled £124,229,109. At December 31 last they had increased to £247,548,616. an increase of over one hundred and twenty-three millions. During the same period the advances of the Com-

monwealth Bank grew only to £13,010,671. If a State bank is the panacea for the financial"ills of the country, why such solid preference given to the joint stock banks by the public generally, as these figures indicate, notwithstanding that the joint stock banks in Australia for some years have charged a higher rate of interest to the public than the Commonwealth-Bank? The figures quoted prove that a State bank is not an important factor in fixing the rates of interest, and the preference shown is duo to the fact that the joint stock banks can give a better service than any State bank can possibly give. The Commonwealth Bank for some years charged a uniform overdraft rate of 6 per ■cent, to the public, but in response to the law of supply and demand it increased its rate for general overdrafts from 6J per cent, to 7 per cent, as from January 1, 1925, and reduced it to 6J per cent, six months later. For years during that bank’s existence our rate for best accounts was 5i per cont., despite the fact that, while we paid the Dominion’s exchequer .hundreds of thousands in taxation, the Commonwealth Bank was entirely immune. The growth of the capital (amassed solely from profits) of the Commonwealth . Bank is frequently cited in favour of establishing a State Bank. A speech delivered by the Federal Treasurer, Dr Earle Page, on June 13. 1924, is illuminating as to the way the Commonwealth Bank amassed its large profits. Dr Page ouoted the balances as at June 30 which the Commonwealth Government kent with the Commonwealth Bank as follows-.— Average. For 8 years—l9l6 to 1923 ... £13,390.000 For 5 years of this period—--1916 to 1920 £17,035,000

On one occasion the balances amounted to £40.000,000. On all these immense sums, said Dr Page, the Commonwealth Bank paid not one penny of interest to the Government. Our institution gets no plums of . that sort from the New Zealand Treasury. When the New Zealand Government receives from us to-morrow the dividends on its shares in the bank,'it will have received in all for the year: —

Mr Massey publicly stated that he valued the State's goodwill in the Rank of New Zealand at 2i millions—a very handsome remuneration for tho Government’s . guarantee—given not jn the interest of the shareholders, but to prevent Dominion disaster—a guarantee which cost tho country not one penny. None of the ordinary shareholders, I am sure, begrudge the generqus reward to the Government for its services by way of guarantee at a critical time. It will not be out of place here to state that while during the war period the rates elsewhere in the world fluctuated widely, and in many cases on a high level, the advance rates in New Zealand were admitted to be the lowest in tho world, and showed little variation from the pre-war days. In discussing the rise in advance rates, reference has been constantly made to the simultaneous fall in the Bank of England rate. As was explained some time ago from this ehair, there is little co-relation between the two rates. The Bank of England rate is the best rate for the discount of gilt-edged commercial paper, the discount being deducted from the proceeds when the bills are discounted and forms a class of business unknown in the Dominion. .The New Zealand advance rate is for overdrafts, and is in an entirely different category, the charge being made on the fluctuating daily balance and debited twice in the year, the security being of a less liquid and of an entirely different nature from that held by the Bank of England. While recognising the necessity of maintaining a strong position and exercising caution, we shall do our best to meet all legitimate requirements of our customers, as we have been able to do in the past.

JOINT STOCK BANKS. December, 1915 ... £29,156,000 December, 1920 ... 49,457,000 December, 1926 ... 44.236,000 POST OFFICE SAV INGS BANK. December, 1915 ...£22,166,000 March, 1921 .:. ... 43,352,000 March, 1926 ... 47,911,000

Income Tax ... £160,418 I and Tax ... ' 17.370 Note Tax ... 119,930 License 200 £297.918 Dividend ... £232 128 Total ... 530,046