A NOTE ON STATE BANKING.

Timaru Herald, Volume LXXVI, Issue 11688, 22 February 1902, Page 4

A NOTE ON STATE BANKING.

The following is an extract fium ail article on State Hanking, in the "i\ew Zealand Illustrated Magazine " for this montn: Tlie question is, now best to enable the people to use their own, wealth as credit. For, irom one point of view, interest paid to a bank upon a loan is but the price paid by the borrower for being enabled to use his own wealth as credit. Let us make this clearer. N A. is a fanner, having a farm worth £1000; he has not the necessary money with which to work it. There are two courses he might adopt—(l) He might sell his farm for, say, £IOOO, and continue to work it (or another farm) as a tenant, •paying, say, £SO a year rent; or (2) he might mortgage his farm to bank for, say, £760, continuing to work it —as a mortgagor—paying, say, SSO a year interest. What is l , the difference between these two cases, except that in the seconj case he has £750 with which to work his farm instead of £1000? (Also a right to redeem his farm in the future if he can, and the benefit of a possible rise in the price of land in the meantime.) In both cases he is using his own capital, viz., the value of his farm. In borrowing £750 from the bank A. gives his promise to pay in the form of a mortgage or lien; in return, the bank gives its promise to pay by opening a credit in favour of A., against which he can draw. The premises on both sides are backed by the same tiling, the farm that A has pledged. It is not certain that the bank has lent any capital, or if it has, it has got A.'s capital (his farm) in exchange. The bank is none the poorer for having set up the credit of £750 in favour of A. For, though its liabilities are increased by £750, its assets are likewise increased by., £750 (or- £1000). The interest the 1 farmer pays is but the price for enabling him to nse his own wealth as credit. He can not use his own credit directly, because he is not well enough known; but the promises to pay issued by the bank are more widely accepted, because it is an established institution, with a more or le-s extended financial reputation. A State Bank, embracing as it would the whole country, with larger assets, would enjoy a still better reputation; and, as it would be run by the people for the people, it need charge no interest, or only enough to'pay working expenses. Private banks charge interest so that they may pay dividends to their shareholders. A State Bank would pay no dividends, and need charge no interest, or if it did charge interest, the value would all come back to the people at large, in the providing of public utilities, or the reduction of taxation. Borrowing capital is not like borrowing, say, a horse and trap, where we pay simply the price for the hire of it. But when we borrow capital, we have also to give full value in _exehar.fje. Let us continue the illustration. A. had £IOOO worth of property (his •farm). Having " borrowed " £750 and spent it in drain pipes, implements, fencing materials, or stock, he now has £750 worth of drain pipes, etc., and £250 worth of land, for he has parted with the other £750 worth of his farm (subject to future redemption). His total possessions are still only £IOOO, so that his "borrowing" is but an exchange after all. He has exchanged fixed capital (land) for floating capital (money), in order that he may obtain with that money the drain pipes, etc., he needs. His "borrowing" is still but the obtaining of currency (money), or the method of enabling him to use his own wealth as "credit."