The Timaru Herald WEDNESDAY, MAY 12, 1909. MUNICIPAL BANKING.

Timaru Herald, Volume XIIC, Issue 13901, 12 May 1909, Page 4

The Timaru Herald WEDNESDAY, MAY 12, 1909. MUNICIPAL BANKING.

Mr E. W.ood puts forward in a. letter which appears in anotfier column, a plan for avoiding municipal borrowing of the usual kind, and saving the_ pay-ment-of interest. It is a plan which is frequently advocated in newspaper correspondence, and it looks very well on paper, to those who do not see the fallacies on which it is founded. For these reasons, and as Mr Wood has given a pretty full example of schemes of the it seemed worth while to publish the letter and to point out the fallacies it contains, at all events the more prominent of them. The first is that the Timaru Borough Council propose to spend, and pay interest on, £'33,000 of "bankers' jnoney." Other portions of the letter show that " bankers' money," is to be linderstood literally, as bank notes.' The Council, however, does not borrow a bank's notes. - .It may receive its -borrowings through the medjum of bank notes, but the banker is merely an intermediary in this case, as is' a, baker's carter in the delivering of bread. "In borrowing from a, bank," says Mr Wood, '.'we only get the right to use the bank's paper issued against gold reserve." A double this. The Council does not - borrow, from a .bank, but through a bank; and it does not borrow the right to use the bank's paper, but — a fact somewhat obscured by the intermediate* processes, and generally over- , looked—the right to ■ use some one's claim, and more than one,-person's , claims, to actual existing property. A. parable of the origin of these claims may be in order here. Y.Z., sheepfarmer, has a good year. He has sold his wool, his fats and surplus stores, arid after buying a motor car, painting his house and repairing his sheds and fences, he cannot see where lie can spend any more of his income advantageously, lie has £SOO -to spare. With '"this £SOO in his possession; lie has a right to demand at any moment £'•soo worth of property or. goods in any market,- in exchange for it, because it represents £SOO of : wool thfit he has given up. He has no immediate use for either property or goods, so he puts his £SOO in a. bank to await aii investment. This, is an example: of one . common form of the; origin ,• 'of "capital," in the comrnon acceptation of that term. If Y.Z. invests his money in Timaru Borough debentures, he transfers to the Borough his right to immediate delivery -of £SOO worth of something or other, in exchange for a deferred right of delivery; and on the principle that a bird in. the hand is worth (two iiLithe; bush, the borrower, for the benefit it will be to r liim,. is willing' to give the lender something extra for the accommodation. Mr Wood says the deposit of municipal paper, in the form of bonds and -interest coupons, is ""seq'urity " to' tlio lender;- That is not so;. ' They aro merely acknowledgments of. rights or claims. The "security" consists in. the honesty and ability to pay of the ' people who lodged them. Municipal bonds are not " backed : by better security" than the bankers' paper. Banks sometimes fail to keep their promises; but so too do borrowers, the Oamaru Harbour Board. The difference between bankers' paper and Mr Wood's municipal paper is that the former represents immediate values, the latter future values, values which arise only on redemption. Mr Wood talks of issuing £33,000 worth of municipal paper at once, and regrets that a former Council did not issue £60,000. But the pebple could not make use of even the smaller sum in paper money. The total bank-note issue of the "Dominion is about .£2 per head of the population. , That;is the measure of the paper money required, so that Timaru people could not lise £33,000 of paper money, even if all bank. notes were squeezed out of use. Mr Wood savs'make the municipal paper " legal tender." Who is to do it? The Borough Council cannot and Parliament will not. Bank notes are not legal tender. They do not profess to be more than promises to pay, but they pass froiri hand to hand because everyone knows that fulfilment of the pro-. mise can be demanded at any time, and that the promise will be redeemed. A guarantee of redemption at some distajit day would not meet the views of money users; though some might be redeemed annually, the risk of delay would have to be reckoned. Mr Wood proposes to redeem some yearly, and return others to circulation as they ; came in. Why then redeem any of 7 them ? Then to talk about burdening posterity with a debt, is to- ignore tho/ benefit the debt provides for thenu He asks what is the difference between cancelling debentures and cancelling ,-the use of bank notes. The difference is seen when time is taken into account. The first year it is the difference between 100 per cent, expended and 5 per cent, to be repaid. Perhaps this suggestion of Mr Wood brings out one of the basal fallacies of these schemes: the neglect to take time into account. Returning to the old waterworks loan, the people ■ of Timaru have not been paying for the use of that £60,000 all these years, as }lr Wood says, but for the use of the water supply, which they could not have got without the. money that at that time represent?,! immediate .values iii material and labour, for which they exchanged in London promises of , deferred values. Tho examples of local, issues of paper money referred to by Mr Wood \w o small affairs. We have not the detail--., but in each case the issue must ii.iv■?. been within the limit of the circulation of money, between the issuers and tli.t people, or else tho people were content to put a surplus in their stocking and wait for its redemption. To this; extent the issuers obtained a loan with-*

out interest. That could be done in Timaru, of course, if people won 1 willing to give goods and services in exchange for municipal promissory notes, and hoard any surplus ot' these until a day of redemption arrived. -If the law allowed it, there would he no gioat objection to ahy local body paying for local supplies and services with paper issued by itself, but the would have to b» strictly limited to the .".mount of the difference between current debits and credits of the issuers in its local business relations within short periods of time. In the case of Timaru, the amount of difference would be small, except when a rate was becoming due, and the cost of

exchanging currency for the municipal ' 1.0.U.s in order to pay these in as rates, would probably he greater than the cost of the farpiliar bank overdraft. The allusions to " the workers" may be passed over as extraneous to the subject, though it may not ho amiss to put this conundrum to Mr Wood: How much had the workers to do with the growth of the wool that is the chief source of wealth to South Canterbury 'r