IDLE CAPITAL

Timaru Herald, Volume CXXXVIII, Issue 19933, 18 October 1934, Page 2

IDLE CAPITAL

SHELTERED IN THE BANKS CONFIDENCE WANTED The art of coaxing money back to work is proving just as difficult in New Zealand as in the rest of the world. For some years now capital has been steadily disappearing from active circulation, most of it retiring to the shelter of the banks, with the result apparent in the high level of bank deposits and in the continued rise in the market value of gilt-edged securities. That movement has been accentuated by restriction in trade, a revival of which will just as naturally accompany a reverse movement in the money market. In the meantime, however, problems have arisen which are associated with the fall in interest rates, itself the logical outcome of the present position of stalemate.

Lending on mortgage is normally one of the main outlets for capital. However, that market went into disfavoui when property values fell, the borrowei in many cases got into difficulties, anc rearrangements of finance, mutual anc compulsory, were made. The mortgage market suffered more than any other by reason of heavy withdrawals oi capital to safer and more liquid investment. Rates of interest once ranged from about 5 h per cent to 7 per cent, but the prevailing rate now is about 5 per cent., with some lending down to per cent., and even 41 per cent The volume of business is still restricted owing to the safety factor, but there is evidence of a quickening of interest in the market. The Banking Position , Successive reductions in the rates of interest allowed by banks and those charged on advances have been made during the past four years. In 1930 the deposit rate for 24 months was 5 per cent; now it is 22 per cent. In the same period the overdraft rate has been reduced from 7 per cent, to 5 per cent. With the first signs of a depression, the banks usually call in credits, but they are now anxious to arrange further credits, where the security is sound. The banks wish to make deposits earn their keep and where they cannot profitably employ, they do not wish to accommodate. A case was reported last week of an Auckland bank rejecting an offer to place £IO,OOO on fixed deposit. This money would have been accepted four years ago. With the banks the position is complicated further. Profitable dealing in discounting Treasury bills has been suspended with the retirement of the bills by the Reserve Bank. In addition overseas funds estimated at about £3,000,000 have been carried since the increase in the exchange rate, although a certain proportion under the present stable rate. As evidence of the banking problem, the following figures are quoted:— Deposits Advances Aug. Fixed Free 1929 . £30,500,000 £23,500.000 £48.500.000 1934 . £41,500,000 £22,500,000 £39,000.000 “Safe” Investments Those whose difficulties are increased as the result of the low rates of interest for first-class securities include trustees and sinking fund commissioners, who have money to invest, but whose choice is restricted by Statute. Naturally, legislation limits the investments to what are regarded as “safe” securities, the very class which now show most appreciation in capital value. This has involved many problems for the trustee and for those whose duty it is to provide an adequate return on funds for the redemption of loans. In the latter case, a margin above the interest allowed on the loan is normally possible, but to retain this advantage is becoming increasingly difficult. Evidence that trade and industry cannot yet offer scope for money is presented in several ways. Merchants and retail traders are carrying less stock than was customary and capital instead of being in a semi-liquid state “on the shelves” is being carried as cash. In many cases this cash has been used to turn overdrafts into credit balances at the bank and to finance repayments of capital to sharehouders. Industry has not shown normal expansion during recent years, consequently there has been a reduced demand for financing extension of works and new enterprises. The suspension of widespread State and local body expenditure has also restricted inquiry for fresh capital. Industry and Business As an employer of capital on a large scale, the goldmining industry so far has been disappointing. Most of the renewed activity in the last few years has been confined to dredging and sluicing propositions, which are not calculated to create widespread interest. New Zealand is still waiting for a good strike of quartz to give the impetus needed to attract money freely to the goldmining industry.

Possibilities lie in the development of local industries, but although new ventures have attracted some capital, progress in this direction has not been rapid. The high exchange rate is a favourable factor for development, but there is the disadvantage that expansion generally is limited to the needs of the domestic market. It is claimed that interest rates have now been reduced to such a level that there is sufficient inducement to employ funds in more productive channels. Confidence in using the funds which have accumulated appears to be the major consideration and it is stated that there is at least a better feeling in this direction. No marked change has developed, but the recent rise in the volume of imports is taken to indicate that traders are adopting a freer purchasing policy. In addition, investors are widening the range of their dealing on the Stock Exchanges and attention is being given to investments issues which previously were neglected.