THE CURRENCY

Wanganui Chronicle, Volume 79, Issue 279, 28 November 1935, Page 3

THE CURRENCY

NATIONALISATION OF BANKING (Reprinted from the Bulletin of the Associated Banks of New Zealand). It has always been observed that periods of prolonged depression have the effect of concentrating critical public attention on economic institutions, and notably on the mechanism of currency and banking, which at ordinary times is taken for granted, and, because of its technical nature, is not closely understood by the general public. Notwithstanding that the balance of authoritative opinion considers that the present depression has in the main been caused by fundamental factors mainly of a non-monetary character, there is a tendency to hold that the difficulties of the time can be adjusted by some manipulation of our banking and credit system. a view which overlooks the fact that our troubles are initiated from abroad, mainly by the fall in world prices. The depression undoubtedlyhas led to a widespread if uncritical tendency to blame the banks for economic difficulties which the banks have done nothing to cause, but are doing all in their power to cope with; and the prevalent sentiment in favour of nationalisation of commercial -banking in some quarters is in the main attributable to this cause. Distinguished from Socialism. It is important not to confuse this issue with the general problem of Socialism as contrasted with a system of private property and free enterprise, subject to social control such as prevails in New Zealand to-day. It is of course admitted that in a Socialist State the banking business would be socialised along with all .other types of business. This, however, is not the point at issue. The question is whether in a country whose institutions are based on private enterprise, the business of commercial banking should be left to operate as it does at the present time, or made a function of State and run under a State Department on the lines of other economic functions that have been assumed by the public authorities. Advocacy of this course, it is important to notice, does not come from the business classes of the community who make most use of the facilities provided by the banking system, and for whose service commercial banking mainly exists. It usually springs from politically-minded persons, and the motives behind it are political and not business ‘motives. Nationalisation or State control of commercial banking, in other words, is desired as a rule, not by those who from practical experience appreciate the benefits of the banking system, with a view to improving the service, but rather by those who see in control of the banking system a convenient and powerful tool for bringing about a larger measure of State control over economic life in general. They do not say: “We want State control of banking in order to improve the banking service or to protect the people from monopoly,” but rather “We want State control of banking to employ it to bring about State control in general.” This attempt to project political objectives into a service that should remain quite clear of political considerations, if it is to function with efficiency, is the most fatal objection to nationalisation of the banks, instead of being a factor in its favour. Currency, the State’s Prerogative Apart from this dominant political objective, and the usual considerations that are adduced in favour of State assumption of economic activities, there is a special lino of argument relating to State control of the banking service, which recent developments have deprived of all weight. It has been contended that in present conditions, now that standard metallic money has ceased to circulate, the standard money of the country is the bank note. As it is the prerogative and function of the State to determine the volume of money and the conditions of its issue, this should not be delegated to the commercial banks, which, since they are traders in money and credit, have a pecuniary interest in the matter. There is force in this contention, but it has no application 1o New Zealand commercial banking at all, the point having been met by the establishment of the Reserve Bank of New Zealand, which is the sole note-issuing authority in the country, and is in effective control of the basic money and credit conditions of the Dominion. As the issue of notes and control of the credit basic are now in the hands of a control institution over which the Government has effective power, this argument for nationalisation has no relevancy to commercial banking in New Zealand at all. Commercial Banking Not Oppressive. The case for State control or operation of commercial banking must therefore rest on other grounds. To establish it, it must be shown that sound reasons exist, based on the public interest, for such a transfer and in a society based on free enterprise the burden of proof must rest in the first instance on those who advocate a widening of the economic functions of the State. It must be shown that the present system in inefficient, wasteful or costly, that it is oppressive to the people, and that transfer to the State will remedy these defects. It is impossible to establish any of these points, and indeed they can be definitely refuted. Technical Efficiency. It is contended that whatever controversy there may be on the banking question, no complaints have been made as to the technical efficiency of the banking service, which is admitted to be high even by advocates of nationalisation. It -is, however, suggested that the present system involves waste by duplication of service owing to the existence of competing branch banks. This. line of thought, the elimination of duplication and wasteful competition, is invariably raised when a programme of nationalisation is advocated in any direction, and it cannot be ignored. In the case of commercial banking in the Dominion, however, it is of trivial importance, since the amount of unnecessary duplication is small, much smaller than is represented by opponents of our present system, who usually speak without much knowledge of business psychology or business requirements. Public Convenience. Even if there were only one large trading bank in the Dominion, it would not be possible to close many existing branch banking offices without causing serious public inconvenience, and impairing the quality of the service now rendered to the business public. The

mere fact that in the largest centres some of the banks find it necessary to have several branches shows that existing agencies are not more than suffh/ent to cope with the volume of business, while in almost all centres, large or small, public requirements demand several offices at least for convenience and ease of working. Even if banking were nationalised, the great majority of banking offices open today would require to he kept open, if serious inconvenience to the public is to be avoided. Inter-Bank Competition. Even if there were some unnecessary duplication, this is much more than compensated for by the added efficiency and higher quality of service that springs from the active competition for business existing among the banks today. Within the limits of- professional , ethics, and the canons of sound and j prudent banking, the banks have always competed eagerly for customers, and never more so than to-day, when their investible funds arc large and credit-worthy borrowers are relatively fewer in number. From this competition bank customers have reaped considerable benefit; and they have enjoyed the advantage of knowing that, they could not enter into arrangements with one banker satisfactory to themselves, it has always been open to them to negotiate with another. If competition among the banks were eliminated by nationalisation this spur to efficiency would be lost, bank customers would enjoy much less liberty of action than they possess to-day, and any saving by the elimination of a few insignificant branches would be a very inadequate compensation for such a loss. It is for reasons such as these that business sentiment is opposed to nationalisation of the trading banks. No Banking Monopoly. It is obvious that nationalisation of banking canot be advocated on the ground that it will protect the public from monopoly. There is no monopoly in the banking business to-day, but on the contrary incessant competition among six sound institutions to increase their business by competitive service to customers. Nationalisation would not protect the public from an existing monopoly, because such does not exist; it would eliminate existing competition and impose a monopoly where none existed before, and that monopoly would be hard to deal with, becouse it would have, in addition to its economic power, the backing of the State, which could hardly be invoked to protect the public against oppression by its own agency. Under a State monopoly of banking the public would be entirely in the hands of the bank, with no means of redress and no alternative service to turn to in case of oppression of dissatisfaction. Political Bias. Another fatal objection to nationalised banking is its unavoidable political bias. Being a Department of State, it would be subject to political influence and control; and while that does not necessarily entail personal corruption, it means that it would certainly be employed directly or indirectly to give assistance to projects, policies and persons in favour with the Government of the day, and to refrain from assistance to opponents of the dominant political party. This tendency could hardly be avoided under a system of democratic party government swayed primarily by electoral considerations; and it would’ speedily undermine confidence in the bank, alarm depositors, cause withdrawals of funds, and impair

or even paralyse the economic utility of the bank. If political influence or party considerations took the place of credit worthiness or soundness of investment policy, bank, deposits would not be safe, as they are now, nor could the bank long remain solvent if this policy were persisted in. It is of course possible that no such influences would be exerted, but politics as they are today, and in the light of past experience with financial functions taken over by the State, it is impossible to resist the inference that political considerations, to a greater or less extent, would influence the policy of the nationalised bank. The primary loyalty of a banker today is towards his depositors, and his motives are economic and financial to the exclusion of political or other irrelevant considerations. He would not [be. allowed to retain this attitude under a nationalised system, especially as the open objective of most advocates of nationalisation is the employment of the banking function for the attainment of other social objectives, such as the re-distribution of wealth or the inauguration of general Socialism. Under nationalisation, the banker would invariably take on the mentality of the head of a Government Department, and that mentality is of necessity political rather than economic. At the present time the banker has no dual loyalty, and is not distracted by basic duties that might draw him in different directions. Under nationalisation he would have to consider not only the interests of depositors and the soundness and security of his advances, but the policy of the Government of 11/? day, which he would be bound to canV out, and which easily run counter to his economic obligations as a banker. This would make sound commercial banking impossible, impair the safety of the banking business, and undermine the confidence of depositors. It would also have the further fatal effect of destroying or seriously undermining the relationship of confidence and trust that subsist under the present system between the banker and his customer. Not many business men would care to enter into their present confidential relations with, or make their present intimate disclosures to, a public official who might be under obligation to disclose such mutters to other Departments. It is not possible to reconcile the dutie.s of a commercial banker with the duties of a transferable civil servant. It is conceivable that a political banker would prove popular when pursuing a policy of credit expansion, but when sound control dictated a restriction of credit this duty might prove impossible to carry out in the face of ai: outcry calculated to embarrass the political authorities, and the banker could not, if he were a civil servant of the banking system for electoral or political purposes, either in general or as regards specific individuals or organisations, if the political authorities were determined to employ it for that end. Foundation of Credit. Banking is founded on credit, and credit on confidence, which is very liable to dissolve under the corrosive effect of political expediency. “Honesty,” says Lord Bradbury, “is a better foundation for credit than the most adroit finesse.” It is not here suggested that politics are dishonest, but they certainly are characterised by finesse, more or less adroit, and this would be an atmosphere in which sound commercial banking w’ould be stifled. Political machinery is guided by sectional pressure, comparative voting strength,

and temporary expediency, rather than by technical competency or long view of social and economic welfare. It is fundamentally unfitted to control so delicate a mechanism as commercial banking without a serious diminution, in efficiency of service, and a derogation from sound commercial standards that might bring banking to a standstill by destroying public confidence in its integrity.