The Weakness in State Banking.

Press, Volume LXI, Issue 18479, 5 September 1925, Page 12

The Weakness in State Banking.

Every observant man who has really thought about it knows how natural, and in a certain sense how reasonable, is the demand of the Socialists foi State enterprises of all kinds, including State Banks. The only thing that surprises him is that these Socialists, and their political cousins the Liberals of the Left, do not demand the nationalisation of everything at once. They look around them and they see private persons, firms and companies of all kinds making good profits, and they say to themselves: " Why should not the " State enter into and ultimately "monopolise these prosperous trades? " What a private firm can do, the "powerful State, with its unlimited " resources, can do much better. It "is only a matter of buying and sell- " ing, after all." It is natural, therefore, that the Socialists should fret over the fine profits left by the State to the private trader. In New Zealand there is one State enterprise in particular which the Liberals and the Reds have jointly demanded, namely, a State Bank. Of all things, they seem to assume, banking is the? most mechanical, consisting merely of arithmetic —a thing which one day will be done by a machine. If we ourselves may make an assumption, we shall assume that the advocates of a State Bank are willing to learn, and for their instruction we shall quote some passages from a pamphlet recently issued in Great Britain by the National Association of Merchants and Manufacturers. 'The writer, Mr O. Hobson, admits freely that a nationalised bank could do a large part of the business of banking nearly if not quite as well as our present institutions: "It could accept de- " posits, pay, collect and clear cheques, "issue circular notes, cut off and col"lect coupons, and take custody of " bonds and share certificates." But, Mr Hobson adds, it could not lend money. This may • appear to be a meaningless assertion, but it ceases to seem so when one reflects that

"nowithstanding the modern 'organisation ' of industry and the substitution of that legal entity the joint-stock corporation—the 'impersonal company,' as it is called in many foreign languages—for the individual trader or private firm, the fundamentals of money-lending are precisely the same as they were in more primitive days. No responsible banker will lend money to a customer unless he believes him to be an honest man who will and can fulfil his engagements.

"His trust in his customer—the 'credit' of the customer—is always the principal security. It is true that collateral security is usually required as well, and that bankers have developed a code of rules to guide them as to the nature of the collateral security which it Aay be desirable or undesirable to accept. "Nevertheless, it is in the main true to say that collateral security is a secondary consideration, particularly where accommodation granted for trading or industrial purposes is concerned, that the banker places reliance chiefly upon his knowledge of the men who are running the business which he is asked to assist, the character and nature of the business, and the purpose for which the loan is required."

But the banker must know, not only to 'whom he may lend money, but to whom he may not —customers whom he does not trust or who are overtrading or launching out in ruinous adventures —and he must also be in a position to say "No" to these people. And this is what a State bank could not do. For, as Mr Hobson points out, when the bank becomes the State the conditions "of accommodation must become stereotyped; they must be reduced to printed rules and regulations by which, and by which alone, any application for an advance must be decided. If the State official discriminated, as the banker must do, between two men whose accounts and position looked identical on paper, there would be trouble.

"Let there be no mistake about it," Mr Hobson adds,* "under the socialised system there will be no keeping such questions out of the ' political arena. Credit policy will become a matter of wire-pulling and lobbying. The memIber for one constituency will want to know why A, Ltd., employing 5000 of his constituents, was refused accommodation and was compelled, therefore, to resort to short-time, while B, Ltd., in the neighbouring division got the credit it needed. Elections will be fought on the cry 'More credit for the cotton trade or the coal mines or the steel industry!' 'Larger loans' for brewers' will be the modern version of 'Hands off the poor man's beer!' "

As for the consequences, Mr Hobson does not entirely agree with Mr Walter Leaf's view that the instinct of the •official to play for safety would result in reduced ' accommodation and higher rates for the trading community. He believes that there would be an alternation between undue caution and excessive ven turesomeness, the former at times when the permanent officials were left to run the show and the latter whenever the political stuntists saw fit to mobilise. If, during the election campaign, the Liberals make a State Bank one of their planks, we hope they will explain how their plan will avoid such consequences as are here pointed out.