BANK OF NEW SOUTH WALES.

Press, Volume LXVI, Issue 20098, 29 November 1930, Page 16

BANK OF NEW SOUTH WALES.

DIFFICULTIES OF THE TIMES. AUSTRALIAN DEPRESSION. CHAIRMAN'S ADDRESS TO SHAREHOLDERS. At the ordinary general meeting of the Bank ot New South Wales, held at the head office, Sydney, on Friday, November 28th, 1030, the chairman (Mr Thomas Buclcland, president of the bank) moved the adoption of the report and balance-sheet. The following is a copy of his address:—

Ladies and Gentlemen,— Events have been marching at such a pace during the last year that your directors felt something more than an annual review was due to our shareholders and customers. They therefore decided to issue from tiiro to time a circular setting forth in as simple language as possible such matters of financial and economic interest &e called for immediate attention. Threo issues have been made of this circular, copies of which are available to every shareholder and customer, and I take this opportunity of saying that, if anyone is not receiving such copies on issue, an application to the nearest branch of the bank or to the secretary will put the matter right. The issue of these circulars will enable me to pass over much that I might otherwise desire to discuss in my address. I shall therefore limit myself to brief references to certain outstanding problems.

A Oood Season. The seasonal conditions generally throughout Australia could hardly be better or more promising than they are at present, Everything points to a heavy crop of wheat, the wool clip lias been well up to expectations, and the other sources of our wealth—sugar, fruit, butter, etc,, will be productive of good yields. The season in the tropical portion of Australia has opened well, and there has been a general rainfall in the northern half of the Continent much above the average for the month of October. Meanwhile the southern portion of Australia is having a suitable season for the garnering of cereal and other crops.

In New Zealand the seasonal conditions are good, as is usual with that favoured Dominion, and full advantage has been taken of the opportunity affbrded to increase output of primary products. As in the case of Australia, the effect of the low prices obtaining for exports has been felt, but the position is recognised, and steps are being taken to combat it.

the Balance-Sheet. In considering our balance-Sheet figures for the past year I would ask you to bear in mind two outstanding chatiges in the general situation: (l 3 the unexpected severity of the recent fall in the prices of primary products, and (2) the difficulty of further Government borrowing overseas. Wool has fallen in value by 48 por cent, during the two years since December, 1928, and the difficulty of placing new issues of Australian securities in London may be seen in the long delay which has marked the funding of present overdrafts and Treasury bills outstanding there.

Your directors have given most earnest thought to the causes of these and to their effects, both on the various sections of our customers and on the public generally. An institution such as ours has a responsibility to the community amounting to a great public trust. Having in view the degree of the present recession of trade, the risks of its* extension, and the task of recovery from it, your directors have sought to lessen its destructive impact by giving the utmost assistance to the community and to Governments. They ask you to support them in making further substantial provision for the future. Our aim is not only to guide and help our customers through the night of difficulty, but to be strong to Bend them on their way when the morning of recovery dawns. Keening this aim in view, let us turn to the figures before you. Comparing our figures with the balance-sheet of the year before, there is again a small decrease in our note circulation in New Zealand.

Bills payable at £6,068,000 show a decreaso of £1,215,000. On the other side of the balance-sheet bills receivable in London and remittances in transit £3,399,000, show a decrease of £1,440,000. These two items aro indicative of the lower turnover in business, and of the lower prices for cur produce to which I have already referred. Bank premises £1,600,000 aro £150,000 higher than twelve months ago. This is more than accounted for by the expenditure incurred during the year on the completion of our new premises in Brisbane and Bourke Btreet, Melbourne, the purchase of the building which has housed our Western Branch in Sydney for very many years, and progress payments to the contractors on account of. our new head office. It is our policy to keep this item written down in our balance-sheet to a low figure in comparison with market values. Apart from the necessity of housing our many branches, bank premises cannot be regarded as a good banking asset. During the year we have gone into occupation of our new premises n Brisbane and in Bourke street, Melbourne. We hope to see the completion of our new head office towards the end of next year. Deposits total £66,238,000. This shows an increase of £182,000 on the year, a satisfactory position in view of present conditions. We ir.ust be very careful, however, in & largo business such as ours, not to place too much reliance upon the figures disclosed on any one particular day in each year. It is not unusual to have large adverse movements during a -few consecutive days in a year opopsed to a favourable movement; in the following or preceding year, and sufficient to cause a substantial alteration as compared with the average figures.

Deposits. It is possible, therefore, that our figures at the annual balance date may include sums which will not stay with for long. Such variation is an inevitable feature in a banking business as widespread in its ramifications as that done by your institution. While it may be a symptom of sluggish enterprise, the increase of deposits is, nevertheless, significant of the confidence reposed in the strength and resources of the old bank. But we cannot overlook the general tendency of deposits to decrease in a period of falling prices and of readjustment to lower turnovers. On the assets side of the balancesheet our flash items amount to

£11,484,000, an increase of £303,000 compared with laßt year. Our total liquid assets come to £24,818,000, a decrease of £2,228,000 on the year, i have already referred to £1,440,000 of this decrease under the heading of bills receivable in London and remittances in transit. This decrease has been duo to present conditions of trade. After allowing for this amount the reduction in our liquid assets is revealed at £788,000, leaving our immediate cash resources in much the same position as a year ago. There have been important changes, however, in the composition of the various items. In order to render all the assistance possible both to our customers, who in Australia represent a substantial proportion of the population, and to Governments, we have strengthened our investments available at short date. In this way our liquid assets are more readily available to meet emergencies to-day than they were twelve months ago.

Aid to Customers. The most important feature of our figures is that showing the extent to which the bank has been able to render assistance to its customers. I must remind you, too, that its ciiM-omcrs arc not confined to the Commonwealth of Australia, and this assistahce has been rendered in New Zealand and other places proportionately with Australia. I have already referred to the large movements which take place in our figures during the course of each year. They ebb and flow with tho requirements of our customers in their various vocations. As more than half of our advances are wrapped up more or less directly in the great primary and exporting industries, we have been called upon to help these in facing the difficulties which have befallen them during tho last two or three years.

Blow to Primary Producer. In this country the first blow of a recession of trade falls upon the primary producer. This shock then spreads throughout the various sections of the community, such as employers of labour, wholesale and retail trades, manufacturers, investors, and last of all it reaches the wage-earner. Thift is the situation we face to-day. Our wool-growers and wheat-farmers are struggling to carry on in face of costs which arc greater than the returns they get for their produce. The values of a long list of investment stocks have fallen 45.5 per cent., and dividends thereon 3.28 per cent, during recent months. The latter figure represents a diminution of income by about one-third. By piling up indirect as well as direct taxation Governments are crippling the only industries which can pull the community out of the present depression. Without an immediate and substantial reduction in tho costs of production, prosperity anil the sources of public revenue cannot be restored.

Your directors, ladies and gentlemen, adopted the policy at the onset oi these troubles of doing all they could to take up on behalf of our customers the first shock of falling prices and adverse markets. At one point during the last two years this policy had called for assistance to the large extent of £15,000,000, made up of an increase in advances of £12,000,000 and a decrease in deposits of £3,000,000. Since then the ordinary flow of business has brought about some reduction which under present conditions cannot be regarded as more than temporary. Compared with last year, our advances, etc., show an increase of £972,000, but with those of September 30th, 11)28, the increase amounts to more than £9,000,000.

At present it is hard to foresee any substantial reduction in our advance business or even a maintenance of deposits. The readjustment of costs which will permit the export of our products, whether primary or secondary, at a profit to their producers, proceeds slowly. By obstructing every effort to push through quickly this critical phase of reconstruction wellmeaning but short-sighted men are prolonging the misery and waste of unemployment. It is to be hoped that wiser counsels will prevail nnd that once the corner is turned employment and energy will revive at the bidding of lower costs and better prices.

Two Factors. Turning now to our shareholders' funds invested in the business of the bank the capital remains the same at the substantial sum of £.7,500,000. Last year we appropriated the sum Of £250,000 as an addition to the reserve fund, which now stands at £.6,150,000, making a total of capital and reserve fund of £13,050,000. This is your contribution to the loanable funds which the bank turns over in tho service of Australian industry. Let mo remind you of the dominant facts of our present position:— (1) That production is to-day being carried on in Australia at a loss. (2) That we must rely upon our own resources to furnish loans.

In view of these facts your directors feel that it is your wish that they should place in the forefront of their policy the maintenance of the reserves of the bank in such strength that they will bo able to assist the bank's customers in their affairs until the present period of recession of trade and its readjustment have passed us by and wo are once again on the fair road to prosperity. With euch substantial reserves and so large a capital your directors have therefore decided that it is wiser on this occasion to make substantial appropriations to contingencies accounts. You will recognise that the bank can only prosper in the prosperity of its customers and that of the peoples in those countries where it carries on its operations. While we all hope that the prices of our exports have reached their lowest level it is not possible as yet to bo assured that this is so. Proper preparation for contingencies must be made while thiß is still practicable.

Reduced Dividend. As a further step towards maintaining the resources of the bank in a condition ready for any emergency, so that it may lend a strong hand in the restoration of Australia and give assistance in other fields where it operates, your directors recommend the payment of the dividend for tho last quarter of the year at the reduced rate of 9 per qent. per annum. In conjunction with *the payments for the other quarters this represents the moderate return of 5.36 per cent, on the total of capital and reserve fund. By these two proposals your directors will be able to maintain the reserves of the bank in a satisfactory position.

Depreciation of Anstrallan Pound. A matter of cardinal importance in considering the figures of the balancesheet and more particularly the figures of gross and net profit is that of the depreciation of the Australian pound. Your directors have not overlooked this, and in the recommendations referred to above the fact that the £ Australian is at a discount compared with sterling has- been taken into consideration in the allocation of net profit. It ip necessary to draw special attention to this, as nowhere have we noticed any recognition of it in the published accounts or reports of companies, firms, etc. The outside market for exchange, which, although statements are frequently made to the contrary, is free of any control by the banks is operating at present on a basis round about £llO Australian being equal to £-10® sterling. Somo authorities state that on the question of purchasing power

parity the £ Australian i. «♦ „ discount than this bein.r = greater between £ 120 and ? on }. ewh ° rc £IOO sterling. i t Australian for iii i tlus juncture it is probably not necessary to go further than to accept the rate rulfng i„ the of "l0no'•* is a dep™cia- • i ii cent. To givti vou a simple illustration, this means that" those in control ot Australian finance should i\ C nnnr?n- i 3 l ' roflt of > sii y> ±.100,000 in pounds Australian would be worth £9O 000 in sterling if the depreciation of the Australian currency is 10 per cent., and £BO,OOO sterling if that depreciation is 20 per cent., and the paper profit should be dealt with upon that basis.

Such a discrepancy between the Australian pound and the sterling money that has so long been a synonym for security and strength brings out again the element of fluctuation in business that has been nil too evident of late. Australians are being urged to "stabilise" prices, wages, and business generally. It would be a fine thing to "stnbi-1 ise'' business, but the business situation is what many millions of people make it by their individual actions. We in Australia .are a very insignificant part of the world of business.

Exchange Eates. Some critics are varying the general cry for stability by accusing tho banks of "pegging" (he exchange rates at a point which is above the true value of the pound Australian in terms of currencies on a gold basis, such as sterling and the dollar. It is very flattering to hear people attribute to the banks power to control the exchanges. The true position, however, is far different. The rates quoted by tho banks do not control the exchange market in Australia. There is a very large body of exchange operations carried on entirely outside tho banks. The rates at which these are transacted arc not necessarily the rates quoted by the banks, and operators in the open market are free to vary their rates from time to tim<\ The rates quoted by the banks are those at which the banks are prepared to do business. In normal times tliey servo to balance the buying and selling of drafts and transfers by tho banks' customers, bank rates in buying and selling being separated only by a fine margin, out of which the bank must pay expenses and find its profit. The rationing of customers, by which of late banks have sought to restrain the purchase of sterling, has been due to a reluctance to raise the rate at which the Commonwealth Government buys the London money needed to pay the overseas interest and other national charges. In this they have responded to the lead of the Commonwealth Bank, and have honoured the exchange agreement. Tt seems to be generally overlooked by those who ask for higher rates of exchange, that every additional one per cent, of discount to which the Australian pound sinks involves additional taxation in Australia amounting to £BOO,OOO per annum. This is the added exchange cost to our Governments of providing interest in sterling on our external loans.

Interest. Simultaneously with the claim that exchange rates urc too low one hears the suggestion that interest rates are too high. High rates of interest are not an advantage to banks. They arc, in fact, a disadvantage, in that they limit severely, especially in a time of falling prices, the bounds of profitable borrowing by customers. High rates of interest were, never; iuless, necessary at a certain phase of the trade-cycle as a means of damping the excessive .zeal to borrow of folk who calculated on a continuous rise of prices and of capital values. When that function has been fulfilled it is usual, in the next phase of the cycle, after costs have fallen, to lend money for short terms, at low interest, as an incentive to the revival of enterprise. In almost all countries except Australia and New Zealand this phase of the present recession has arrived. Among the reasons for the anomalous position of credit in these Dominions are the unsound schemes of public finance, advocated in some quarters and the persistence with which Governments are leaning upon the banks to finance policies and commitments already responsible for the severity of the local recession. Their insistent demands for credit have absorbed funds which should have been hold in readiness to aid, at lower interest charges, the revival of enterprise when prices turn for the better and confidence returns. To make matters worso, the expenditure of those funds on relief works and on the payment of salaries and wages to establishments built up by boom time activities has supported standards of living and an internal price-level which the earning power of the general taxpayer cannot long sustain. That expensive support retards the fall in costs imperatively necessary to bring back to our exporting and home industries the incentive and hope of profit. I agree with the statement made recently by the chairman of a large English trust company when he said: "I do not see any possibility of a reduction in the rate of interest on investments. While Government and the municipalities continue their prodigious expenditure, and are prepared to offer to the public obligations secured on taxes and yielding 5 per cent, interest (Australia 6 per cent.) those raising money for industrial ventures must needs pay a considerably higher rate.''

Position Growing Worse. As a necessary result of the procrastination of the Legislatures to face the situation that confronts us, the position is rapidly becoming worse. When I addressed you twelve months ago we could have avoided serious trouble by a reduction of between 10 per cent, and 20 per cent, in our costs, and, possibly within a period of three to five years could have passed through the depression. By this time we would have been on the road to recovery. The retrogression since has required us to face a lengthened period of trouble and a more severe reduction in costs. Further delay will make the process of readjustment still more difficult.

As an illustration of the impossible position in which the legislation existing in the Commonwealth places our producers I may give three instances out of many where wo have obtained figures based upon actual results, showing the costs of production as against tho returns received therefrom. It must always bo borne in mind that such vary in every district, but these three instances will serve to draw attention to the impossible position which has to be rectified. In three different districts in which we have branches we find that the cost of wool production ranges from 9jd to Hid per lb. Wool from these districts at the date these calculations were made, about two months ago, was averaging little over BJd per lb on the sale floor. It is easy to see that the reduction that will have to be made in costs in these instances amounts to some 30 per cent. The wheat farmer is in a similar position, and the manufacturer of our secondary produce as well as our primary producers must be given relief until a point is reached at which he can export his surplus output at a profit in competition with his rivals overseas.

Higher Taxes. Australian Treasurers have sought to meet their commitments by the imposition of fresh or increased taxes, but it would seem that the point ha« been.

at which increased rates of f" ttwfn will not produce more revenue. In* view of the excessive costs of production many concerns and individuals will be unable to pay the taxes even though demand is made for them and nressure to collect such taxes will be of no avail but will tend to aggravate the situation. Australia is rapidly becominsr if it has not already become, the most heavily taxed country m the world in order to support its unsound and uneconomic systems of regulating trade and industry and of developing the country in excess of economic possibilities. The burden is now_ becoming overwhelming, and uiUess it is reduced considerably at an early date will bring disaster upon the Treasurers who have imposed it, as well as upon those on whose shoulders it has been laid. To quote a Canadian writer of eminence: "Economic ignorance haa bred legislative restraint; the labour voto helps to shut labour out of its inheritance."

Central Reserve Bank. The creation of a Central KeservC Bank for Australia has been before Parliament and the public of Australia for some time past. The Bill is at present in the Senate. It will serve no good purpose to create an institution intended to become a Central _ Reserve Bank for Australia unless it is established upon sound principle. Should an institution be created which docs not comply with these principles it will not be recognised as a Central Beserve Bank by other such institutions throughout the world and will therefore be useless in that direction. On the other hand it will be a menace to tho Australian community so far as internal finance is concerned. It is now generally recognised that a Central Beserve Bank should be an institution discharging a public function but independent and therefore of private origin. It is advisable to require certain qualifications in the men elected by the shareholders to become directors, to have reasonable restrictions upon the shareholders, voting power, payment of dividends, etc., but all authorities lay it down as a fundamental principle that the State should not have the power to appoint the Board or to control the institution beyond this one concession, viz., that the State may have the right of appointment of a minority of directors including possibly the Governor. If this course be taken, however, it must 1)C required of the man appointed to fill this important position that he is a man of wide experience in and knowledge of banking in its practical as well as its theoretical aspects and especially of reserve banking.

The National Income. In any event, it must be emphasised that neither Government nor the trading banks nor a Central Reserve Bank, however well constituted, can by monetary manipulation lift Australians out of their troubles. Only one fund can ultimately afford the means of a sound national living, viz., the volume of ouf actual services to one another. This fund, whatever the unit in which you reckon it, constitutes the National Income. To emphasise the great significance of this common social fund out of which and from which alone we are all paid, let me quote Dr. Benham'g warning written in 1928: — "Australians may, for a time, meet some of their needs by selling property externally, but apart from this the sole source of all expenditure, both private and public, and of all saving, is the National Income. Food, clothing, shelter, education, amusementß, necessities, comforts, luxuries, everything which is 'consumed' (in the widest sense of the word) within Australia—all must come from this one

source alone. From this, too, all the vast expenditure of Governments and local authorities must be met; From this 'saving' in the form of developmental work, new buildings, and other additions to assets, must be made. Thus the prosperity of a nation depends so very largely upon it* National Income that this must be the chief test." In applying this teat faithfully and without bias we have all to admit that the only solution for our ii to be found in some conjunction of harder work, longer hours, and more thrift.

The Directorate. It is with profound regret th&t I refer to the death on June Bth last of one Of our directors, Dr. R. L. Faithful!, who, during sixteen years of office, rendered valuable service to the bank. To fill the vacancy caused by his death, the Eight Honourable Sir Adrian Knox, P. 0., was asked to join the directorate. I also wlßh to place on record our appreciation of the services rendered to the bank by Messrs James Bums and J. M. Dunlop, who resigned their positions as directors during the year owing to lengthened absence abroad. Their respective places have been filled temporarily by the appointment of Sir Alexander MaoCormick, K.C.M.G., M.D., and of Mr T. H. Kelly. In conclusion, I wish to exprene the directors' appreciation of the work of the staff throughout the year.