CREDIT FACTOR

Evening Post, Volume CXII, Issue 59, 7 September 1926, Page 23

CREDIT FACTOR

AND THE INFLATION EVIL

This matter of money, in the form of long-term credit, ranks next in importance to better dairy herds i and soilfertilisation. Indeed, it precedes them, since the farmer cannot do very much along even the most obvious lines of farm improvement without capital and labour. He looks to the Mother Country partly for the latter (by immigration) and almost wholly for the former. In a certain technical sense, it may be incorrect to say that New Zealand has been looking to Britain for capital for rural development. If is true that, latterly at any rate, the Government Advances to Settlers money has been borrowed in New Zealand and Australia. But this could not have been done if New Zealand had not borrowed millions annually in London for other purposes. Without these British millions lent for public works, hydro-electrical power, etc., New Zealand would have exhausted the local and Australian loan markets for these purposes, and there would then' have been no local and Australian money left for settlers' farms and workers' homes—not even at 5J per cent. So indirectly, if not always directly, the Mother Country is the source of the capital that has developed, and will continue to develop, rural New Zealand.

A DELICATE TRANSACTION

Borrowing from mother is always a rather delicate operation. Mother js mother, but a wise mother who lends her children money will not neglect all moneylending precautions. A. money-lending, country may be too wise to dictate that the loan shall be spent in its own factories; but the eternal relationship of lender and borrower is such that as a rule the money will be spent as and how the lender approves. Again, a money-lending country may be too discreet to interfere with Government loan operations such aB the State Advances Office conducts in this country; all the same, if the British money-lenders do not consider Statelending to be sound economics, they have a right to their opinion, and to be chary about placing their money in conditions the soundness of which they are ■ somewhat doubtful of. To come right down to the point, at the annual meeting of the Bank of New Zealand on 18th June the Chairman of Directors, Sir George Elliot, in announcing that the State Advances Office had lent over thirty millions, and was "the largest single money-lending organisation in the country," significantly added :— "There appear to be many reasons why the activities of this Department should not be much further extended. Apart from the political aspect and from the fact that little revenue by way of taxation is obtainable from the Department a's at present constituted, it seems that loans for its extension are not received with much favour in London, while extensive borrowing in New Zealand would have a tightening effect on the local money market, with a consequent tendency to increase interest rates." In short, there is not the required capital in the country, and —London does not admire the State Advances principle!

THREE COURSES

Personal opinions on such a principle may, and do, differ, but the practical question is how to obtain the credit that the farmer needs. If, apart from controversial matters, money cannot be obtained at State Advances rates of interest, then money must be got at such price and on such terms as will attract it. The Bank of New Zealand's idea of a fair interest rate on long term money (34-J years) is 6 per cent. The bank's advocacy of it seems to indicate that it is in consonance with London ideas, and that part of the money could be obtained in London if necessary. Three propositions of long term finance are in the field: — (1) A going concern, the State Advances which no doubt will go on turning over its present capital, and which perhaps will raise new capital when and where it can, but which, according to Sir George Elliot, has exhausted its possibilities of obtaining any large amount of new capital, except in the limited local money market, which may need to be conserved for other purposes. (2) The definite scheme of the Bank of New Zealand, which requires legislative sanction. (3) The less definite scheme of raising loan money for farmers by issuing to the public debentures secured on the farmers' land. This scheme (fathered by :i [ special Commission which toured abroad) combines short term and intermediate credit, and is very intricate. Its ability to do what it claims to do is hardly capable of being proved except by actual demonstration. Those people who contend that the Government, or some Government-backed agency, should lend to the farmer at less than the economic rate of interest are confronted with the argument that artificially cheap money means artificially dear land.. If artificially cheap loans

lead to landrinflation, does the farmer gain? Are not all the evils of boom, reaction, and fluctuation —referred to at the beginning of this article —in danger of being reproduced?

CHEAP MONEY, DEAR LAND

It is not within the .writer's province to express opinions, but rather to state points of view that they may help to elucidate the subject discussed. The issue is between those who see the immediate gain of cheap money and those who fear* that cheap money may be so cheap that it 'will inflate land, drive out competitive private lenders, and then prove itself unequal to the task of carrying the finance of a gigantic inflation of its own creation. They think that, even after years of apparently successful working, cheap money may yet prove to be dear money if it gets away from the general price-level, and then finds itself compelled to readjust in line with a general deflation such as appears to be concomitant with the return to the gold standard. Again for the purpose of elucidation, let quotation be made from the June letter of the National City Bank of New York, which discusses the relevant, if not parallel, situation of the farmer in the United States. The underlying argument of the National City Bank is that liquidation of an inflated situation may require reasonable credit, but that artificially easy terms, by tending to prolong inflation instead of reducing it, may be worse than stringent terms. The difficulties against which agriculture has been contending, writes the Bank, "cannot be corrected by price-fixing or further extension of agricultural credit." The remark about "price-fixing" will bo referred lower down; the immediate

question is the extension of credit— whether by the State Advances Office, or by the Bank of New Zealand scheme, or by the project of the Commission. The following summary of the American farmer's plight seems to be entirely applicable to the New Zealand farmer: — "At the bottom of farm troubles is the fact that production of farm products was over-stimulated during the war. New areas were brought under cultivation, and prices of old lands rose to levels which were far out of line with anything that could be sustained once the warshortage of foodstuffs was brought to an end by the return of the soldiers to the fields of Europe. Farmers saddled themselves up with capital charges (based on these inflated land values), which now they have difficulty in meeting since farm products have returned to more normal levels." As. a diagnosis of the farmers' illness the above fits the New Zealand as well as the American patient. What, then, is the prescription? Whatever it is, the American authority denies that it is easier credit. While Government-lend-ing to farmers may not have had the vogue in U.S.A. that it has had in New Zealand, it seems that the American farmer has had plenty of credit of a less I paternal quality : ' "The farmer should have been cured long ago if lack of adequate credit were the basis of his ills. It is, of course, true that the farmer has been at a serious disadvantage since 1920 by reason of the greater fall in prices of his products as compared with the prices of the manufactured goods which he has to buy. These conditions, however, are temporary and are already in the process of correction. They are nevertheless being made the basis of much loose talk about the 'incurable ills' of the farmer. Figures are cited showing farm income as making unfavourable comparisons with other industries, but usually nothing is said in such comments to bring out the chief incentive for the settlement of our vacant lands, namely, the constant rise of land values throughout the history of the country." In New Zealand, as much as in America, this registers as a "palpable hit."

WORLD LEVEL OF PRICES

Again: "It is conceivable that an effort to check a decline in the general price-level (caused by declining farm products) by a policy of easy money might simply result in advancing the prices of commodities which the farmers have to buy, while prices of commodities

I PRODUCTION ENERGY.

I * j In face of all difficulties of fall= f ing prices, over=eqnipment, and i transport loss, the New Zealand I producer is increasing the output I of his customary lines, and is pre= | paring to add such world commodi* | ties as timber, the State Forest 1 Service having reduced the estab* | lishment cost of exotic trees to £2 I an acre, while the actual seed-, I solving is-done by machine at half I that ugurc.

which the farmer sells, being- fixed by the world-level, would be unaffected, and the farmer would thus be left in a worse position than before." If such a statement as the above can be written about the American farmer, with his big American tariff-walled market, surely it would apply with double force to the New Zealand farmer, since his great market js free trade Britain, and his home market consumes but a small proportion of his output. In this respect the New Zealand farmer is evidently much more dependent

on world-prices than is the American farmer; also much more dependent than is the Australian farmer. For instance, it is estimated that New Zealand exports about four-fifths of her dairy produce, while Australia exports only about onethird of her butter, and under the Paterson Plan the Australian consumer pays a bounty on exported butter. The New Zealand farmer's dependence on world prices in a free trade market is about us complete as it could be anywhere outside Britain herself. Such must always be the case so long as the great creditorcustomer magnetises New Zealand's surplus produce and remains herself-.a free trader. These explorations of contemporary criticism in New Zealand and America, on the rural credit issue, show that while everyone agrees that a sufficiency of capital is a pre-requisite to rural development, opinions differ as to the best method of raising the money and as to the terms the farmer is entitled to. No doubt the question will ultimately be settled by money market conditions,, but at time of writing the next step is not certain. Parliament, however, will probably rise to the occasion, as it recognises that reasonable credit iij the key to in'crease-of-pro-duction by soil-fertilisation, better breeding, etc., and is also an adjunct to checking further retrogression in certain limited areas which are known as "deteriorated lands," and which are simply lands awaiting the competent farmer with cash.