PRODUCE & MARKET REPORTS FROM DAY TO DAY

Evening Post, Volume CVIII, Issue 134, 3 December 1929, Page 14

PRODUCE & MARKET REPORTS FROM DAY TO DAY

CREDIT CONTROL

AUSTRALIAN PROPOSALS

HOW THEY ARE VIEWED

"Evening Post," 3rd December.

Fuller details than were cabled of the Commonwealth Government's banking proposals are now to hand, and the "Sydney Morning Herald" financial editor has no hesitation in describing them as "dan-gerous;"-The Federal Treasurer, Mr. Theodore, stated that the Government was convinced that the present system of credit control in Australia had many defects which militated against the best use being made of-the credit resources of the nation. These defects mostly arise from the fact that the private trading banks have in recent years almost exclusively arrogated to themselves the' power to determine the bank, discount, and exchange rates, and the extent to which credit shall be expanded or restricted; and (equally important) the classes of business or industry to which credit facilities shall be extended.

Mr. Theodore's critic points to the fact that the resources o£ internal credit are the floating capital of the people, the capital for which they have no present use themselves, and which they are willing to let out to whoever on acceptable terms will use it.' Most of that capital is in the care of the banks at current account or on fixed deposits, and the banks let from 80 to 95 per cent, of it out on loan, at the rate of interest of the day, in the form of advances, or by discounting bills. Further, the banks fix rates of interest, arid they have done so not "in recent years almost exclusively," but from the time that banks began their existence. The banks fix the rate of interest at which they will lend the money entrusted to their care. They do not allow the borrower to fix the rate, much no doubt as the borower would desire to do, and on the rate which is fixed for the borower depends the rate which is paid the fixed depositor.

WHAT FIXES THE PRICE OF '■'■■. . , MONEY. :i. The rate is not fixed arbitrarily. Money .•- to Jend -is a-. commodity, and its price ; depends upon supply and demand, as does . the price of any other commodity. If the supply is abundant interest rates come down. Tho money market is easy. If most of the floating capital has been ■used up in loans then money is scarce, it:is said to be "tight," and the rate of interest is increased. No power can com-- ,-: pel interest rates to move the reverse way ,: to' that on which economic forces are impelling them. I£ a Government attempts ; t<j fix interest rates it is courting chaos '.. and. disaster. /More than anything else it will cause a l' restriction of credit. People will not • lend at a lower rate than that which they consider to be the market rate, nor • •will a holder of money lend on any security which does not seem to him safe, oj; for any purpose which he deems will - em! in a loss. A man's money is his own, : and no Government in a civilised commun- : ity, to-day takes a forced loan, or dictates how or for what purposes a man shall lend. ;' BANKS AS LENDERS. '-It is also pointed out that all enthusias- - tic reformers of banking look at the matter from the point of view of the borbut it is emphasised that the banks iif not lend their own money. They lend xooney placed with them partly on curtent account, that is, at call, and partly on fixed deposit. Also it is not realised : that' a great deal of the iised deposit money is practically at call, for there is ai large amount of it falling due every day. . In these circumstances the banks must . see, to it that a large portion of their . advances is liquid, that with the course of trade the advances will be continually fluctuating. There are good propositions admittedly that banks turn down, but that | is. because they are practically long-term ; loans. It is no function of a bank to make "•a.- long-term loan. . Applicants for such -■'-.a;<loan should be referred to people who are willing to place their money at interest on mortgage for a long term. ' BRAKE ON BORROWING. 'j '':K ■money is tight the proper course is to advance the rate of interest. That is ■ the corrective. That stops borrowing by those who cannot use money profitably at the advanced rate. The position automatically becomes easier, and'as it be- . CQmes easier the rate of interest is rer dueed. In no country of financial stand- . ing does the Government fix the rate of /interest, "The danger is that if a Govern- : ment were to fix the rate of interest it ■would do so to suit its own purpose or ' to;procure votes," remarks the "Herald's" ' financial editor. "That would mean keeping down the rate of interest, and it could be accomplished only by inflating the , currency, which would result in discarding the gold standard and inflating prices. Central banks fix their rates of discount on which generally trading banks fix their . rates of discount and of interest on loans ; .is. well, but it has happened that a cen- :: tral bank has misjudged the position, and r tjie, money market has not followed its :f;lfti&." Reference is made to the Fed- ■. eral' Reserve Board of the United States, ;: ■which tried-to. restrict loans to stock .brokers by the banks. The result Vas depositors withdrew their money ' from .the banks and lent it to brokers at '. Higli rates of interest. Much money crossed" the' Atlantic for investment in New York. On the other hand the Bank of Eng- ' land, when it deemed the time ripe, on i 26th'September advanced its rate of dis- • count to 6% per cent., so as to stop .-.the.flow of funds to America, and in two {iveeks the flow outwards was stopped. '. Since then -there has been a flow of gold back to Great Britain.