The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES.” GISBORNE, TUESDAY, AUG. 15, 1939. THE DEBT SYSTEM

Gisborne Herald, Volume LXVI, Issue 20016, 15 August 1939, Page 4

The Gisborne Herald. WITH WHICH IS INCORPORATED “THE TIMES.” GISBORNE, TUESDAY, AUG. 15, 1939. THE DEBT SYSTEM

The recent Parliamentary discussion on the public debt of the Dominion and possible difficulties of meeting repayments directs attention to the wider question of borrowing generally. Some there are who declaim against what is loosely referred to as the debt system and imply that it could be completely eliminated. This system, after all, however, is merely a method by which accumulated savings are utilised for the purposes of further development, and although the procedure might be varied it is difficult to see how the principle could be abandoned without causing economic stagnation. In the simplest form the savings of an individual or an organisation are used for the purpose of expanding operations, but in some instances the savings are inadequate for the required purpose and in others there is no particular use for the accumulated savings. There is thus created the situation that leads to the relationship of borrower and lender. In private transactions of this description there is generally a reasonable safeguard, firstly, because the prudent borrower does not borrow in excess of his capacity to pay or, from a business point of view, beyond what will be profitable, and, secondly, because the lender will take steps to ensure the safety of his capital. Public borrowing, however, is largely devoid of these safeguards, and consequently is apt to be carried to the point of danger.

Borrowing, either private or public, is not necessarily evil: indeed, it might be the essence of short-sightedness to avoid it. A shopkeeper, for instance, might not have sufficient capL tal to buy the stocks that are necessary to maintain his business on an efficient basis and in conformity with the level of his overhead costs. Whether he is owing money to those who supply the goods, ■ working on bank overdraft, or using borrowed capital, the principal is the same. He is in debt, it is true, but instead of the debt being a burden it actually relieves his burden, by enabling him to increase his turnover and his profits. So it is with the farmer. If he takes up undeveloped land, it is essential that he should use outside capital from one source or another. To the extent that he is able to increase the production of his property, the overhead cosl of working it is reduced and his own financial position is improved. The position of the shopkeeper or the farmer is similar to that of any other individual or business — so long as borrowed capital is used only in proportion to the capacity for increasing development and earning power it is more than justified and the debt, although nominally a liability, is in actual practice a very real asset. The danger comes in when money is borrowed, not for capital development, but for working expenses or maintenance, but as has been pointed out, in the case of the private borrower there is reasonable protection against such a position developing. With public borrowing, however, the position is vastly different. In the first place, the borrower, being the community in the mass, pays comparatively r scant regard to the productiveness or development value of the work on which the loan money is expended, and, secondly, the lender, since he is lending to a community with a collective responsibility and presumably unlimited capacity to pay, 1 is apt to take the security for grant-

ed. Borrowing, especially perhaps in a democracy, tends to become a habit; it is an easy method of buying political popularity at the expense of posterity. The people are far less concerned with the liabilities which they are piling up for future generations to pay than with escaping the alternative of paying higher taxes themselves; yet, in actual practice, public borrowing should be subjected to the same tests as private, and it is only on the presumption that this is the case that it can be justified. So long as a community is developing and expanding it is to be assumed that it will have an increasing capacity for the production of wealth and, consequently, a greater ability to meet the cost of whatever debts may be incurred. What is inclined to be overlooked, however, is that in a country or in a

community, as in a private business, r.here may be a limit to profitable expansion. But whereas the private borrower is subject to some automatic check and control the community is not, indeed, the tendency is for the community to counter its lack of expansion and its reduced capacity to pay by resorting more than ever to a policy of borrowing. These general observations might profitably be applied to the experience and position of New Zealand. Until comparatively recently with the steadily increasing population, with continuous land settlement and dedevelopment, with expanding production. and with unlimited markets overseas, the Dominion was amply justified in borrowing additional capital for the exploitation of its natural resources, but even under those favourable circumstances it was still necessary that borrowed money should be judiciously expended. To-day it is both necessary and desirable that there should be a careful stocktaking. New capital should be introduced only in proportion to the capacity of the Dominion, or any particular phase of its industrial activity, to expand, and borrowed money should be used only in directions in which it will be reproductive and will not add further to the burdens of the people. In other words it is necessary to draw a distinction between self-supporting and deadweight debt. For example, money borrowed and spent on hydroelectric development should not only meet its own cost, but, by extending the scope of the service should reduce the overhead costs and the charges to the public. On the other hand, loans raised for public works which in actual fact are little more than unemployment relief projects make no direct contribution towards their own charges and become a dead-weight burden on the community, perhaps for generations to come. New Zealand, as a democracy, if it is to survive as a democracy, must face up to this question of borrowing and discipline itself into the harder course of paying through taxation for those things which is has no right to obtain through extravagant loans which will bring disaster to some future generation.