LOANS AND LAND

Hawke's Bay Tribune, Volume XVII, 2 December 1927, Page 4

LOANS AND LAND

JJNDER the above heading an Australian financial writer discusses a question which no doubt exercises the minds of a good few in this country where, for the time being, conditions are on much the same footing. How often, he asks, have we read lately that the property market, though firm, is quiet, because dituculties ol finance stand in the way.- And the buyer Wuo thinks that lie has a goou tiling unu the seller who knows mat lie’is making a profitable disposal ol property, denounce the baiuis because nicy wu. not auvance the money on wnat tin. borrowers declare to be the best oi security in order to complete a bargain. How often is it staled, ”i ottered such a bank security ol property (by which is meant land and ouiluing) worth £5090, and the uu.. refused to consider it!'” The complaint is made as though every man had a right to borrow, providing he could offer security. I'he complaint would never be made against a private lender. In that case there is no refusal to recognise that the lender is quite within his right in choosing his debtor, the class ol security, and the time at which he will lend. When the bank is the lender every borrower speaks as though the bank must lend; that the bank has no choice in the matter, provided the security is there. The buyer of land offers land as security. The bunk mny determine that it has sufficient land to be holding as security, and that it is not taking any more. It has always to keep before it the fact that it might be compelled to realise on its securities. Land is not liquid. It cannot be realised to order. Merchandise can. So can many classes of bonds and stocks and shares. They are liquid. A bank, too, cannot lend more than it borrows. Deposits with it are its borrowings. During the quarter ended September 30 the Australian hanks had at loan and invested in Government securities £219.850.000, and held at call and on deposit £260,600,000. It is true that every advance results in a deposit, and so the banks find it necessary to restrain their advances in order to maintain a safe proportion of cash to deposits. These are elementary. but they need repetition and emphasising when complaints are made that there is a restriction of credit. After all credit is not illimitable. There are bounds to it, and when the boundary is being approached the merchants of credit, that is, the financial institutions, have to determine on what class of business the available credit shall be used in order to best serve the business of the country. Is it to be used in production, in trade, or in land dealing? To that there can be only one answer. It should be apportioned as far as possible to production and to trade. To production in order to enable us to live, and to trade in order to facilitate the exchange of products. Dealing in land does not serve production. Dealing in land does not facilitate the exchange of products. If the process of dealing in land is considered it will be clear that the value of land increases as the facility with which credit to buy increases. The purchase of land for the purpose of holding it for increased value does not serve to make the products reach the consumer more quickly or in greater volume. If the grower or manufacturer borrows money he does it with the object of increasing production. If the trader borrows money he does it with the object of permitting a greater volume of goods to pass through his warehouse. But borrowing does not increase the quantity of the land in existence. That remains the same. It serves to increase the demand for land already in existence, and so the value is forced upwards. If further loans are available values advance still further, because buyers who are able to command the loans, believing with the optimism of borrowers that values will still further advance beyond what they are prepared to give, make their offers on a higher basis than previous transactions, and further transactions take place. These transactions do

not release credit, rather they make further demands on the credit available. Credit used in production is released when the product is sold, and is available for further production, and every increase of productign makes some fresh credit. Credit used in trade when the goods are disposed of is thereby released for fresh trading. The effect of land dealing on a rising market is to increase the demand on credit, that is on lendable capital. Every increase in the amount of money I to deal in land sends up the value of land, and results in a still furthe demand on the amount of lendable capital, with a consequent reduction in the amount available for financing production and trade. Financial institutions, if they lend as they arc asked by dealers in land, are only aiding to the inflation of land values, and are ensuring for themselves a period of frozen loans.