AGRICULTURAL BANKS.

Hokitika Guardian, 1 May 1923, Page 1

AGRICULTURAL BANKS.

DANGERS INVOLVED. (By H. Belshaw ALA., Tutorial Class Lecturer, Canterbury College, in the “Lyttelton Times.”) The primary industries of New Zealand are chiefly dependent for their prosperity on conditions in a world market over which the New Zealand producer has practically no control. External price movements in this market are, therefore, the serious concern of every farmer, for they determine to a very large extent his profits. From 1800 to 1020 prices in the world market were steadily rising so that conditions were almost continuously on the mend for the primary producer. The value of land rose with the rise in the value of farm products and investment in land became in general a particularly “safe proposition.” Unfortunately the persistence of times of buoyant prosperity encouraged speculative dealings in land so that the market value of land was always ahead of its value as measured by the value of the product which could be obtained from it. In other words, allowing for all costs, the average farm did not" pay at the price for which it was obtained, until the lapse of years brought better prices and consequently higher returns. Land agents, agency companies and other concerns dispensing rural credit were usually only too willing to provide the capital required; for not only did they earn commissions on the repeated sales of land, hut also they often obtained a hold, either directly, or indirectly, over the business operations of the farmer who sold his stock through their auctioneering departmoits or bought his supplies through their stores. It was these transactions, rather than the financing operations, which provided the chief sources ol profit. The war and post-war boom accentuated the tendencies already in evidence and the competition amongst each other of the businesses providing credit resulted in much reckless financing. As a result of these conditions the slump in 1020 found many farms overcapitalised. Even at the peak prices of the boom many farmers could not have made their farms pay. But lor the moratorium the fall in prices since that time would have resulted in tho failure of many farmers who are -at present able to continue in business. Recognising the difficulties which are certain to fate the primary producers on the expiration of the moratorium at the end of 1021, pressure was brought to bear on l’arlianient during tho closing session of 1922 to bring down legislation providing for the establishment of an agricultural bank. The resulting Rural Credit Associations Act proved disappointing and the farmers organisations are now agitating for a more comprehensive measure.

The rough draft of the proposed Agricultural Banking Act contains many excellent features which would recommend themselves to most economists during normal times; but it is dear that the framers have only partially diagonised the malady and are proposing a remedy which, while putting off the evil day, will serve but. to aggravate the disease and render more serious the inevitable collapse ol land values.

The proposed Act provides for the establishment of an agricultural bank for Die purpose of lending sums ol Irmu £-50 to £20.000, transferable bonds to fie issued tit the security’ of laud to the extent of GO per iont id its value. Ten per cent of tho value of tlm bonds must be deposited with tiie bank in the form of cash. Applications for loans under CoOO are to have preference, other things being equal. Provision is to be made for Die amortisation of bonds w liii h may also lie redeemed at any time in amounts of £-j or multiples of £5. Liability is to be limited by the values of Die bonds held.

Tile draft is in accordance with the principles of co-operative banking as practised in other countries—•principles which are in themselves perfectly sound and admirable as applied under conditions in those countries; hut it does not therefore follow that they will be equally sound under the vastly different conditions which exist in this country, especially at the present time. In normal times the hank would provide the useful service- of freeing the larmcr to a large extent from the control of tlie Ilnancial houses which are concerned only incidentally witli his welfare, and would reduce the evil of the “tied” farmer. It would also operate favourably to the small holder hy giving him preference. I lie principle of amortisation is also excellent. I'nfortunately the times are not normal, and the proposal must lie judged with reference to present conditions in New Zealand. No true friend of the farmer can look with favour on proposals lor increasing credit facilities at the present time. Under the proposed scheme, land values are to he assessed hy a committee of producers appointed from tie controlling bodies of the various branches of the hank. In a recent letter to the “Dominion” 31 r W. >J. Poison states: “The agricultural hank establishes the actual value of the land, •uul the ami milt which the bank will lend is the standard of value. In practice the hank dictates what the values of land are, and the very fa t that it will not lend beyond these values is a sufficient deterrent against speculation.” The statement reveals the real danger of the scheme; For the branch committees can no more determine tlio value of land than a shop-keeper determines the price of groceries. It is this failure to recognise that land values are beyond the control of individual groups that is the menace at the present time. The real iortos dotermining land values in any place at any time are numerous and complex The movement of prices, the operation of the hank’s competitors and of speculators in land, who will still operate through other channels if the hank refuses them accommodation, will still exert an influence which at best the bank can only hope to modify very slight!v. Seeing that these who determine the value of the land on which loans will lie advanced by the bank ran have but d narrow knowledge limited l>v their experience of local conditions, and are scarcely likely to he able, m literal to estimate the importance of those long-period market trends, which arc the real ultimate determinants ot land values, it follows that they are likelv to make their estimates of land values in accordance with short-time conditions of the land market in their district. These conditions are aluats partly speculative. Further, with the expiration of the moratorium the bank will be su iject to extreme pressure by farmers who require accommodation. This demand ; trill come from those whose security is inadequate and who cannot meet tlieir liabilities. Those who have bought In at reasonable prices will not require

credit to any great extent or will Iro able to obtain it on reasonable terns elsewhere because their security is adequate. If the bank is to adopt sound methods it must confine itself to “legitimate” demands whicii aro backed up by adequate security. In short, it must refuse the majority ol demands for credit which will then bo made; otherwise a further artificial boom with its consequent slump is inevitable.

To the present writer it appears that the agitation for an agricultural bank is directly occasioned by the probable difficulties of this class of farmer. It appears inconceivable, therefore, that a body of fanners, not experienced in the technique of banking, will be able to resist the inevitable pressure and will succeed in realising the gravity or the situation where expert bankers have failed on at least two similar occasions in the past. The contention that agricultural banking will prevent slumps is untenable even though tae writer quoted states that “agricultural flanking has universally provided against slumps” in other countries. It must lie remembered also that conditions in these countries are different from those in New Zealand, and it is questionable whether the highly individualistic New Zealand farmer would submit to the discipline necessary under the terms of the draft.

The danger becomes more serious also when the probable future trend of prices is considered. It is the general opinion of economists that apart ITom unforeseen political contingencies, the world is about to experience at least a decade or two of falling prices, accompanied by minor ups and downs. The present mild boom can only bo looked upon as a temporary recovery, and the expiration of the moratorium is as likely as not io be coincident with a second depression. With land values already very much inflated, the securities arc likely to he subject to rapid and steady depreciation as prices fall. The extent of the present in(litLinn causes the 31 per cent margin which the bank proposes to allow ilself to look very inadequate in the case of the majority of those farms for which credit is likely to he demanded. Securities held by a hank must ho “liquid.” Security in land is particularly “immobile” and is likely to become “frown” at the first cold whilF of adversity. The bank will therefore he in danger of finding itself with shrunken assets and of being forced to follow the example of the Hank of New Zealand on a similar occasion and apply to the Government for assistance. Since it is hoped to persuade the Government to guarantee the liabilities of the bank, tiffs becomes the concern of every New Zealand citizen.