Untitled

New Zealand Times, Volume XXX, Issue 4514, 8 September 1875, Page 2

The recent failures in South Wales and the City, of which the colonial world has been made acquainted, first by telegram and subsequently in the regular course of post, are not without significance at this side of the globe. Similar causes to those which produced these monetary failures at home are in operation in the colonies. We have undue speculation, enormously high rates of production, a limited market, and discount facilities which,, to say the least, are perilous, The Economist has a very instructive article on the suspension of the Aberdare Iron Company and the London billbrokers, Sanderson and Co., through whose hands the Aberdare Company’s paper passed’ for discount. The process is a simple but ruinous one ; and it arises in part from the recklessness induced by the rapid accumulation of capital in England, and in part by the lax administration .of the banks. An extract from the Economist will place the matter before our readers in its .true ■light, while it points a moral which is not without use in New Zealand/ Our Loudon contemporary remarks : These events show undoubtedly that an amount of bad business has been done in the money market which was not suspected, and which scarcely anyone would have believed except upon proof. The Aberdare Company were in the habit of drawing accommodation bills on the “Plymouth”—a kindred company; —and these bills and others similar, having been discounted by Sanderson’s, were re-discounted by some of our principal joint-stock banks. And if due care had been taken this could not have happened. The partners in “ Sanderson’s” were not known to be men of first-rate wealth, and therefore it was very necessary that the, bills taken from them as security for large loans should be scrutinised very carefully, and such scrutiny would have at once detected the unsound character of much of the Aberdare Company’s paper. * The whole of these operations were sustained by re-discount, and an extensive re-discount of this kind of bills should have been impossible. The danger thus revealed is the greater because it is one which has been foreseen and pointed out as one characteristic of oar modern banking system., All banking rests on credit, and the banks in the best credit get the most money, which in itself is natural and right. But it brings with it a risk which must be seen and provided against. The accumulation of great sums of money.in. the hands of single companies is a great strain on their organisation. A system of administration which was suitable to manage £5,000,000 might be scarcely adequate to £10,000,000, and be even more unfit to cope with 15 or £20,000:000. The detail brought by every additional £1,000,000 is very great, and unless the system of management is correspondingly improved the danger is considerable. Wo must never forget that our modern system of deposit banking is substantially a new thing in the world. Even a hundred years ago the beginnings of it were so small that those then living would have had great difficulty in comprehending the present state of things. We enjoy its advantages, but such events as those of which we are now speaking seem to show that we are - scarcely sufficiently alive to all its dangers. The support of such a concern as the Aberdare Company so largely by fictitious paper would have been impossible if our banks had been as judicious as they are large.

When the funds of any bank become suddenly inflated by the deposit of between two and three millions in excess of its ordinary deposit receipts, a very severe strain is undoubtedly placed upon the management, and it will require the utmost care and prudence, and an uncommon degree of foresight also, so to arrange the expansion and contraction of discounts, within a limited period, as to use this large sum with profit to the bank without creating a very serious financial pressure. “The detail brought “ by every additional million is very “ great,” writes the greatest monetary authority among English newspapers, “ and unless the system of management “is correspondingly improved, the'dan- “ ger is considerable.” We have no wish to create alarm, nor do we anticipate that there is any cause for anxiety on account of transactions to which we incidentally refer ; but we cannot refrain from pointing to what has taken place in the heart of the city of London, and to the words of sound advice which the Economist, and other high class journals, give on the subject. Money in the colonies has been, of late, too dear. That is, it has been at such a rate as to preclude the hope of borrowing to advantage, and investing in any kind of manufacturing or other industry, involving 1 the employment' of skilled labor. What between interest on capital and wages, the profits would be swamped altogether. Hence it happens that new industries do not spring up around us, and old established ones barely hold their own. Of course, there are exceptions in those branches of industry which are stimulated by the large expenditure on public works and immigration, but no corresponding progress is otherwise noted. Money is dear, produce of every kind fetches high rates, and labor is consequently beyond the range of profitable reproductive employment. Such a state of things may give an appearance of general prosperity ; —it may swell the revenue receipts, and give an impetus to our import and retail trade for the time ; but it is not evidence of a sound and economic basis of colonial progress. This is an incontrovertible fact, and it should not be lost sight of by our legislators, now assembled in session. Free immigration has not produced some of the expected results, because the Government competes with private employers for labor ; but when the Government expenditure is stopped, and the immigrants are thrown altogether upon private enterprise for employment, money must be much easier than it has boon for several years past, or the revenue will suffer seriously. In round numbers, the Consolidated Fund is absorbed by interest on the public debt, permanent appropriations under Act, the Civil List, and departmental services, and unless the ordinary sources of taxation produce £1,700,000 for the year commencing on the Ist July, 1877, there will bo a deficit which must bo made up in some way, that is, assuming that the interest on loan remains a first charge bn the Consolidated

Fund, j Of course, a portion of it will bo charged against the land fund, as in the case of constructed railways, but .that relief will be slight in view of the suspension of public works expenditure, unless a rapid extension of domestic industries takes place through cheap money and unrestricted competition. In that case, wages would fall, but so also would the cost of living. The condition of the bulk of the working-classes would also be improved, because they would learn to practise economy, which they never think of doing while money is plentiful and rates of living abnormally high* These combined, induce a reckless spendthrift habit, which is very injurious. Now, the question arises : la there any . likelihood of money becoming cheaper, so that the Government and General Assembly may look forward to the close of the next financial year, and the estimates of the year following, with, complacency 1 Wo should be deceiving ourselves and the country if we held out any such hope. The tendency is rather the other way. It is unquestionably true that all great financial failures have a tendency to cheapen money, “by increasing the distrust in bills, ‘ ‘ and the lessening of the disposition “to take them;” but these causes would be partial in their influence here. It will bo necessary, in some way, to raise a million and three-quarters of revenue within the colony, to keep faith with the public creditor and sustain the departments of State, and while that sum is to be raised by taxation, it is very clear that the Government cannot afford to make any relaxation in favor of commerce and manufactures ; and it _is equally clear that unless the existing high rate of wages be maintained, thereby sustaining the spending power of the people, this revenue cannot be chiefly raised through the Custom-house as at present. Wherefore, it follows that new industries, adding to the fixed capital and producing power of the country, will not be established.” This is our deliberate opinion. We may be wrong ; and if we are in error, we shall be glad to have the error pointed out to us.. But holding this opinion, we feel constrained to give timely warning. We blame no one ; but we counsel prudence.