WAR LOAN

Otago Daily Times, Issue 24414, 27 September 1940, Page 6

WAR LOAN

A CRITICAL SURVEY THE INTEREST PROVISIONS ADVERSE EFFECT ON BONDS MR DOWNIE STEWART'S VIEWS While fully appreciating the urgency of the need for a strong financial war chest, Mr W. Downie Stewart, in an interview with a Daily Times reporter last night traversed critically the proposals announced by Mr Nash for the raising of an internal loan for war purposes. In particular, he directed attention to what he regarded as the weakness of the interest provisions and raised the question of how money provided in New Zealand could be used to relieve the drain on the British Government. "The Minister of Finance has expressed the hope that there will be a generous response to the invitation to subscribe to his War Loan," Mr Stewart, said. " There is no reason to anticipate that his hopes will be disappointed. "The public fully realises the need for a maximum war effort and that any financial sacrifice it is called on to make is not comparable with the contribution made by our sailors, soldiers and airmen.

"Yet it is difficult to understand the principles which guided the Minister in framing his loan proposals. In the Budget he said the ban would be a compulsory one. He now says it is a voluntary one, but that compulsion will be applied where people who ought to contribute fail to do so. This seems merely a curious play on words and the loan is, in, effect, compulsory. Probably, however, no one objects to compulsion if it is to catch the shirker, more especially as we have applied conscription to the army. A Dubious Precedent " But the real reason for compulsion," Mr Stewart said, "probably arises from the fact that the loan is free of interest for three years and thereafter bears interest at 2£ per cent. Will not this practice of compelling the public to lend money without interest involve Mr Nash in serious difficulties with his Left Wjng critics like Mr J. A. Lee? Has he not, in effect, sold the pass to his enemy? For bj this precedent he weakens his case for continuing to pay interest to the Reserve Bank. That bank as keeper of the centralised reserves of the trading banks has the use of big blocks of free money. Moreover, as it is the moneymaking authority it can, if ordered to do so by Mr Nash, lend money at a nominal rate of Interest or free of interest as in any case its profits go to the Government. Therefore, if the free-of-interest idea is sound it is far more applicable to the Reserve Bank than to loans raised from the public. "Nevertheless," Mr Stewart said, " we must assume that the Government has no desire to challenge or abolish the institution of interest on loans, as it still continues to pay interest to the Reserve Bank and on Post Office Savings Bank deposits, etc. In my view, it is wise to do so, for otherwise the bank will be robbed of one of its most useful functions. For, if money becomes so plentiful as to threaten inflation, the Reserve Bank can sell securities to the trading banks, and thus curtail the volume of money in circulation.

"But if its Government securities carry no interest, they will hardly be saleable in the market. In like manner, if the War Loan carries no interest for three years, will not the bonds at once drop to a heavy discount and thus create a bad impression of Government securities? " The argument used by Mr Nash In his Budget is that as some people have already lent money free of interest to the Government, it is not right that other people equally able to assist should escape," Mr Stewart said. "But If this argument is sound, might he not equally well argue that as some people have made straight-out gifts of money for the war, therefore compulsion should be applied to others to do the same? Saving Discouraged " It is clear that the Minister is seeking to apply different principles to the savings of the public, according to whether they belong to large or small investors. For in the Budget he says the interest-free loan contributions are to come 'from the material assets of those with property.' At the same time, he continues to pay _ interest on savings bank deposits in the Post Office and lie has frequently declared that he desires to encourage saving.

"If that is so, I think it would have heen wiser to pay interest on the War Loan throughout the term of the loan in order to encourage saving and to keep the war honds saleable in the market. For, if saving is discouraged the Government may find as time goes on that there are no savings to borrow. "Yet borrowing from the public is the only safe form of borrowing a Government can pursue, for thereby its debt increases only at a pace equal to the demand for gilt-edged securities arising from current savings. A Question "One statement by Mr Nash seems to require explanation," Mr Stewart said. "He says that he hopes to raise in New Zealand some part of the amount necessary to meet expenditure overseas, thus relieving as far as possible the drain on the British Government. But how can money raised in New Zealand be used overseas? If it could be, we need never have had any import restrictions. It is only overseas funds that can be used for overseas payments. Indeed, Mr Nash knows tis, for at one point in his Budget he urges that we should reduce imports to preserve our London funds. But how can he increase those funds by raising loans in New Zealand? "No doubt public r>atriotism will make a success of his War Loan," Mr Stewart added, "but taking a long view I think compulsory interest-free loans are of doubtful value." COMPULSORY IN PRINCIPLE ONE CLASS SINGLED OUT INEQUITABLE BASIS OF COMPUTATION (Per United Press Association) WELLINGTON, Sept. 26. "There is no misnomer in the term 4 compulsory' as applied to the loan announced to-day," said Mr Andrew Hamilton, president of the Slock Exchange Association of New Zealand. "A particular class of taxpayer has again been singled out, and is compelled to make application. Admittedly he may apply voluntarily for more, but he is under compulsion for a certain amount, if there is any practical meaning to the statements in the prospectus. "An unnecessary amount of difficult calculation has been passed on to taxpayers," Mr Hamilton said. "in that they are obliged to add to their taxable income certain other forms of tax-free

income and then endeavour to calculate the amount of tax that would have been payable on this total. Many people will have a difficulty in deciding what higher rate of tax they would fall under in this increased amount. Changed Conditions " Compulsory subscription has been based on income tax for the year ended March 31, 1939, a year when many traders and business concerns would show profits which they have not been able to make since the war began and since further import restrictions have increasingly reduced their earning capacity," Mr Hamilton said. "It is more than likely that many will not have the available cash and may have to sacrifice some other form of asset, or appeal to their bankers- How the banks wilj be able to assist is difficult to conjecture, as the loan is almost certain to be at a heavy discount and will not be easily valued because of the first three years carrying no interest. One obvious result of compulsory subscription wi'.h no return must be a tendency towards further private unemployment through reduced income. "The amount to be saved in annual interest 0 n the anticipated amount to be subscribed, £8.000,000, is only £200,000," Mr Hamilton said; "a sum negligible in comparison with the hardship and other results to be produced. With an internal State expenditure of somewhere about £20,000,000 annually on public works, many of which could have waited till after the war, this saving is very small, and could have been achieved by an almost unnoticeable economy in such expenditure. Voluntary Appeal Preferable "The people of this country as a whole are well imbued with the Empire spirit," Mr Hamilton said, " and unless this form of loan is a political Beau Geste to certain elements in the country, it is hard to understand why a voluntary appeal was not made first. In no other part of the Empire has such a loan been brought forward at this stage of the war. The country might have been given the opportunity of responding to a well-handled financial appeal, and the pressure pump withheld until the voluntary well was running low. "Another question being asked by many," Mr Hamilton .added, "is what provision has been made for cases of hardship, and finally, what is the position of soldiers overseas whose incomes before they left the country were such as to bring them within the terms of the prospectus? Are they obliged to contribute to this loan as well as offer their lives?" \ . I