CORRESPONDENCE.

Poverty Bay Standard, Volume I, Issue 52, 29 January 1884, Page 2

CORRESPONDENCE.

(We do not hold ourselves responsible for the opinions expressed by our correspondents).

CREDIT AND BANKRUPTCY.

TO THE EDITOR, Sir, —A well-written, thoughtful letter, bearing the somewhat fanciful signature of “ Zaooni ” (Zanoni ?), appeared in your issue of the 24th instant. Nevertheless, it contains some dangerous fallacies, as it seems to me, which I will endeavor to expose. I believe that the sudden and entire abolition of the credit system, advocated by Zaooni, would be extremely detrimental even to an old commercial community, where capital is superabundant. and that it would mean ruin to a young, undeveloped country like New Zealand, where capital and population are the two things needful. For, the real service which credit performs is that it enables an increased quantity of the wealth of a country to be used productively as capital. It encourages the productive employment of wealth. And here the banking system comes in. To abolish credit would be to virtually abolish banks, and all the aid they give to the opening up of a new country. Scarcely anyone retains a considerable sum of money in his own keeping; people keep just sufficient money to pay their daily personal expenses; all their money above this amount is generally deposited in a bank, and is there used for productive purposes. Experience has shown that a bank need never keep in the form of money more than about one-third of the sums deposited with it, and this the banker, by accumulating a large quantity of small capitals, is able, with advantage to all concerned, to employ two-thirds of the total amount deposited with him to assist the future production of wealth. So, again, the abolition of credit would also imply the abolition of joint stock companies, the means of others by which the mineral resources of a country are got at, and great enterprises in the way of steam navigation made possible. The fact is that the capital of any country, and a fortiori of a new country, is practically augmented by the means of credit, because it offers great facility for the productive employment of wealth. There are, too, special forms of credit which very materially facilitate the exchange of wealth, and which produce a very great influence on the prices of commodities, I refer to bills of exchange, bank notes, cheques, and book credits.

If bills of exchange are, swept away money must be transmitted in specie between different countries and different parts of the same country at enormous inconvenience, risk, and expense. It is true that “ Zaooni” hints at retaining the bill of exchange in a simple form of a draft payable at sight. But I have shown that the abolition of the credit system implies the abolition of banks. Such drafts, therefore, could no longer be issued, except between private individuals, and with restrictions as to negotiability which would deprive them of half tueir present usefulness. Now, all political economists are agreed that bills ot exchange, performing, as they do, many of the functions of money, exercise considerable influence on general prices. As the law at present stands, a bill up to the time that it falls due has the purchasing power of gold and silver coin; and any circumstance which increases the amount of money circulating in a country will, if other things remain unchanged, increase the prices of commodities. If all business now transacted by means of bills had to be carried on with cash payments, one of two things must happen: either a corresponding amount of money must be added to the currency, or the general prices would decline. And it is obvious that the same effect would be produced upon prices by the extirpation of bank notes, to say nothing of their usefulness and portability as a substitute for money. The same remarks apply to cheques, which also exercise an appreciable effect on prices. The working of book credit can be easily explained. Suppose that an ironmonger, A, buys £5O worth of coals from a coal-mer-chant, B, and that B buys £5O worth of ironmongery from A: instead of actual specie, or bills of exchange, or cheques passing between the two, A debits B with £5O in his ledger, and B does the same to A, and thus, again, the use of money is dispensed with. In considering this important subject, it must be borne in mind that credit influences prices as credit, and not the particular form which credit assumes. A bank-note, a cheque, a bill of exchange, is not credit, it is simply a declaration of the existence of credit. Every form of credit which dispenses with the use of money produces an effect on prices. Moreever, credit greatly increases the purchasing power of every individual and every community which employs it. Like any other good thing, it may be greatly abused; but if all commodities were bought and sold for money, trade would be very seriously contracted, and a young community like ours practically paralysed. Since, therefore, credit enables a great many purchases to be made which never could take place if the payments had to be made with ready-money, it is evident that credit produces an increased demand for commodities, — and it has frequently been proved that any circumstance which increases the demand for commodities tends to increase their price. Hence, credit, by increasing the purchasing power of individuals, tends to increase the prices of commodities, and it is clear that the influence of credit on general prices is beneficial, if it be kept within legitimate bounds. It tends to prevent those fluctuations in general prices which are always so disastrous to production, owing to the uncertainty which they cast over commercial transactions. And there is one more advantage derived from the

use of credit which must not passed unnoticed, viz,, its direct economy. If bank-notes, ■ cheques, and bills of exchange, to say nothing ; of book credit, ceased to be used, a much larger quantity of gold and silver coin would be required, so there is a direct economy in the employment of these instruments of credit, because a comparatively worthless substance like paper is used as a substitute for the highlv-valuable commodities—gold and silver, The material of which a Bank of New Zealand note for £lOO is composed does not cost as much as a farthing—its intrinsic value is inappropriately small, but, owing to the purchasing power which credit confers upon it, it is as useful to its owner as 100 sovereigns. Thus, the wear and tear of the gold and silver coin is greatly lessened. The fact is, that if you destroy the credit system of a country you destroy its prosperity. The drastic remedy suggested by Zaooni would, if adopted, produce a change like that in Pharaoh's dream, Money may be scarce just now, but wages are high, work is plentiful, and we hear of no serious or widespread distress. Forbid credit, and the thin ears will blight the full ears ; the lean kine will devour the fat kine ; the days of plenty will be over, the days of dearth will have arrived. Our farms will be uncultivated and unstoaked, our roads unmade, our harbors unimproved, our mineral resources and our waste lands undeveloped, our industries of every sort starved out, Then will come a dead level of stagnation. The capitalist will be destroyed ; but will he be the only or the chief sufferer ? So great will be the misery of our large towns that a man of sensibility could hardly dare to pass through them. Everywhere will be found neglected roads, decaying bridges, empty warehouses, closed shops. Everywhere filth and nakedness, and plaintive voices, and wasted forms, and haggard faces. Politicians who had never been thought alarmists would begin so tremble for the very foundations of society. Then, the artisan, unable to get work, and therefore without

ready money, will be driven to pledge his scanty property—first his little luxuries, then his comforts, then his necessaries—until his cottage is stripped as bare as the wigwam of a dog-ribbed Indian, and barer than the whare of a Hauhau. Alone, amidst the general misery, the shop with the three golden balls would prosper, crammed from cellars to garret with the clocks, the tables, the kettles, and the blankets of the poor, And all this because a few merchants and shop, keepers, who, having trusted not too wisely but too well, have been fleeced by some dishonest bankrupts, in their panic abolished credit altogether I

I trust, Sir, that I have not monopolised more of your space than the importance of this subject demands. In a future letter I propose to deal with the historical, ethical, and legal aspects of the relation of debtor and creditor, in regard to which Zaooni has, I think, made some grave mistakes. I am, &c., Spectator.