VALUE OF LOAN DOUBTED

Southland Times, Issue 24243, 28 September 1940, Page 6

VALUE OF LOAN DOUBTED

SUBSCRIPTION FOR WAR PURPOSES MR DOWNIE STEWART’S CRITICISM (Special to The Times) DUNEDIN, September 27. “The Minister of Finance has expressed the hope that there will be a generous response to the invitation to subscribe to his War Loan, ’ said the Hon. W. Downie Stewart in an interview. “There is no reason to anticipate that his hopes will be disappointed. “The public fully realizes 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,’ said Mr Stewart. “In the Budget he said the loan 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 means 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. „ “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 2J per cent. Will not this practice of compelling the public to lend money without interest involve Mr Nash in serious difficulties with his Left Wing critics like Mr J. A. Lee? Has he not, in effect,' sold the pass to his enemy? For by this precedent he weakens his case for continuing to pay interest to the Reserve Bank. That bank, as keeper of the centralized reserves of the trading banks, has the use of big blocks of free money. Moreover, as it is the money-making 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.

INSTITUTION OF INTEREST “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 and so on. 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?” said Mr Stewart. “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 he has frequently declared that he desires to encourage saving. “If that is so,” said Mr Stewart, “I think it would have been wiser to pay interest on the War Loan throughout the term of the loan in order to encourage saving and to keep the war bonds 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. “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 it is, 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 patriotism 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.” .