The Temuka Leader TUESDAY, FEBRUARY 15, 1887. REDUCING BANK INTEREST.

Temuka Leader, Issue 1553, 15 February 1887, Page 2

The Temuka Leader TUESDAY, FEBRUARY 15, 1887. REDUCING BANK INTEREST.

ixia louuuiiuu lunue ujr tuc uauao ui the rate of interest on fixed deposit is made the subject of an article in the Australian Banking and Insurance Record of last January, The Record, let it be remembered, is a paper published every month in the interest of the Banks and Insurance Companies, and it always backs them up “ tooth and nail,” and when therefore it admits that the redaction will be of great benefit to the colonies we must regard it as pretty near the trntb. The Record says that while the Banks were giving 6 per cent fur money their shares fell in yalue, and of this it gives many examples. It ssys that the shares of the Commercial Bank of Australia were worth £8 2s in J muary, 1886, when the Bank was paying oo'y 10 per cent, dividend, ami when its reserve fund was only £215,000 ; now with a reserve fund of £380,000, that ia an increase of £160,000, and the Bank paying 12| per cent dividend, the shares have fallen to ±7 17s 6d. The National Bank of Australia increased its reaervo fund from £420,000 to £620.030, yet the

value of its shares have fallen from £9 17s 6d to £8 17s 6d. v This iB most extraordinary, and yet these are only two of, the many examples given by the Record. Soissto understand the full’bearing.'of this it is first necessary to understand what is a reserve fund. The reserve fund represents the amount of money the Bank puts by every year to provide against possible contingencies, such as losses of any hind. For instance, suppose a bank made £2GO profit, and paid only £IOO in dividends to tbs shareholders, the other £IOO would be put to the reserve fund, and thus the capital of the bank would be increased by that amount. The reserve fund therefore increases the capital of the bank, and it is extraordinary that while the capital has increased the value of shares has decreased. Take for instance the National Bank of Australia quoted above, Ihe reserve fund of that bank I has been increased by £200,000—-an | immense sum—in 1886, yet its shares fell from £9 17s 6d to £8 17s 6d, that is £1 per share, or nearly 10 per cent, according to the Banking Record, because the banks rose the interest on fixed '.deposits from 5 per cent to 6 per cent. The Record does not explain the cause of this ; it merely points it out, but we think that it is not very difficult to find. When banks were giving 6 per cent, for money capitalists were quite ..satisfied with that; they lodged their money on fixed deposit, and never troubled themselves with anything else. The result-was that no one Oared to buy bank shares; the banks themselves were giving better interest than could be made out of shares ; thus there was no one to buy them, and they fell in Value, It was a question of supply and demand ; the banks were killing the goose that was literally laying the golden egg, Now if such is the effect a high rate of interest has on the banks, what most be the effect on business generally; The Record is candid enough to admit that “ property, produce, manufactures, commodities, and wages are all cheapened in an inverse ratio to the high price, of money. This may be an advantage to the buyer arid the consumer, but experience shows that good wages and good values for what is produced makes communities prosperous.” Our readers will doubtless note that this is exactly what we have been arguing h|l along. We have held that the high rate of interest was ruining the colony, and here now the very paper which has been established to back up the banks in everything, and whose circulation is principally amongst bankers, points out the same thing, and adds that the fall of one per cent will greatly add to the prosperity of the colony, And now since the Record predicts such happy results from reducing the rate of interest by I per cent., we should like it to tell ns what would be the result of reducing 2 or 3 per cent, more? Supposing, for instance, that the Banks refused to give more than 2 to 3 per cent, interest on fixed deposits, and charged only from 5 to 6 per cent, interest on overdrafts, etc., what would be the result? Simply this: that this colony, would immediately become prosperous; pricea of the products of the‘soil would go up ; capitalists would be looking out for a means of investing their money, and would take up shares in local industries; work and money would be plentiful, and we should soon feel astonished at the Altered circumstances of the colony. There can be no doubt but that it is the high rate of interest that is crashing industry and ruining everything, and, if so, to bring down the price of money must be the cure. There is only one way of doing this; the Banks will not do it, and consequently a National Bank must be established before it can be done,. Those who rely on bringing down the price of wages have got bold of the wrong end of the stick. It is the price of money that must coma down, and unlit then we can have no permanent prosperity.