MONETARY REFORM

Wanganui Chronicle, Volume 77, Issue 131, 5 June 1934, Page 4

MONETARY REFORM

SCHEME FOR NEW ZEALAND ) DOUGLAS PROPOSAL ANALYSED. (By 11. Ive Ford.) (In Point Blank, the official organ of the Farmers’ Union.) It will be remembered that last month I dealt with certain aspects of. Major Douglas’ evidence before the Parliamentary Monetary Committee and pointed out that he had admitted to Mr. J. N. Massey, M.P., that he could offer no assistance to the dairy fanner who was suffering from a cataclysmic fall in overseas prices. As the dairy farmer is not the only member of the primary industries who sends the bulk of his product abroad, it naturally follows that if other primary producers in the same category are receiving low returns for their produce, they too cannot hope for assistance from the Major’s scheme. The admission made to Mr. Massey was most unfortunate indeed, and it is to be hoped that the farmers of New Zealand will “mark, learn and inwardly digest” this unexpected frankness from the monetary Messiah. His admission means in effect that, so long as a great proportion of a produce is sold outside the country, his proposals will not raise the prices of that product to any great extent. Furthermore they are infinitely more dangerous than other schemes for raising price levels, such as the raising of the exchange rate. The admission is most important in view of the fact that over 40 per cent, of New Zealand’s total production is exported and at least 55 per cent, is in the main influenced by overseas prices. In his scheme which he placed before the Parliamentary Monetary Committee, Major Douglas proposed that the banks should write up all their assets, including real estate, furniture and all immovable property appliances to the current market value. Where it was found that the figure at which such assets arc held on the books of the bank for balance-sheet purposes is lower than the market value, an amount equal to the difference should be transferred to a suspense account. A second suspense account should be created by the profits from any source over and above 6 per cent. He recoin- , mended that six months after the en- . actment of these prposals an amount equal to 50 per cent, of the first account should be applied to a reduction - of the overdrafts debited to the cus- j

1 tomers of the bank, such appropria- ’ tions being made pro rata on the basis of the average overdraft of the banks’ customers for a period of three years preceding the date of the enactment of these proposals, and such appropriation of this occount to be made annually thereafter. He proposed that the second suspense account should be used for the reduction or reimbursement of interest paid on overdrafts, his stipulation being that 75 per cent, of the credit in this account should be used for this purpose. The first criticism one would make of this sheme is that the writing up of the assets would weaken the banks as economic institutions, and this is a dangerous procedure dn a time of falling or uncertain prices. Anyone with the faintest spark of business acumen knows that, if there is the slightest danger of uncertainty in the future, is is the quintessence of wisdom to write down asserts as far as possible in order to provide a reserve for contingencies. The failure to carry out this policy was responsible for the critical position in which many of the American banks found themselves after the orgy of speculation -which culminated disastrously in 1929. Furthermore Major Douglas’ proposal would discriminate in favour of the business men who obtained their working capital by means of overdraft, as those who financed their undertaking by means of debentures or in other ways. It would discriminate against businesses with a high proportion of fixed capital, and in favour of weak businesses as against sounder concerns. Surely such a proposal has no rational justification. Let us take the main items in a bank’s balance-sheet. The liability side includes capital, reserves and deposits while'the assets include advances and bank premises. If the banks premises are written up, by say £2,000,000, a suspense account for that amount would be placed on the other side of the ledger. Supposing £1,00.000 of that suspeuce account was used to pay off overdrafts, in the way Major Douglas indicates, then there must be a change in the position of the balancesheet. The position of the bank which carried out such a policy would grow definitely worse. It would be writing up its assets to the full extent and on the strength of these assets would be making gifts to its customers. Surely

no institution could carry on under such a procedure. Under tho Major’s proposals, no bank would be able to make advances, and as the scheme is to be applied to insurance companies as well, there would shortly be no lending institutions in the country. Lending would be reduced to transfers between persons and our financial structure would be of the most primitive nature. Perhaps we could take a couple of further steps backward and return to a state of barter for. as Captain Rushworth maintains, there is no such thing as depression when the exchange of commodities is on a barter basis. The dairy farmer would be scouring the country to find a man who would take 20 pounds of butter for a pair of boots and the sheep farmer would seek for a friendly soul who wanted wool in exchange for a set of motor-car tyres. The scheme proposed for insurance companies is even worse than that recommended for the banks. Major IDouglas suggests that the procedure laid down for the banks shall be applied to the accounts and assets of all insurance companies operating in the Dominion, with the exception that the funds required for the first insurance suspense account shall be provided by discounting the disclosed reserve with the New Zealand Reserve Bank, and that the disposition of the funds shall be as follows: “Fifty per cent, of the amount to the credit of (Insurance) Suspense Account No. 1 shall be applied annually to pay for preference shares or debenture stocks applied for by any natural born New Zealand subject over 21 years of age, to tho extent that application for shares to be paid for by this fund can be met. Such shares shall bo allotted pro rata to the applicants without charge, and shall be registered as non-transferable and as not good security for loans. On the death of a holder, or his permanent residence outside the Dominion such shares shall be cancelled. (Insurance) Suspense Account No. 2 shall be retained as a dividend equalisation fund to ensure that the dividend on all preference and debenture stocks allotted under the preceding clause shall re-

ceive a dividend at the agreed rates. Should this fund increase at a rate exceeding 5 per cent, per annum, such excess shall be allotted to a pro rata increase in the dividend on the preference shares or debenture stocks applied for by the persons entitled to them. If we wish to destroy the banking institutions w r e must take the consequences. If the Douglasites were advocating Socialism, Communism, or some other form of society, one might be able to sec their view point, aild the criicism one would offer would bo from a different angle, but Major Douglas, in the course of his evidence, repeatedly stated that he did not wish to “traverse the tenets of the present system.” His scheme, if put into operation, would transfer the purchasing power from the bank shareholders and insurance company share and policy holders to other individuals, and the transfer would aggravate the disease from which we are suffering. It would actually decrease purchasing power. One quarter of the amount in the second suspense account would be sterilised, and that would mean a decrease of 25 per cent, of purchasing power. Under the insurance scheme the debenture stocks are not transferable, not security for loan, not purc-hasing power, and cannot add to purchasing power but the dividend paid on these is purchasing power. In so far as there is any amount remaining in the insurance suspense account No. 2, that is the dividend equalisation fund, this amount is by that much a decrease in purchasing power. Furthermore Major Douglas has said that this scheme could be extended to all existing assets in t<he country. The more the scheme is extended the more would purchasing, power be destroyed. The insurance scheme and its application to other institutions is therefore wholly deflationary in that it would pav only a part of what would otherwise have been paid out. The transfer of bank dividends over 6 per cent, is similarly deflationary. Therefore the reduction of overdrafts by writing up the book value of assets is not necessarily adding to purchasing power, but probably decreasing it. The only logical conclusion from the proposals and the evidence put forward by Major Douglas is that, quite apart from their arbitrariness, their injustice and irrationality, they would, if put into effect, bring a net decrease of purchasing power and would add to the burden of unemploy- ( ment and reduced incomes. In such a precarious position neither the banks nor the insurance companies could carry on.