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The Pamphlet Collection of Sir Robert Stout: Volume 76

No. II. — The Credit Foncier System of Loan Repayments

No. II.

The Credit Foncier System of Loan Repayments.

The valuable principle set out in my previous article is embodied in the Credit Foncier method of loan repayments, and is applied by Credit Foncier associations to their borrowings as well as to their lendings; a practice which ought to be followed as closely as may be found possible by Governments, municipalities and money lending societies, as one of the best safeguards against bad business, and a most efficient regulator of the currency. The periods of repayments must vary from we month to twelve months or more, according to circumstances. New loans for the planting of orchards, vineyards and land improvements may have to stand unreduced for a fixed term of years, until the investments begin to yield profitable returns, bat after that the periodic repayment should commence forthwith. Under the practice of "fixed loans" the tendency of interest is to rise and swallow up the whole of the profits made by a large proportion of borrowers, depriving them of ability to make provision for repayment of principal, or any part of it, as loans mature. This is a taxi upon industry to which the adoption of the Credit Foncier system would be a whole-some check. The compulsory character of periodic repayments of loans, both principal and interest, would prevent reckless borrowings and usurious lendings, whilst testing the ability of borrowers to meet their obligations right through the course from beginning to end.

Building societies have adopted the gradual repayment system, but very imperfectly. They apply the principle to the repayment of advances made by themselves to borrowers, but not to the repayment of their own borrowings from the public who supply them with loan funds. It is not easy to see how they could have done otherwise without Government assistance, even if they tried, in a community where the system is so unknown and its economic value so little understood. Where Credit Foncier societies are in vogue, and their operations familiar, their credit—which can never be assailed as ours can be under the cruder methods we employ—is such that their bonds are saleable with but slight variations in value, notwithstanding minor temporary fluctuations in the market rate of interest for no purchaser would give much more than par for stock that was liable to be balloted for at any time at face value, and no seller, for the same reason, would accept much less. The essential part of the system must be that the bonds should carry interest comparing favorably with that carried by other sound stocks, with a slight increase to compensate for any inconvenience a bond holder might suffer in having to surrender his scrip and accept payment at short notice. All this goes to give a steadiness to the value of Credit Foncier bonds, which makes them favorite stock for temporary investments, and, when made of small denominations, form an addition to the currency, being as easily changed as a ten pound note.

This enables the directors of Credit Foncier societies to effect another important economy, which forms a special feature of the system when carried out in its integrity, and that is, to make their advances in bonds instead of in cash. Borrowers have to accept the responsibility of selling page 7 the bonds, the issuing society, probably, acting as broker, charging a small commission. The advantage of this is that the society has no idle money on hand the proceeds of a premature sale of bonds for the purpose of providing loan funds, as would have to be the case if advances were to be made in cash, and as soon as a bond is issued the account becomes at once active. Some of the societies have their bonds guaranteed by the State, for which consideration is given, making them marketable at a rate of interest a little more favorable to the societies and their borrowers.

If our Government, at the commencement of lending money to farmers on the Credit Foncier system, had issued its bonds a rate of interest liberal enough to take them at once attractive to investors, the public would by this time have become familiarised with this description of stock, and interest, if at first a little too would have come to adjust itself to a fair market rate, after which every other economy belonging to the system, other things being equal, could come into practical with natural facility. But under the monetary system which prevails other things might not remain equal, for it has to be constantly kept in view in this discussion that every extended use made of a volume of money not elastic enough to expand "pari passu" with the demand for it is like the distribution of an insufficient quantity of water to supply the wants of a increasing population, "losing in depth what it gains in diffusion," as Dr. Chalmers said of the literature of his day. For want if new money to support trade expansion, new demands must either remain unsatisfied, or must be met by an extended use of the volume of money already in existence—amounting to a practical shrinking of the currency, with a proportionate tendency to the lowering of prices. A State bank in touch with a Federal Bank of Issue would meet this case on exactly the same principle as that on which it has been argued that Bute banks in touch with a Federal Bank of Issue could be provided with an elastic currency to support commercial expansion at level prices. In granting loans to farmers, for instance, the Government could make its advances in bonds instead of cash, and enter into arrangements with the State and Federal Banks under which the State Bank could at once purchase the bonds from the borrower, and pay for them in Federal notes, issued on the security of the new business and the guaranty of the State, the state Bank immediately placing the bonds on Change to be taken up by private is restors Savings Bank commissioners as they might feel disposed.

This mode of working the Credit Foncier system in association with the State, in making loans to farmers and to societies formed for the better housing of the people, or in any direction in which the State may have to accept responsibility, would be in complete harmony with the proposed banking and currency reform—indeed, a very necessary part of it—and, whilst promoting public interests of the most important character, would have the following economic effects, proving it to be based on true currency principles:—
(a)Making advances in bonds, instead of in cash, would relieve the Government from having to pay interest on idle money.
(b)The prompt purchase of the bonds by the j State bank would protect borrowers against loss; of time and money in getting their bonds disposed of.
(c)By paying for the bonds in federal notes, the new money necessary to promote the new trade expansion would be found; and
(d)By offering the bonds at once to the public at a studiously fair rate of interest the question would at once be tested whether the new money for the new business was required or not. If the bonds were neglected, it would be evidence that the new money was necessary, as it would be plain that some of the money in existence could only be obtained by competing for it at a high rate of interest. If, on the contrary, the bonds were taken up, it would show that some of the money already in existence was available at a fair late of interest, and that no new money was required.

This would be a sound and perfect currency, which is well tested in other lands where many millions of pounds of people's money are invested in societies which adopt it. If the Labor party here understood but a little of its great value as the most economical of all means for providing the workers with better homes, it would not cease to agitate for it until Government gave it being, not as a Government department, like the Brunswick experiment, but by chartering and assisting a Credit Foncier society to give it effect, and to prevent its administration falling into the hands of politicians.