The Pamphlet Collection of Sir Robert Stout: Volume 70
Rates of Interest on Loans to Settlers and the Effects
Rates of Interest on Loans to Settlers and the Effects.
When we last met I touched on the rate of interest, and reminded you that about seventy-five per cent, of the holdings were mortgaged. I had much left to say on the subject, which I consider of more importance than any other to the New Zealand settler. The amount of money borrowed privately is about, say, £40,000,000. Now, if we assume that the rate of interest is 7½ per cent., there would be paid in interest £3,000,000. Suppose that by Government aid or otherwise this was reduced to 5 per cent., there would be an annual saving to the working settlers of £1,000,000 paid to lenders. This saving would be equal to more than the profit on all the agricultural produce sent out of the country. The question is a national one, of equal importance to the progress of the country, to the borrower, and to the man working for wages. The settler as a rule lays out all the money he gets in improving and making the country more productive. The sum of £1,000,000 a year saved in interest to the settler would be the means of employing over 12,000 additional men at £80 per annum—a perfect army which would convert half a million acres of bush to grass annually, and as the operations of the settlers enlarged the saving and general results would be increased in proportion. We have become so accustomed to these exorbitant rates of interest that the Government rent on what are called perpetual leases of 5 per cent, on the capital value seems quite an easy charge in comparison—and yet an English landlord in the best times never looked for more than 2½ per cent, as rent on the capital value of his property; and now it is much less, in fact about 2 per cent. After coming about 18,000 miles over sea, we have to pay on "perpetual lease" more than twice as much rent as an English landlord would get on the capital value of his property. This does not sound liberal on the part of the State landlord of this colony. Twenty years ago I obtained money in England at a rate that made me pay 5 per cent, in the colony. I wanted to borrow £4000, and within a month there was about £200,000 placed at my disposal, and only one of these lenders was even a connection or known to me previously. It ended by there being three deeds drawn up, by which, should the first lender wish to withdraw, the second or third would page 12 make the loan. So little did the English lender understand high rates of interest that a higher rate than this would induce suspicion of the the value of the security. It has been objected that for a Government to arrange loans to settlers on freehold or other security would give that Government too much power. I can only say that either the Government or individual that brought about a general rate of 5 per cent, would have done more for the colony than any Government or individual has done in the past, and would have earned a right to power. Railway schemes may or may not pay; the introduction of more people to share the land and work may or may not be desirable; but there would be little objection to making it illegal to exact more than 5 per cent, on new advances made on freehold security. I believe that in the United States it is illegal to charge on any transaction over a certain rate; in many States the limit is 6 per cent. In England the landlord's rent is about 2 per cent, on the value of the land, and the farmer's profit on his capital about 6 or 7 per cent., or together about 8 or 9 per cent., and the highest rate on mortgage of agricultural freehold is 4 per cent. Here the landlord and farmer are combined, and if he earns about 10 to 12 per cent., a corresponding rale on mortgage would be 5 per cent. As I said at our last meeting, the money-lenders had in the past too large a share of the profits. No wonder that it had been often considered better to hold a mortgage on properties than to nominally own the properties. Even large accounts had in the last year or two been charged 10 per cent, where the lending company had the power to abuse its position by doing so. I know of one account where the difference between 5 and 10 per cent. meant about £3600 per annum. It might be said that capital would be cent to Australia and to other colonies where a higher rate of interest was obtainable; but, as a whole, Australian and other such securities were of a more speculative nature—little on freehold, much on stock and growing clips of wool, subject to heavy risks and losses from drought, floods, disease of stock, loss of crops, &c. The lender who preferred a solid freehold security, and moderate interest, would leave his money here. Here the capacity of the land under English grass is now ascertained. The climate is singularly free from extremes, and stock probably more free from disease or risk than in any country in the world. Much damage has been done to the credit of the colony by these high rates of interest. The rule has been to advance to two-thirds of the value of the property at a rate of interest which, on a good going concern, barely left the ostensible owner a page 18 living, and on less paying concerns has ruined thousands that should have been prosperous settlers, thus getting the Colony a bad name. This ruin has not been limited to any particular class. Among the runholders who occupied the coast line from Napier to Wellington in 1857, hardly one pulled through, and these had the interest reduced by private lenders to 5 per cent. This had not even the effect of distributing the land among more people, but natural increase would do that. These holdings were still of the same size, or in many cases several had been thrown into one holding. I will give one case. Not more than fifteen or twenty miles south of Napier on the coast-line there is a block of about 50,000 acres of the finest land in the province that was held in six runs of about equal size. The owners had been working men chiefly—a baker, a plumber, a gardener, a sailor, a potter; the sixth was of a different class, but well acquainted with stock management. All these men had been long enough on stations to know what they were about with stock. I was acquainted with them all. They were quite in earnest, frugal and industrious, but the money-lender got them all out in a few years without a shilling, and then sold the places at a profit. I know of another block in this province where, the ten original runholders being ruined, the ten places were made into one. The greed of some of these money-lenders is such that nothing short of the complete ruin of the borrower will satisfy them. There are far more failures now than there should be among the occupiers of smaller holdings, failures that there would not be if the people got the money at reasonable rates, the small landholders being specially singled out for a higher rate of interest, "because it was a small amount." As the borrower has to pay the legal expenses, this does not seem a very good reason to the borrower. This class had generally to pay from 8 to 10 per cent. Among these lenders there are, of course, many conscientious and honourable men who have dealt leniently, and in many cases have been the means of carrying their clients through great difficulties to fortune—notably the late Mr Tollemache. On the other hand, there are corporations and lenders before whom Shylock is a philanthropist—people who, not satisfied to take the blood needed in securing their pound of flesh, but take the whole body if they can get it, and will stop at no deceit or breach of faith to attain their end. Shylock was not allowed to take any blood with his pound of flesh, and therefore our modern lawmakers are scarcely as equal to the situation as those of Shylock's time. A private lender may have to call in a loan from many circum- page 14 stances that should not be allowed to be an excuse for a company or bank that professes to make a business of lending money on property In old countries a fresh loan on a property that was paying the interest would be easily got to replace a loan called in. It is not so here, where money is scarce, and the obtaining money to replace loans uncertain, particularly for large amounts. It places it in the power of a dishonest company or lender to make this the excuse and opportunity to seize on a desirable property. There are plenty of instances. Protective law is wanted for the borrower. Take a case of this kind: A property is worth say £60,000, and a company holds a mortgage of £40,000, the property is paying 9 per cent, on the total value, or £5,400 per annum. The interest on the mortgage is at 8 per cent., or £3,200, leaving a margin of £2,200. The company calls in the loan at a time that there may be neither buyer nor lender available for a few years. Meanwhile the company, besides turning the man out of his property, which should be only tolerated in the most extreme cases, deprived him of £20,000, and these people generally put it out of the borrower's power to redeem the property. Millions of acres are in the hands of these people, wrested from useful settlers in such manner, or from their inability to pay these high rates. Three of those lending corporations still hold something like two million acres obtained in this way—about one-twentieth part of the whole available area of the colony, and the largest proportion of all the properties they had advanced on had come into their hands by foreclosing mortgages. And this was in addition to the enormous area of foreclosed mortgages these three companies had already sold. If three leading companies alone had foreclosed to such an extent, some idea might be formed of the proportion that the total foreclosures by all lenders bore to the total area of the country. How much had escaped? Was this not wholesale robbery? These settlers had been systematically kept going, sometimes for twenty or more years, the lender drawing everything out as interest, and then, when it became sufficiently tempting, the business was finished by seizing the property altogether. Some of those lending companies, with a few good names on the Board of Directors, have lulled into false security both shareholders and borrowers—boards that I am bound to say have characterised the action of some of their managers and officers as so rascally that they should never have been in their employ, but should have been dismissed. Such, companies have been almost as disastrous to their shareholders as to the settlors who were led into accepting loans by promises of page 15 every support and assistance in carrying their undertakings to a successful issue. When the successful issue was arrived at, I know instances where the property was seized on by the company. Men who never had known what it was to have a money engagement unmet, had been, by these promises, made the cause of heavy loss to others, as well as being ruined themselves. The management of some of these companies became an instance of glaring incapacity, fraud, and embezzlement on the part of officials; reckless advances of enormous sums made on worthless properties, and to incapable people. Vast sums advanced for what were, at the best, experiments, and on land speculation instead of for purposes of legitimate settlement, have resulted in huge losses. Properties that were making twice interest have not escaped some of these companies, where, after endless and ruinous losses caused by the interference and caprice of a lending company, and fads of unfit managers and inspectors, a company by a breach of faith and of verbal undertaking has seized on a paying property. Fancy the sort of people who talked of "only a verbal undertaking "! The details of some of these transactions within my own knowledge if made public would be a revelation, their motto being "to make the good pay for the bad." Settlers who had capably and honestly made use of the money they had borrowed, and had fulfilled all or more than they had undertaken to the lender, misled by these promises of continued support, were robbed by underhand means by a company in the endeavour to make good losses caused by the incapacity and embezzlements of officers of the company. There are cases where a lending company has not kept a single undertaking made to a borrower. For instance, I know of a case where one of the largest and finest properties in this country had been kept going for about twentyfour years. At the end of that time the account was solicited and obtained by a lending corporation on pretences that were not correct, to put it mildly, and with promises of every support to a successful issue and protection from inconvenience, &c. Yet within two years of obtaining this account this corporation had taken possession of the property, the owner having been induced to decline offers made elsewhere to pay off the company, and never rested until the owner was got out, although the owner had, by his position and influence, considerably aided in bolstering up the credit of the company. This property was one that was conspicuous for the good quality and moderate cost of the improvements, there being no partial failure whatever, as is not unoften the case even in generally successful properties. The page 16 expenditure was within what was arranged, and many thousands of pounds within the company's written estimate. The borrower had much more than fulfilled his undertakings to the lender. The security had been largely added to by the borrower on terms more than thrice as favourable as usual. There was one-third margin for the advance shown by their own valuation. The clip took a high place for quality and condition; the management was good, careful, and exceptionally experienced in every particular; the property was making twice interest and the income increasing perhaps more rapidly than any similar property in the country. This, instead of being done with intelligent co-operation from the company, had literally to be done in spite of the officers of the company, and after endless and ruinous losses caused by their interference. Yet, with the above result, necessity would be a bad excuse for not keeping such an engagement. What then of such action where there was no necessity? I know, further, that this corporation refused to give any reason for this action, refused to keep any of its own proposals for paying off the debt, and declined any basis and every overture for paying off the debt. At the same time a release was refused, the thing being done as quietly as possible, and certain formalities no doubt observed, being nevertheless a sneaking theft. It was afterwards being worked at a disadvantage under an inspector who tried to make up for want of experience by substituting petty meanness for experienced management. A large and unproductive outlay had been incurred. The first year for the first time in the history of this property the clip was much less than the preceding one. Instead of a heavy increase on each preceding clip as heretofore, the whole income and produce were less. Now the income and produce were less than they would have been under the management of the owner, and some of the most important and costly work a partial failure, the permanent loss and depreciation, which is irremediable, caused by general mismanagement being in two years not less than £16,000. It is only fair to say that in a case such as this, few if any of the shareholders of the company would be aware of the facts, and the directors only partially informed, or supplied with false information. Few shareholders could probably be found to endorse knowingly what amounted to a theft to be enabled to get a better dividend. Although managers and inspectors who had the dealing with the matter might see a tempting way to show a better statement of accounts out of what amounted to stolen income, and evidently considered such action good and smart management, I fancy the ordinary public would consider it page 17 anything but honest management. Now, however a Government might be disposed to abuse its position, it could not rob prosperous settlers to make good losses of interest or advances made by the incapable, unfortunate, or dishonest, not could it deliberately call in money on which stipulated interest was being paid, and so ruin settlers. Even advances for bushfelling would be safe; and there is a precedent in the advances made to farmers for draining in England—a much more speculative venture than bush-felling.