BANKS AND MONEY.

Auckland Star, Volume LXV, Issue 2, 3 January 1934, Page 6

BANKS AND MONEY.

SOCIAL CREDIT ILLUSION. (By E.C.F.I More by condemning the existing state of things than by showing a satisfactory way out, the advocates of social credit have won a following, and they will lose it again as conditions improve. Their movement has flourished in a world of discontent. It has gathered around it those who believed its roseate promises that prosperity could be restored by the issue of money, that the problem w-as a financial one, and that it could all be put right by a change in the money system. What they were really led to believe was that a double change was needed—that there should be a large increase in the supply of money, and that the control of it should be taken out of the hands of bankers and financiers and placed in the hands of the State. For those who did not understand the working of the banking system, -and particularly that very important part of it which was concerned with the use of cheques, the 'arguments which Douglas and his followers used seemed plausible enough.

Under the searching eye of one who is well acquainted with the affairs of the banking, industrial and commercial worlds, however, the Douglas illusion falls to the ground. The examination of the ens© for social credit by Mr, F. J, Docker,* therefore, serves a valuable need' in unmasking the fallacies underlying these proposals. Here every phase of the Douglas argument is dealt with in a way that can be followed by the untrained mind. 'More than this, the explanation of banking methods and the control of credit is so clear and straightforward that anyone can follow it. The limits on the issue of credit by the banks are plainly shown, and there is a vigorous reply to the Douglas contention that any expansion or contraction is at the whim of the banker. To say that credit can bo issued in unlimited quantities is to betray an ignorance of the facts which is typical of social credit dogmas, and one needs merely to contrast the .situation in the United States with that in Britain, in the past few years to show what becomes of a banker who believes that he can overstep the bounds of safety. Bankruptcy is the inevitable result, and bank failures form a trail of wreckage in the recent experience of the United States. Credit is not something which can be blown up like a balloon or contracted with equal ease; it is related strictly to the resources which bankers possess. 'When they lend or give credit they must keep an eye upon the funds on which they draw. Long experience has taught them what is the safe limit, and beyond this no prudent banker will go. But it would be folly for him to refuse to lend, on good security when he was within this margin of safety, for he would then be allowing his resources to lie idle, and his profits would be smaller.

In normal times new lending by the banks corresponds roughly with the amount of cancelled loans, and it is interesting to follow Mr. Docker's explanation of how the balance is maintained, and why there is a contraction in a time of depression. He shows what the elTect is if money goes into "hiding," is accumulated by depositors in the form of bank [deposits or is invested, and he leaves the impression that a.s this money comes back into ordinary use Douglas and his supporters Iwill be somewhat at a lo*s to reconcile their A plus B theory with the improvement in economic conditions. Tin's much-discussed theory receives the treatment it deserves at the hands of Mr. Docker, and it becomes a sorry-looking scapegoat. Douglas ha.s shut his eyes to a vital factor affecting prices, and every effort to make him see it appears to be in vain. He is utterly blind to the influence of the velocity of circulation of money —that nigarer in the monetary woodpile—but Mr. Docker has draped it to the firont. As Irving Fisher has said, the price-problem of to-day is two-thirds a question of velocity and only one-third a question of the quantity of money. |

*''Douglas. Delusions : A'Critical Examination of tho Di>uf.'his Credit Proposals." by V. J. Docker, Assoc. Inst. Chartered Accountnnts (.4ust.). (Angus and Robertson.)