CREATING MONEY.

Auckland Star, Volume LXVI, Issue 48, 26 February 1935, Page 6

CREATING MONEY.

Mr. McDonald is unfortunate in his lettcT where he cites the Reserve Bank as an instance of a bank "creating money," for the bank's weekly returns give no evidence of this having been done. So far from the bank starting with little capital and no deposits wherewith to conduct its business, it started with half a million from the shareholders and a million from the Government, not merely a "Government guarantee" of that amount. As for deposits, the six trading banks were required by law to deposit with the bank 3 per cent of their own time deposits and 7 per cent of their demand deposits, and the returns show that they did more than this, for their combined deposits with the bank at the end of the first week exceeded fourteen and a half millions. However, what I asked Mr. McDonald, in my letter of the 13th, was to explain precisely what he means by "the power to create money," which expression he used in connection with trading banks, and why,, if they have that power, they pay interest on deposits in order to lend to other clients. CROESUS.