CREATING MONEY.

Auckland Star, Volume LXVII, Issue 151, 27 June 1936, Page 8

CREATING MONEY.

If trading banks were not lenders, the amount of their deposits and shareholders' capital would equal the amount of legal tender not in circulation amongst the people, and this legal tender would be the sole asset to meet the banks' liability. In making advances banks obtain securities from borrowers and incur a liability to depositors corresponding with the amount of the advances; these securities ensure that the banks \yill be able to meet their liabilities. Deposits, however, resulting from advances, involve a liability to pay legal tender, which can only be furnished from the fund which exists to meet the liability to other depositors and the shareholders. It should here be emphasised that the same legal tender is used for. hundreds of exchanges and repeatedly moves from bank to bank as ordered by cheques, or circulates amongst the people and afterwards returns to the banks in the form of deposits. Over a long period of experience banks have ascertained the average amount of depositors' demands which at any one time can be readilymet by the fund of legal tender, and this knowledge has guided them in deciding upon the volume of their advances, subject, of course, to there being a demand for loans and the borrowers being able to provide satisfactory securities. If, therefore, the average demand for legal tender appears at any time to exceed their estimate, there is a call upon borrowers to reduce their overdrafts. To the extent that depositors agree to postpone their demands and allow their deposits to become "fixed" for a period, the lending ability of the banks is increased; this.ability was also increased by the issue of notes by trading banks, for which they paid the Government 4 J per cent interest on the amount in circulation, in that more tokens were thereby available to meet depositors' demands. The foregoing is intended to be a simple explanation of the extent to which original legal tender liabilities have been affected by bank advances. ANOTHER BARRISTER.