DO BANKS LEND DEPOSITS?

Press, Volume LXIX, Issue 20918, 27 July 1933, Page 15

DO BANKS LEND DEPOSITS?

to nrr editor Of tip; cjie-s. Sir, —The National Bank of Australasia, Ltd., in its June circular, published in Monday's is:,ue of "The Press,' attacks the criticism which is being directed at the system of banking. In doing so it makes some ama7ing assertions which can have no other object but to deceive the public. No one will dispute the statement that "It is a fact that a prosperous country means a prosperous banking system": but the converse is not necessarily a fact. At the present time the banks are prosperous, but are the countries so? True the banks are not so prosperous as they were, but it is their own fault for taking so much money on fixed deposit. Of course were they to refuse to pay interest it would be much more difficult to maintain the delusion that banks lend deposits. So ingrained is this idea that even bank officials believe it. I have met them. I have also met experienced business men who believed it. Banks will refuse to release a fixed deposit before the due date because it is supposed to be lent out. But at the same time they will offer to allow the owner to draw on overdraft against it. If the fixed deposit is not available because it has been lent out, where does the money for the overdraft come from? I have known the ov/ner of bank shares ask the bank for an overdraft against its own shares. Horror of horrors! It could ncrt be done without calling in an overdraft, as its capital was lent out. But rqther than see a client go to another bank for the loan they gave him an overdraft on his own note of hand as security. Naturally if the head office saw that he transferred his shares, the loan would have immediately been called up. The English system of advances described in the circular might help to keep up the illusion, as an account opened with n credit looks as if the bank gets the money from somewhere. However, the circular admits that the loan creates a deposit. Jt did not mention the other account, that is opened with a debit of a like amount to the customer. On the first day the two accounts balance in the one bank, but thereafter deposits and advances balance in the banking system as a whole. In its effect there is no difference between the English and Colonial system. In Brilain no exchange is charged between branches which is an offset against the system of charging interest on what is equivalent to the limit of the loan A study of Bank of England weekly returns should settle the argument whether banks lend their depositors' money. On the basis of ™ theory we should expect to see r r ,f J n A ho fort night from July 6to 7,'y 5, the advances increased bv £12,008,485, as they did, that the doposits decreased by that amount. As a matter of fact the deposits increased vl? u' 4Bs ' Go)d increased by £968, which was paid for with notes Finally, there is all the difference between bank credit and tradesman's credit. The bank is potentially the owner of the borrower's assets. The tradesman has no security for the credit he allows his customers and often he has to whistle for it in vuin —Yours, etc..

Y , W. B. BRAY. July 25, 1933.