THE DOUGLAS PLAN

Press, Volume LXX, Issue 21116, 17 March 1934, Page 20

THE DOUGLAS PLAN

I TO THE f.OITOB Or THE F*»SS. Sir,—On first reading the chapter on money, credit, and capital, in Mr G. D. H. Cole's The Intelligent Man's Guide Through World Chaos, I was somewhat surprised to find the writer suddenly depart from the level academic style expected from a Reader in Economics in the University of Oxford, and deliver himself as follows: "It is so fatally easy to go stark, staring maci in thinking and talking about money; and those whom the madness grips appear to be fatally incapable of talking sense on any subject." But after following for the last few weeks the discussions on money matters in your columns, one realises that such an outburst has been fully justified by I one side or the other. Can anything be said to help to I remedy this very undesirable state I of things in Christchurch. I think one | of the most useful remarks is contained in a letter by "Terminology," [ where it is suggested that the combatants should have regard to the ! connotation cf the word "create, quite apart from its mere use by authorities. In the classical sense and still in the popular mind, the word carries a fairv touch and lends colour to the idea of making something out of nothing. Would it not be safe to agTee cn two propositions and their necessary conclusion? — (a) The volume of cm: depends on the action of the banker™. (b) The action of the bankers depends on available securities. Hence, the volume of credit depends on available securities. If the word "create," inadequate and misleading as it is, must introduced in a single sentence, let it be ap ':ed' in the above conclusion only, which takes us at any rate a step nearer the "fons et origo." So Lord Melchett preferred to say, in Modern Money: "What creates credit in practical banking is the security of the borrowers." Another point on which both parties in the dispute would do well to clarify their minds is that when they defend or attack the banks they

are not helping practical politics. They are really for or against the existing capitalist system. Unless sufficient concessions can be obtained from the private ownership of wealth, reformers must aim at radical or even revolutionary legislative changes, including, if they wish, alterations in the law as it affects banking practice. In the meantime, shareholders, directors, and employees are lawfully engaged m very responsible work for society as at present constituted. In case readers may wish to classify Mr Cole as an economist. I finish with a quotation from his work already referred to: "It will be found that, m general, German and o'her continental banks have a considerably larger capital of their own in relation to the volume of their transactions than British banks, which operate mainly with their depositors' money."—Yours, etc., VISITOR. March 16, 1934. TO THE IDITOR OF TR» 11ESS. Sir,—Commercial firms and other similar institutions have in themselves no power to create credit or money; the only power they have is to perform the transfer, by way of loan, etc., of money already in existence to someone else. They cannot increase the amount of money already in existence,. Now please note what the Encyclopaedia Britannica, fourteenth edition, under the heading Banking and Credit, says: „ . . . , "Banks create credit. It is a mistake to suppose that bank credit is created to any important extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in the community." . Perhaps critics will object and say that such a quotation is worthless without the full text from which it is taken. They may rest assured that to add the whole chapter would not alter the meaning one iota. Again, there are £11,000,000 approximately, of tangible money, gold, silver, copper, notes, in New Zealand; and vet according to the quarterly returns about £50,000,000 is on deposit in the banks. How is this increase of credit to be explained unless we take the experts' assurance that banks can and do create credit? "The Village Idiot" says, 'May I state the case from my point of view?" But the trouble is that his point of view about bank credits, deposits, etc., does not in any case agree with the authorities' point of view. Says "Aristotle": "If a person has adequate security he can obtain the equivalent value in the form of bank credit, if he wishes. The banks do not create credit from nowhere." Let me assure him as one who knows from experience that it is not so simple as he appears to think to obtain "equivalent bank credit" with adequate security. Furthermore, the "equivalent value' created by the obliging banker has no real relationship whatever with the security offered. Take, for instance, the Hatry frauds and more recently, the Stavisky swindles in France. In both these cases bank credits or "equivalent values," as "Aristotle" would say, were created against worthless securities or sometimes none at all. The real value of the bank credits so created rested on the ability of the community generally to provide goods and services. The credits were just as valuable, allegedly issued "against" worthless securities, as they presumably would have been against good ones. It is the community's ability to provide goods and services which gives the credit its value, not the security pledged. Even from the bank's point of view a security is not essential to a loan. A leading banker, Dr. Walter Leaf, formerly chairman of the Westminster bank, admitted that nearly 30 per cent, of bank loans were unsecured.—Yours, etc., G.O.C. March 16, 1934.

TO TUT. *DITOR OF THE MESS. Sir.—Through error somewhere, £150,000,000 appears in my letter of Thursday where £1,500,000,000 was intended. The correct figures are £1,500,000,000 deposits, and £285,000,000 cash resources of the five large English trading banks in 1919. This mistake has caused "Alpha" to "utter a deal of breath." The subject under discussion seems to have shifted from the question of creation of credit to that of lending deposits. The latter does not seem to be of vital importance to the issue. Accepted authorities say banks create money. "Alpha" and various others stoutly repudiate this statement. They, however, have not so far given any indication of admission or denial of an increase of money a£ a basis of the war debts, and, if increase is admitted, of the process. The subject of overdrafts has evoked some withering contempt. lam informed that under English practice the granting of an overdraft effects a credit in the customer's account; the New Zealand practice is otherwise. It should be apparent to our critics that the overdraft does not exist until a cheque is drawn, and that this cheque simultaneously makes the overdraft and a deposit.—Yours, etc., Q.E.D. March 16. 1934.