LOANS FROM BANK DEPOSITS

Press, Volume XCVI, Issue 28447, 29 November 1957, Page 16

LOANS FROM BANK DEPOSITS

Mr W. B. Owen Replies

To “The Press”

The following letter has been received from Mr W. B. Owen, leader of the New Zealand Social Credit Political League, in reply to a leading article printed yesterday: “I am pleased indeed to clear up the litttle problem which you would seem to have unearthed. The problem of relending the same deposits more than once would be overcome by requiring the trading banks to bank their deposits with the Reserve Bank (except, of course, enough in the form of cash for their day-to-day cash transactions). A perfect example is a savings bank. The Invercargill Savings Bank banks its deposits with the National Bank of New Zealand, and it is from this lump sum that they lend, and this lending is strictly within the limits of the deposits. It is a simple matter of double entry bookkeeping which any accountant could readily demonstrate. “The return of advances to the trading banks does not explain the excess of deposits over advances. The Monetary Commission states clearly that "deposits increase every time a bank grants a loan, and they decrease when a loan is repaid. The excess of deposits over advances is explained in paragraph 161 of the Commission’s report, which says that not only lending but ‘purchase of assets’ increases deposits. “The credit squeeze, over two years, has reduced advances from £180.000,000 to £160.000,000, and yet, as you say, deposits have increased. This is explained in the commission’s report, appendix D. page 342, as follows: ‘The general policy of the banks is to increase investments when they cannot find a sufficient number of borrowers who are acceptable to them, and to reduce their investments when they wish to increase their advances.’

“What a lovely racket, and the Government still has faith in the reserve ratio system and the credit squeeze. It’s heads the banks win and tails the people lose.”

[But does it matter where the trading bank keeps its deposits as long as it is able to lend them? Even savings banks create credit, because they lend money deposited at call. We did not say that deposits at trading banks had increased. Of course, they have fallen with advances. Mr Owen cuts his quotations conveniently short. The paragraph on page 342 to which he refers goes on: “The banks, however, do not possess unlimited powers to create money. A banker, if he is to retain the confidence of depositors, must always be able to pay cash to any of them on demand.” —Ed.. “The Press.”]