BANKING—AND MYTHICAL CREDIT

Evening Post, Volume CXXIV, Issue 89, 12 October 1937, Page 8

BANKING—AND MYTHICAL CREDIT

(To the Editor.) Sir,—Surely Mr. Langstone, after two years of office", with opportunities for acquiring ,first-hand knowledge, should have displayed a more practical knowledge of monetary matters. The Minister is reported to have said: "If a person went to a store for an article where his credit was good, he took something away. On the other hand, the bank gave nothing to the person 1 who went to such an institution for credit." Well, suppose a customer of the bank obtains an advance of £1000 to purchase a property. What actually has happened? .In exchange for security the bank has advanced its customer the money (which he did not possess himself) to buy the property. But JMr. Langstone says the bank has given nothing! If the sum is withdrawn in notes the bank's asset, "Reserve Bank notes," wsl be .decreased by £1000, and another asset- "Advances." will be increased by £1000. The transaction therefore is simply ah exchange; of assets—a liquid asset for a less liquid one. It is more likely the customer would withdraw the £1000 by cheque, paying that cheque to the seller of the property, who would pay it into his own bank, and ultimately the £1000 would be debited to the lending bank's account with the Reserve .Bank. The lending bank's asset "deposits at the Reserve Bank" will therefore be decreased by £1000. This also is simply an exchange of assets—the liquid for the less liquid one—the lending bank having parted with £1000 of the balance owing to it by the Reserve Bank, and having acquired in exchange therefor a debt of , £1000 owing by the customer. This shows quite clearly that a trading bank gives value to a customer who borrows from it just as much as. does the storekeeper to his customer in the example quoted. The storekeeper must first get his goods from some outside source, so the bank must first obtain its credit from its shareholders or customers. Mr. Langstone denies 'that the banks lend against their fixed deposits, and adds that they create costless credit. If the banks can create credit in the way in which Mr. Langstone suggests, will he explain why the banks seek to obtain fixed deposits and pay interest, on them? If Mr. Langstone will peruse any bank's balance-sheet he will see that'the bulk of the funds provided by current and filced deposit balances are lent to those who can make good use of them, the bank acting in effect as an agent in the matter. Mr. Langstone will also see (if he desires to see) that the Government itself gets a goodly share of the same funds, gs all banks hold large amounts, of Government bonds and stocks purchased with funds supplied by shareholders and customers, and not from mythical credit of the type to. which Mr. Langstone refers, which is of a nature very similar to that discredited ins recent Alberta experiments.—! am, etc.,

SCRUTINY.