BANKS AND CREDIT.

Evening Star, Issue 22136, 17 September 1935, Page 5

BANKS AND CREDIT.

TO THE EDITOIt. Sir, —“ Libra’s ” letter is the finest mix-up that'has graced your columns for some time. The learned “ Libra,” whose writings we are asked to read intelligently, mark carefully, learn diligently, and digest carefully, falls down to “ its ” and “ why.” There is nothing whatever constructive, nor is there proof in any shape that the socalled absurd statements are absurd. Does “Libra” arrogate to himself the sole right of thought on this subject? Is it not possible that the obscure professors may be on the right lines? Mi JVM. Keynes, by no means an obscure person, reported to the War Cabinet that Britain would be bankrupt by March, 1916. Still we carried on the war till 1918, and Britain is not bankrupt yet. During those same years. 1914-18, goods were sold to the public at one-sixth their apparent financial cost, and no one lost money over it at the time. Let “ Libra” read page 2of the first report of the Committee on Currency and Foreign Exchanges, 1918, and he will learn, if he is diligent and intelligent, how this was done. I would advise “ Libra ” to forget grandfather’s style and thoughts, step into line with the youth of New Zealand, apply his suggestions regarding intelligence, etc., to himself, or he will be left out in the cold.—l am, etc., Mac. September 17.

TO THE EDITOR. Sir, —On Friday last you published a letter on ‘ Banks and Credit ’ from “Youth Groh|) Study, New Economics.” While it is pleasing to see young people taking an interest in pre-sent-day problems it is a pity to see them start off ou an unsound basis. While I am not a banker nor a shareholder in any bank my business experience prevents me from accepting the dictum of Professor Soddy as to tho functions and operations of banks. No man of any practical financial or business experience would make such statements as this theoretical professor does. May 1, in the most friendly way, suggest to the Youth Group that it gives more study_ to the operations of banks, and so avoid building its studies on a wrong foundation? Among a class of inexperienced people it has become the custom to blame the banks for all our troubles, but a little investigation will show that banks are only a part of our economic machine, and the whole is always greater than a part. To bring the matter down to- something concrete, and in order to help the Youth Group in its studies, I am enclosing a recent balance sheet of a bank, and shall be glad if you will forward this to your correspondent for its consideration. This balance sheet is certified as being a true and correct view of the state of the bank’s affairs and may be accepted as such. The balance sheet shows that this bank held about 33 millions of deposits, and it will be admitted that these deposits belonged to the people who had placed them with the bank. The bank admits that it owes the amount of these deposits, and where they came from

originally docs not matter in the meantime. In addition to the liability to depositors of about 33 millions this bankhad shareholders’ funds (capital, reserve fund, etc.) amounting to about 11 millions, making a total liability to depositors and shareholders of about 44 millions. The assets, comprising investments, advances, etc., are shown at about 49J millions, but after deducting from this amount a sum of about four and a-half millions Giving by the bank to sundry creditors the net assets are about 44 millions, the same total as the liabilities to depositors and shareholders. It will thus be seen that if this bank were wound up to-morrow and the assets realised their full value the depositors and shareholders would receive a return of their money. It will also be apparent that there has been no creation of credit which cannot be explained. Does it not seem strange to the Youth Group that Professor Soddy and his like do not persuade their friends to enter into such an easy method of making money as banking. Certainly there are conditions to be complied with, but existing banks have to comply with these and still make the enormous profits which exist in the imagination of so many theorists, A new hank called the “Bank of Imagination,” with Professor Soddy and Major Douglas as copresidents. should be able ito wipe out all other oanks in a short time and so bring in the financial milleniura. As an illustration of the profits made by banks the profit and loss is enlightening. As stated before, the shareholders’ funds 1 invested in this bank amount to about 11 millions, while the net profit for the year was £585,000, equal to a fraction over 5 per cent, on shareholders’ funds. From another point of view the net profit of £585,000 represents less than 2 per cent, on the depositors’ funds of 33 millions, without taking into account the shareholders’ funds of 11 millions at all. This surely proves that there could bo no profit from “ created ” credit. I trust that the above plain and straight-forward statement of the case will give the Youth Group pause for thought, and that it may bo enabled to realise that statements of men lacking practical knowledge and experience should not be accepted as gospel because they appear m a book.—l am, etc., Practical. September 17.

TO THE EDITOR. Sir, —May I ask “ Libra ” to answer the question which the Welfare League and others have dodged? How is it possible to have orer £100,000,000 of bank deposits in the country, when the notes and coins in that same country only amount to £12,000,000? Can the bank lend the same £12,000,000 eight or nine times, and if so does it collect - forest caclYtime it lends? It is possible that “ Libra ” knows more about credit creation than the following authorities, but I should like proof of it. R. G. Hawtrey (‘ The Art of Central Banking ’) : “ When the banks increase their advances they create money, whoever their borrowers may be, and whatever their purpose.” Frederick Soddy, M.A., P.R.S. (‘ Men and Money ’), Hartley Withers, and the ‘ Encyclopaedia Britannica.’ I would suggest that “ Libra study

any of the foregoing and cease displaying his childlike faith in fairies and banks.—l am, etc., Ken, W. Bknnet. September 17.