The Banking System

Hawke's Bay Tribune, Volume XXV, Issue 79, 16 March 1935, Page 6

The Banking System

(To the Editor). Sir, —With the apparent aim of destroying the public confidence in British banking an active irnti-bank campaign is going on in New Zealand backed by misunderstanding of the system and by not a little deliberate misrepresentation. No one familiar with the system would be influenced by this attack, but many people maybe misled with disastrous results to the public unless the true position is stated. Two main charges are made against the system, namely that “every loan creates a deposit (which is true to a limited extent), therefore a bank, if short of money, can create deposits, to meet the demand, bymaking advances “out of nothing.’’ This is such sheer nonsense that contradiction seems superfluous. The chairman of Lloyds Bank recently- explained the true position he said: “No one would talk like this if he had had any practical experience of banking, or if he had ever started a bank. I.et us picture the exact procedure. Having established himself in premises with the help of the capital lie put up, and supplied with the minimum requirements of cash in the till for daily outgoings, and fortified by some further investment of capital in gift-edged securities, he sits down and waits for customers. If the first customer happens to be one seeking an I advance, and if all the embryo bank- ' er’s resources are-employed as stated i above, he has no means at his disposal | for g’-.uiting the accommodation re, i quired. and the maxim that every loan [ produces a deposit will bo of verv little I help or consolation to him. If. on the other hand the first customer is a de positor. the banker retains in cash 10 per cent, of the amount received, ready to meet anv likely calls for repayment, and thin has a balance of 90 per cent, available for loans if he is prepared to ] use the whole of the balance for this I purpose. “To go a step further, if his borrowI Ing customer can assure the banker that he t? paying the proceed? of the

loan to a man who will re-deposit the amount with the same banker, the latter will be in a position to continue the process of making further loans to the extent of a possible 90 per cent, of the deposit. This simple illustration is sufficient to show the limitation in actual working of the truth of the maxim that every loan creates a deposit, and demonstrates the undeniable fact, if such proof were required, that a banker is no more able than anyone else to create something out of nothing.”—Yours, etc., N.Z. WELFARE LEAGUE. Wellington, March 13.