The Guardian And Evening Star, with which is incorporated the West Coast Times. FRIDAY, SEPTEMBER 28, 1928. GOLD AND CREDIT.

Hokitika Guardian, 28 September 1928, Page 4

The Guardian And Evening Star, with which is incorporated the West Coast Times. FRIDAY, SEPTEMBER 28, 1928. GOLD AND CREDIT.

Pursuing the subject of the credit situation. as affected by bullion reserves, it will be interesting to study the explanation given by the American financial expert quoted before on the special function and uses of gold reserves. As a banking authority himself he is able to say that every banker knows that it does make a difference whether gold is coining in or. going out, for he knows that his own lending power depends upon his reserves and that the aggregate amount of hank credit which can be outstanding in this country depends upon the system’s aggregate holdings of gold. A great part of the discussion which is current upon the subject of credit stringency, and particularly upon stock exchange loans, is very much beside the mark. Much testimony is offered to the effect that brokers’ loans do not bear an undue ratio to the value of the securities pledged for them. This is important of course, in its way, but the question at the moment is not one for security. but of reserves.

Much is said of the rapidly growing wealth of America, and what this means for its important corporations in the future. All of this may be admit--1 ted, and there is nothing to prevent anybody from discounting the future as far ahead as he wants"to, providing he is able to, but without using bank credit; but the lending power of the banks is limited by legal reserve requirements. Perhaps 90 per cent, of the talk about credit restriction would be eliminated if it would be generally understood that the member banks are constantly up to the limit of their reserves. The banking resources of America are ample for all banking purposes but this does not signify that the banks are able to supply all the credit that might be justified by the aggregate wealth of the United States. The founders of the Reserves system thought it prudent to limit the expansion of bank credit by requiring a certain percentage of reserve to be maintained in the Reserve Banks against all deposit liabilities, and loans cannot be increased without increasing deposit liabilities. During all of the years in which our gold reserves have been increasing credit has been abundant and cheap. The Reserve banks have had little control over it, for tlieir control only begins when tlie member banks apply for Reserve aid. Nobody can control the money market when supply exceeds demand, as it did in those years. The excess above the needs of industry and trade naturally flowed into the securities market and promoted the great advance of prices. It will help to an undersanding of conditions in the security market to realize that the funds which are coming to them so freely in the past were surplus funds, not needed in trade, and that the supply of thei.se lias been cut ofF. This of course does not signify the end of all things, but only the end of abnormal conditions. We will continue to have industry and trade, and savings and profits will make a market for securities in a normal way, but the exhilarating effects from time to time of having 10,000,000, dollars of gold create 100.000,000 of purchasing power for the market will he missing. That is not the normal manner of wealth creation, and we are getting back to routine business. It is very intriguing to have this explanation of the position in the United States where wealth is supposed to flow so readily. Tt clearly indicates that abnormal times are passing and a stringency in regard to trading will be felt, because there will he no less credit to operate on. The real factor in the position is that other countries which were buying from America and sending over their gold, are not doing so now to the same extent. Thov are recouperating and their own industry is recovering, and their trade is creating a more healthy condition of affairs in their own lands. Tbs growth of trade will have a rapidly .multiplying effect for it means more credit internally with monetary facilities to expand, and that is exactly what is happening,

notably in England, which was such a good customer to the States for so long. The trading tables are turning and while a stringency seems to loom in the distance of the States, England has a more brighter outlook, which will be the subject for further reference to this matter later.