CURRENCY AND LABOUR

Hauraki Plains Gazette, Volume VLI, Issue 3420, 16 December 1935, Page 6

CURRENCY AND LABOUR

THE BANKERS’ VIEWPOINT LIMITATION OF LOANS (By H.C.J.) Every prudent person knows that there are limits to which he can go in lending his goods or money to others. The first thing that he must guard against is leaving himself short of ready goods or cash. This same safeguard applies equally to a banker. Whenever a banker makes a loan, he has to make sure that he has enough ready cash to meet possible emergencies. A bank loan creates deposits, but it does not follow that a bank can replenish its cash supplies simply by granting loans Jo its customers. The article on Banking in the Encyclopaedia Britannica puts the matter in this way: “If the bank increases its lending the tendency will be for the debits at the clearing to exceed the credits. The bank’s cash will be diminished and to reinforce its reserves it must realise some of its liquid assets. To that extent, it loses the profit on its additional lending, and at the same time its position will be weakened.” What is meant by “debits at the clearing exceeding the credits” is that when the banks come to settle between themselves the bank which has increased its advances will find more cheques issued against itself by its customers than are issued in favour of its customers and deposited by them, and, in consequence, the lending bank will be called upon to make a settlement with the other trading banks. The other trading banks will not be satisfied for this purpose with a cheque drawn by a bank on itself. The competing banks will want cheques drawn on the Reserve Bank.

Pursuing the subject further, the Encyclopaedia proceeds: “On the other hand, if all the banks in the community are increasing their lending to the same proportional extent, no one of them will lose at the clearing, and this check upon them will be inoperative. But there is another check.” This other check is the retention by the receivers of cash of a larger amount in their possession. “The cash holdings of the community will grow and the cash holding of the banks will be reduced.”

In New Zealand, of course, there is yet another check on the banks engaging in over-issues of credit, and that is the extent to which money would be sent abroad. An undue expansion of bank credit in New Zealand, as elsewhere, would lead to uneconomic spending and also to an over-large quantity of imports leading unavoidably to considerable losses by traders and resulting in bankruptcies which would involve the banks themselves in serious losses. The trading banks are aware of this and seek to avoid such a state of affairs arising by applying a timely check on the expansion