BANKING.

Manawatu Standard, Volume LV, Issue 256, 26 September 1935, Page 6

BANKING.

(To the Editor.)

Sir, —The general manager of the Bank of New Zealand delivered a speech to the Wellington Chamber ot Commerce which we are told is a reply to critics of the banking system. On carefully reading the report of that speech we find that it consists mostly of statements not backed by evidence. Certain statements also are very misleading. The speaker stressed the point that the banks had never refused to lend money, provided the securities were good, and funds available. Surely we are not asked to believe in this enlightened age that the banks merely lend “funds.” It is the function of the banking system to create credit. This is not done by lending “funds” but by book entry entitling the borrower to draw by cheque. In so far as the borrower avails himself of this privilege the deposits in the associated banks swell accordingly. At least seventy-five per cent, of the deposits in the associated banks represent loans to customers and have no tangible existence apart from book entry. He also states, referring to State banking, that it would be disastrous if the people lost faith in the bank. Quite so. But what would happen if there was a run on any bank in New Zealand, not only now but in our most prosperous times ? Merely tins: that the banks could not pay out. Just what the total deposits of the banks are at the present time I cannot say. in 1929 the Post Office Savings Bank held deposits to the amount of £49,000,000, the private savings banks, £9,000,000, and the joint stock banks £52,000,000. And there was only £6,000,000 of legal tender money in New Zealand altogether. It required only a run on one of the banks and all would have been compelled to close their doors. The whole banking system works to-day. as it always did —on the faith of the people. Now, sir, surely the credit of the whole of the people is a greater security than the credit of a few of the people. Will anyone deny that it was the action of the Seddon Government pledging the securities of the people which averted the threatened disaster in 1894, when the Bank of New Zealand was in difficulties?

I’m not suggesting that the banks are not sound or are not run scientifically. The banks like all other institutions were brought into existence to fulfill public requirements and as those requirements changed so the banking system continually evolved to suit the changing requirements. But changing requirements to-day demand that private banking give place to State-owned banking. Will anyone dispute the following facts ? When trade is brisk the banks increase the issue of credit in order to take advantage of the general prosperity. This stimulates the demand for cash and increases the ■ velocity of the circulation of money. As the amount of money in circulation multiplied by the velocity of its circulation equals the amount of trade multiplied by the general level of prices, an increase in the velocity, of circulation through the issue of credit causes prices to rise. ' The result is a boom. When some unforeseen reason, say an increase in production, tends to ease the demand for commodities the banks in order to protect their shareholders reduce the amount of credit, which reduces the velocity of the circulation of money, and we dive from the peak of a boom to the trough of a slump. I’m not suggesting that the slump is caused deliberately. It is the inevitable result of private banking. Tlie real cause of slumps is of course the maldistribution of purchasing power. But one of the remedies must be a State owned banking system which will extend credit in an economic crisis and put the brake on in times of threatened boom. The speaker suggested that a State bank would be made the tool of the people (instrument would be a better word). At present the people are the tools of the banks. Boiled down the difference between private and State banking is simply this: A private bank is run in the interests of the shareholders. A State bank will be run in the interests of the people. The question which the people must ask themselves is this: Are they going to have State banking where the credit will be backed by the industry of the people for the benefit of the people, or are we to continue private banking where the credit is backed by the industry of the people for tlie shareholders’ benefit? Because it is a fact that, while the amount of credit which a bank can issue depends a good deal on the amount of cash reserves; in the final analysis it depends on the industry of the people and the purchasing power of those who buy the commodities produced. —I am, etc., V. A. CHRISTENSEN.