BANKS AND TRADE

Nelson Evening Mail, Volume LXVI, 20 April 1934, Page 2

BANKS AND TRADE

NEW ZEALAND POLICY CREDIT LIMITATION STERLING INFLUENCE A survey of banking practice in New Zealand was given to the Parliamentary Monetary Committee by Professor A. If. Toeker, Professor of Economics at Canterbury University College, who dealt in particular with the rela& tionship between deposits and advances and the ability of the banks to extend credit (reports “The Post”).

“A survey of the bank records of the past shows clearly that no close relationship exists between the movements of bank advances and bank deposits in New Zealand,” said Professor Toeker. “When the balance of payments with overseas countries is favourable, deposits increase and advances decrease. When that balance is unfavourable, deposits decrease while advances increase. Bank advances do not necessarily create bank deposits. The best approach to the relationship of advances and deposits is through a bank balance-sheet. The balance-sheet is a device used by accountants to show the distribution of the funds used in a business. On one side of the balancesheet are set out the sources from which various amounts are drawn, and these are described as liabilities. On the other side are set out the channels through which funds are employed, and these arc described as assets. Both sides of the balance-sheet, however, refer to precisely the same funds, the total funds used in the business, and the balance-sheet classifies these funds in accordance with the sources from which they arc drawn and the channels through' which they are employed. Since both sides describe the same funds, the balance-sheet must necessarily balance. Any increase or decrease on one side must therefore lie accompanied by a corresponding increase or decrease on the other.

ADVANCES AND LIABILITIES “An increase in advances, which is one item of the asset group, may therefore be balanced by a corresponding decrease in any other asset on the bal-ance-sheet or by a corresponding increase in any liabilitv on the balancesheet. It is only when all assets and liabilities other than advances or deposits remain the same, that an increase in advances must necessarily be accompanied by an increase in deposits. “In the case of the banks operating in New Zealand their assets and liabilities are distributed between New Zealand, Australia, and Britain. An increase in the assets held in New Zealand may therefore be accompanied by either a decrease in assets or an increase of liabilities held overseas. That is what usually happens. Conversely an increase of liabilities in New Zealand, deposits for instance, is usually accompanied, not by an increase in advances in New Zealand, but by an increase of assets in the form of exchange funds held overseas. It follows that the view commonly advanced that advances and deposits must rise and fall together does not as a rule hold true for New Zealand conditions.

DEPOSITS AND ADVANCES “Over any short period no close relation can be found between changes in advances and deposits in New Zealand. It is seldom true that increased advances mean increasing deposits, or that decreasing advances mean decreasing deposits. Generally deposits are increasing when advances are decreasing and vice versa. Over long periods both deposits and advances expand with the fncreasnig value of production and trade. . . .” Professor Toeker said that bank credit consisted of the total liability undertaken by the banks to find cash when called upon, and the real liability which the banks undertook was to find cash abroad.

EXTENSION OF CREDIT “A bank’s ability to extend credit is therefore limited by its liability to provide sterling, and its deposits must be kept within such limits in relation to exchange reserves held overseas as experience has shown to be safe,” said Profesor Tocker. “It is this relationship that fixes the limits to which banks can Safely extend credit. On the other hand the banks depend largely on advances for their gross income. They are commercial institutions which have to find profits to cover operating expenses, dividends, and expansion of re : serves, and they usually want to advance as much as possible in order to maximise their gross income. But there is another limit on their power of lending, for they cannot normally lend beyond the amount demanded by their customers.

“Marshall says that in every community there is a certain proportion of its wealth and income which the community finds it convenient to hold in the form of .money. This proportion is determined, not by the banks, but by the users of money who are customers of the bank. These customers pledge their credit and obtain bank advances. Customers’ credit in this sense may be regarded as the confidence that bankers have that those customers will fulfil their obligations when due. This confidence may rest on the pledging of assets or on knowledge of the customers’ circumstances, character, and ability. Banhycustomers have to pay for the accommodation given them, and they usually therefore take no more than they can employ to return them something more than cost.

LIMITED BY PROFIT “The demand for credit, therefore, depends on the demand of creditworthy customers, which depends upon the extent to which they can use bankcredit profitably. It is to the banks’ interests to provide as much credit as posible and so augment their own incomes, but their power is limited by their liability to find funds overseas as well as by the limited demands of their customers. The price at which advances are made, that is, the interest rate on overdrafts, is usually determined by the conditions of supply and demand of bank credit. Among those conditions must be included the competition of other forms of credit such as long-term credit. “These are the general conditions governing the volume of bank credit in most countries where banking is highly developed. The special features of the New Zealand system have developed mainly to meet the needs of .the country and the community. The present system appears to he sound, flexible, and very closely interwoven with the economic life of New Zealand. . .

FINANCING OF PRODUCTION “The fact that production has expanded more rapidly than deposits probably means that production is now

financed to a larger extent with longterm credits, as anight be expected with the increased mechanisation of industry. From the fact that advances have increased more rapidly than deposits either of two conclusions may be drawn. First, the banking structure may be sounder because shareholders’ funds bulk larger and deposits smaller in the total liabilities, or second, there may have been a variation in bank practice whereby bank advances bulk larger in the total assets.” Professor Tocker said that it could he sliowar conclusively by official figures that over a period of thirty years bank credit had expanded in rough correspondence with the needs of produc-, tion and trade. “I know of no evidence, statistical or other, to support the view that arbitrary restriction of bank credit has ever been the cause of depression in New Zealand and the view that it has been, does not agree either with bank practice or with the published returns of our monetary system,” said Professor Tocker. “During the period of the present depression, taking figures for the March quarter to avoid seasonal variations, bank deposits fell from £58,200,000 in 1929 to £53,300,000 in 1932, and have increased to £62,300,000 in 1934. Bank advances amounted to £45,200,000 in 1929. £53,200,000 in 1931, £49,500,000 in 1932, and- £40,300,000 in 1934. These figures show that deposits are by no means wholly dependent on advances, and that there is now no scarcity of bank money. There has, however, been a remarkable change in the amount of bank credit in active circulation. Taking March quarters again, in 1929 free deposits were £25,700,000, and in 1932 £ 17,000,000! In March* 1934, they had risen again to £21,600,000. These variations have been due, however, largely to the fact that, under the conditions existing, bank depositors could not use as much of their money profitably in their businesses and they have preferred to place more of it 011 fixed deposit.”