THE A PLUS B THEORY

New Zealand Herald, Volume LXX, Issue 21457, 3 April 1933, Page 13

THE A PLUS B THEORY

Sir, —Mr. Johnstone's difficulty is that lie does not believe the Macmillan Committee, tho chairman of the Midland Bank, the Encyclopaedia Britaunica and all other first-class authorities on banking, who lay down that every bank advance creates a deposit and that every withdrawal of credit J destroys a deposit. Until Mr. Johnstone grasps this elementary fact of banking we shall be at cross purposes, Mr. Johnstone wishes to make his own rules and frame tho discussion within his own limits. Ho says tho debt repayments havo nothing to do with the question. 1 deny this entirely; they are tho question. When tho leathermaker includes in his charges to tho bootmaker all previous charges, the bootmaker has to pay back to tho leather-maker, who has to pay all but profits back to tho banker (.keep down his overdraft), the bank cancelling more issued credit than the leathermaker had issued in wages. It is at tho bank's option whether such credit is re-issued. Limiting tho question, as Mr. Johnstone wishes, still the increased capital and reserves of banks, which were earned as interest, and wero charged into goods' prices, were withdrawn from purchasing power, only wages and dividends paid by banks being returned as purchasing power by the banks. During the past 10 years 20 million pounds wero so withdrawn. Capital "maintained by depreciation charges" is not purchasing power, it is figures in a factory or bank ledger, but depreciation is charged into costs and paid in prices. Mr. Johnstone says that if capital is. maintained by depreciation charges its volume remains undiminished, no deficiency is created to bo made up by price increases. But depreciation is a cost and goes into prices. Book entries will not pay for goods. Tho bootmaker cannot raid his depreciation account to pay wages. Mr. Johnstone constantly confuses money in figures and purchasing power. Money in a bank ledger is not purchasing power in exercise. Bank deposits aro stone dead, and even advances to-day mostly represent dead stocks of merchandise. If Mr. Johnstone wero right this country would bo in its most prosperous period. It is an admitted fact that purchasing power in tho hands of the people is measurable by the currency, which bears a definite ratio to cheques, and they, not advances, are effective purchasing power. A. E. Robinson.