A PLUS B THEORY

New Zealand Herald, Volume LXX, Issue 21468, 17 April 1933, Page 12

A PLUS B THEORY

Sir, —If cancellation of an advance does not destroy purchasing power, as Mr. Johnstone states, an advance is not purchasing power. Bank advances shown in statistics are "dead," because they are not so shown until cheques are drawn to their total; cheques cannot be drawn twice against the same advance. The cheques then figure in deposits, and, as deposits, are potential purchasing power. If a trader is allowed £SO and draws it, when he repays the overdraft he must collect cheques on notes from others and send these to the bank, thus reducing deposits somewhere to cancel his overdraft. The top limit of advances, that is to say, the top limit to which cheques can be issued, is decided by the legal restrictions on note issue, it is the sum which would call for as many notes as the bank's resources in gold and/or Government securities, where allowed to take the place of gold, would permit of issue. Mr. Johnstone's farmer who "bought" cattle did not create them, he was merely the transferee, and consequently money is only transferred, so the illustration is useless. Depreciation which appears only as book entries is duly charged into goods, despite Mr. Johnstone's denial. If the banks' reserves, are extra advances, as Mr. Johnstone asserts, and if they did not come from the general public's allowance, the additional money would appear somewhere, for Mr. Johnstone now agrees that advances create deposits and denies that cancellation of advances destroys purchasing power. An examination of bank figures should help. Independent of 23 millions increased capital and reserves, Mr. Johnstone's banking returns must show increases. But bank advances in 1920 were about as high as they are to-rday. A. E. Robinson.