BANKING PRACTICE

New Zealand Herald, Volume LXX, Issue 21596, 14 September 1933, Page 12

BANKING PRACTICE

Sir,—A great, deal of confusion exists in the mind of the average person regarding banking and its relationship to goods through the medium of the monetary system. Surely, therefore, it is desirable that any explanation of the system should be couched in simple form. Mr. Sexton's little witticism relating to droves of sheep and loads or bricks passing through a. bank is not helpful. He must realise that I did not intend the use of the word "goods" to be taken in its literal sense. It merely served to illustrate the'•preceding passage which Mr. Sexton ignores. Mr. J. Johnstone has given an apt illustration of the relationship between the transfer of goods and hank entries in his letter of September 6 to which I would refer Mr. Sexton. I was referring to commercial banks when I asked Mr. Sexton if he knew of any bank having commenced business by granting over? drafts without first of all having received deposits.. Mr. Sexton replies* that the Commonwealth Bank started business without any capital, the preliminary expenses being advanced out of the Consolidated Revenue Fund of the Australian Commonwealth Government, Granted. I would add that the Australian Commonwealth virtually gave the bank ?n open cheque as it held itself responsible for the liabilities of the bank, behind which was the whole credit of the Commonwealth. However, the point is, can Mr. Sexton prove that the Commonwealth Bank made a loart before it received a deposit? I would suggest that immediately upon the bank commencing business the accounts of the Commonwealth Government, and probably also some ot the State Government's accounts, were transferred to it from the trading banks, and that thereafter ordinary deposit accounts were being opened and loans made simultaneously. The Commonwealth Bank is functioning in the nature of a Central Reserve and Savings Bank, and it does, not seek ordinary banking business, although it docs a certain amount. Will Mr. Sexton clinch his argument .by illustrating how banks manage to make loans without first of all having deposits? Also, why should it be necessary for a bank to close because of a run on it by the depositors, whose money sis locked up in advances, if the theory is correct that a bank does not need to have deposits with which to make loans and that the banks own all the money/ Actually, the banks are owned by their shareholders, and all they have a claim to is their own funds in the bank. Mr. Sexton has asserted that banks can and do create and destroy money, or credit, and that this power must be taken out of their hands and placed under the control of a National Credit Board. I would suggest that credit is governed by prices over which banks have no control, and that when .prices fall, monev, or credit, is not destroyed, but lies dormant until suoh time as required through a rise in prices. Does Mr. Sexton consider that banks retuse to grant credit •, without justification, • and if so, how? Just for once, leavecthe "authorities" out of it, because carefully chosen passages from here \ and there merely to support an argument is apt M 6 be misleading, and we want to arrive at correct conclusions rather than win an argumentFairfwy.