THE BANKING SYSTEM

New Zealand Herald, Volume LXXI, Issue 21845, 6 July 1934, Page 15

THE BANKING SYSTEM

Sir, —I am not at all surprised at the fact that no advocate of the theor.y that banks create wealth by book entries has condescended to reply to the queries I put in niv last letter, as 1 have previously failed to get any reply to them. Whenever I got any overdraft from my bankers, I had to pledge real wealth considerably in excess of the overdraft, and that wealth was behind the book entries, as the bond of the people of New Zealand was behind tbe advance made- to the Rural Credits Board. The transaction was founded upon substantial wealth represented by the bond, f now ask another question. \V oukl the supporters of the "book entry" system transfer their own private accounts from an ordinary bank with its share capital, reserves, property and other real wealth to a bank without this wealth, carrying on its business purely by book entries? Avondale. A. Wakburxon.

Sir, —It is doubtless very interesting to read extracts from tlie London Chamber of Commerce journal, and also to learn that Mr. Sexton is "quite certain" that a bank's operations do not represent a purchase and sale of goods, but it would be infinitely more convincing if he would try and deal with the specific instance I gave, instead of quietly ignoring it. Did, or did not, the bank borrow from "B" to lend to "A"? If the bank's transaction had nothing to do with the purchase and sale of the machine, exactly for what is the bank debtor to B? What did the latter do for the bank that it should undertake to pay him £IOOO on demand? If Mr. Sexton can show a fallacy in the inferences I have drawn from these transactions will he put his finger on such fallacies, instead of merely telling us of what lie is "quite certain?" If he cannot, he should do the appropriate thing and candidly admit that his view, that banks give nothing for their loans other than "figure:: in a book," is a mistaken one. Accountant.

Sir, —Bank loans that are fixed in amount, as in English hanking practice, and those on which interest is charged on the daily balances owing, are precisely the same in nature. In all cases the borrower obtains goods or service equal in value to what lie would obtain if borrowing from any other party. The fact that banks neither owned the goods their borrowers have purchased, nor possessed cash sufficient for their purchase, does not affect the soundness of their loans. An auctioneer does not possess the goods he sells, nor has he any need to possess funds sufficient for their purchase. He accepts liability for the. price of the goods the sellers supply, and passes the liability on to the purchasers. The purchaser pays the auctioneer and the auctioneer pays the seller, and the transactions are perfectly sound, though the auctioneer may possess nothing. Similarly when a borrower obtains goods with cheques drawn on overdraft, and the cheques arc deposited by the sellers, the bank accepts liability for the price of the goods and passes the liability on to the borrower. When the loan is repaid, and the deposit is returned, the goods are paid for and the bank retains nothing, apart from interest. It is very incorrect to say that paying with notes costs our banks practically nothing. As bank notes are simply promissory notes, when a bank issues notes it merely promises payment, or borrows from the public. But the public, by levying a tax on bank notes, charge the banks interest on these loans at the rate of 4i per cent. As the banks, in addition to, in this way, paying full interest on their note issues, also back them with idle gold almost equal _ in value to the notes issued, it is obvious that they loso in place of gaining by circulating notes in lieu of gold. As it is evident enough that banks gain nothing from the cheques that are circulated by their customers, the whole case against banks that is grounded on the assumption that they pay with money that costs them nothing, falls to pieces. J- Johnstone.