THE BANKING SYSTEM

New Zealand Herald, Volume LXXI, Issue 21855, 18 July 1934, Page 15

THE BANKING SYSTEM

Sir, —Suppose Mr. J. Johnstone is allowed an overdraft of £IOO, and he draws two cheques of £SO, and these are lodged. The overdraft is thereby created. Mr. Johnstone has installed, let us suppose, a milking machine, price £SO, and some new fences, gates and watering facilities, costing also £SO, to improve the carrying capacity of the farm by increased subdivision, and the banker has accepted the farm as security. The banker is now in debt to the maker of the milking machine, and to the suppliers of the fencing, gates and water troughs, and Mr. Johnstone is in debt to the banker. Would Mr. Johnstone agree that at this stage the community has. the use of £IOO more money than previously existed? Presently, Mr. Johnstone, by sales of milk, pigs and calves, recovers from the community £lO2 with which he repays his banker. The banker takes £2 and sets it to his profit and loss account, for interest, and sets the £IOO against the two debits of £SO, thereby cancelling them. Mr. Johnstone's farm is now freed from the lien. Would he agree as to the substantial accuracy of the above description, and to the proposition that the community has now again its original quantity of money? (ignoring the £2 interest for the present). Suppose, however, that Mr. Johnstone, instead of borrowing from a banker, had obtained the loan from a moneylender; the latter's cash would have been depleted by £IOO, and he would have that much less to lend to others. Mr. J. Johnstone's two hypothetical cheques of £SO would be counterbalanced by the reduction of the money-lender's deposit .account by £100; and the community would have neither more nor less money than ifr had before. In the first case the bank creates the money to lend, and destroys it when it is repaid, in the other case nothing is created or destroyed. Drury J. Bat.lantyne.