BANKS AND CREDIT

New Zealand Herald, Volume LXXII, Issue 22056, 12 March 1935, Page 5

BANKS AND CREDIT

LIMITATIONS IN PRACTICE THE USE OF DEPOSITS The question of whether or not banks create credit was discussed by the chairman of Lloyd's Bank, Mr. J. Beaumont Pease, at the annual meeting in London. "There is a great deal of loose talk about 'idle money in the hands of the banks', and 'bankers' resources,' as if the funds were their own property and were being improperly or inadequately Used," he said. "The resources ( in bankers' hands, with the exception of their capital, are the result entirely of -the deposits left . in their safe keeping by the public, and their first duty is to see that these deposits are so employed that there can be no difficulty in refunding them to the rightful owners, the depositors, when called upon to do so. . "This simple fact has been wilfully or ignorantly made obscure by laying an altogether misleading exaggeration on the maxim, 'every loan creates a deposit,' and from that maxim, which is only partially true, drawing the conclusion that at any time, if a banker is short of money or if trade requires more help than he can give, it is in his power, by making a loan 'out of the air' and thus creatine a new deposit, to meet the demand."

Mr. Pease illustrated his remarks with the example of a banker starting business with the minimum requirements of cash for daily outgoings and fortified by investment of some capital in gilt-edged securities. "If the first customer happens to be one seeking an advance, and if all the embryo banker's resources are employed as stated, he has no means at his disposal for granting the accommodation required, and the maxim that everv loan produces a deposit will be of very little help or consolation to him," Mr. Vease said. "If, on the other hand, the first customer is a depositor, the banker retains in cash 10 per cent of the amount received, ready to meet any likely calls for repayment, and then has a balance of 90 per cent available for loans if he is prepared to use the whole of the balance for this purpose. To go a step further, if his borrowing customer can assure the bankor that he is paying the proceeds of the loan to a man who will re-deposit the amount with the same banker, the latter will be in a position to continue the process of making further loans to the extent of a possible 90 per cent of the deposit. "This illustration is sufficient to show the limitation in actual working of the truth of the maxim that every loan creates a deposit, and demonstrates that a banker is no more able than anyone else to create something out of nothing, and that the stock in trpde with which he works is the deposits of his customers."