THE FINANCIAL SPHINX

Otago Daily Times, Issue 21736, 30 August 1932, Page 12

THE FINANCIAL SPHINX

TO TII.IC EDITOR.

Sir, — I observe that your esteemed correspondent " S. D." again honours me with his attention. There is nothing new in his latest effusion, which only confirms my previous impression that " S. D." suffers from an aggravated form of " egoism " —a common malady, only curable by a drastic exposure of the ignor ance that originates this recalcitrant habit " S. D." presumes I have a " set" on the banks and the moneylenders. Nothing could be further from facts. As I am neither a banker nor a moneylender my knowledge of these branches or our economic system must of necessity be derived from other sources than my own experience. It may interest " S. D." and a good many more to learn that my favourite instructor is Mr Reginald M'Kenna, chairman of the Midland Bank, whom I consider the foremost authority on banking and finance in the British Empire, and whose annual "addresses form a model of lucid exposition. I believe Mr M'Kenna to be thoroughly honest and not afraid, to speak his mind when occasions require it. "When I quoted the figures from the

Daily Express stating "there was £2,786,000,000 practically cash in the pocket, which is a saving the British publie does not use fully," I cast no aspersion on the banks. It was simply a statement involving facts. Are the figures correct ? I know that the nearly £3,000,000,000 do not belong to the banks, which at most are only the custodians on behalf of the owners, and, as the banks themselves .supply the figures of the amount deposited, there is no reason for doubting their correctness. That money is in abundance may also, be inferred from the fact of the recent successful conversion in Britain of £2,000,000,000 5 per cent, war loan, now reduced to 3J per cent. This is a feat that could not. have been performed had money not accumulated to that degree that, the Government could issue shortdated Treasury bonds bearing interest at as low a rate of • I per. cent., which gave the opportunity for conversion. Had money been scarce the interest would have been so high, as to prevent-the Govern ment from converting. AH of this shows that the banks furnish the statistical figures from the supply of money deposited with them by the public, * but does, not prove that the banks" can advance unlimited credit for industry. This form of credit must be carefully separated from loans advanced to..the Government, which has the power to raise by taxation the interest that, is payable, whereas in the case of advances for the promotion of industry the source of income is exclusively derived from profit - without the power of increasing it. It is this difference that leads people astray when ■ they say that money was raised .by thousands of millions, for destruction during the war, while now none can be obtained for production, which surely is a far more profitable investment than warfare. The public assumes rightly that the banks have legal authority to issue currency in the form of credit, but-the difference arises when we examine the personality of the borrower >-and the purpose for which the loan is required, and in , New Zealand a stage has been reached where bankers, from motives of self-preservation, are forced to curtail the advancement of loans to an unpleasant degree. It must not be imagined that the. bankers refuse to advance loans. It is by advancing, loans that banks make their profit, especially when bank credit is known to cost them nothing. The risk to the banks lies in getting the loans repaid, for if loans cannot be repaid the banks are unable to meet their obligations to the depositors., Their caution is, therefore, perfectly justifiable.

The actual amount of legal tender in possession of any one bank forms the genesis upon which the volume of credit can be expanded by that bank. Hence all banks have not equal power in advancing credit, and, while money now is more plentiful than ever, it does not follow that legal tender money is equally plentiful to the same degree. This discrepancy in volume between legal currency and the volume of bank credit issued places the banks in a tight corner when the general price level commences to fall. The fall in prices at once contracts profit and places every debtor in a precarious financial position by withdrawing money from circulatory channels and placing it in- the repository custody of the banks. That does not, however, give the banks power to expand credit because the conditions upon which security rests have disappeared and can no longer be obtained by the borrower from profit in business; hence his failure to secure credit. Nevertheless, in spite of this fact, the cause of the disturbance arises from within the sphere of banking, whence the issue of currency legally commences by furnishing credit to, an amount that causes prices to rise without a corresponding volume of production of goods sufficient to check the rising prices and keep them at the equation that prevents inflation. But once this stage is reached and an upward movement in prices commences no power of any bank can arrest the movement, which will run its course until it collapses, forming what is termed the trade cycle. Individual banks have no responsibility in this movement, which centres in the controlling influence of the Bank of England. An extract from a recent monthly summary issued by the Midland Bank says: —"The effective total of bank cash as a basis for bank deposits is finally determined by the Bank of England, through its open market operations. The central institution —none other power in heaven above or in earth beneath—is the ultimate arbiter of what our supply of money shall be.'*—l am, etc., W. SIVERTSEN.