BANKING AND FINANCE

Otago Daily Times, Issue 21989, 26 June 1933, Page 10

BANKING AND FINANCE

TO THE EDITOR.

Sir,— The views of financiers upon the present world situation are not only interesting, but. of tbe greatest importance, because financers are collectively responsible for sanctioning an expansion of credit, and thus are responsible for the chaos in which we now find ourselves. It is a mistake to suppose that banks are exclusively to blame, yet it is perfectly true that without the assistance of the’ banks no promoter has any power to inflate the currency, and without an inflation of the currency no harm can be done. This is an important aspect of the situation, but the chairman of directors of the Bank of New Zealand omitted all reference to it in his otherwise il uminating address. Bankers are naturally not going to implicate their own actions ns mainly accountable 1 for a situation which now threatens the whole world with chaos,” unless a solution is discovered, and ott this important question Mr Gibb is not very reassuring. He says; ‘ Possibly at no time in the history of the world have more serious problems confronted it than during the past year. Numerous conventions have been held to deal with them, but the best brains of the world have so far evolved little by the way of solution”, By and by, when the economic situation has further evolved it will be seen more clearly that political financiers are the principal culprits responsible, no bank with regard for its own safety will commit itself without ample security legally sautioned. As bankers are neither econorhists nor statesmen, their profession being purely the financial ones of issuing credit, their sole concern centres in the value of the securities offered by the promoters. If this security is guaranteed by the State the banks are prepared to underwrite loans to the limit of their credit, expansion power which rarely. in British banks exceeds £lO credit per unit of £1 sterling legal tender. The exercise of this power to increase the value of money in circulation by credit expansion is the primary cause of the inflation of prices which, results in that fluctuation which, Mr Gibb says, was “brought about in part by tbe failure of the gold standard system to function in recent years.” This statement -can not be, sustained by argument of economic validity. All currency instability arises from a departure from a metallic standard (gold ■or silver), apart from which the State has no power to stabilise prices. The departure from the gold standard is termed “elasticity option” (Bank of England Currency and Bank Note Act, 1928), under certain stipulated conditions, and this permits the Bank of England : to exceed its fiduciary issue. Never ventured upon without legal sanction, this immediately furnishes the banks with an increased volume of legal paper currency which becomes available for an enlarged credit expansion on the part of the banks, It is utterly impossible to prevent inflation of prices once this process has commenced its baneful influence, which does not stop before production proceeds faster than consumption, until prices collapse and depression sets in. That is why the cry for stability is now heard everywhere, but the demand for a staple currency ignores tbe fact, that unregulated credit power held by the banks nullifies all State stabilisations of the currency. The public, being quite ignorant of both currency and finance, should demand explanations from its parliamentary representatives on these questions, but. not dictate proposals. The actual defect lies in the system whereby ,we determine “ value and price,” in which process the currency performs a very secondary part, not at all understood except by expert financiers.—l am, etc., W. SIVERTSEN.