THE OTAGO DAILY TIMES FRIDAY, OCTOBER 12, 1934. MONETARY POLICY

Otago Daily Times, Issue 22391, 12 October 1934, Page 8

THE OTAGO DAILY TIMES FRIDAY, OCTOBER 12, 1934. MONETARY POLICY

The discussion in the House of Representatives on the report of the Monetary Committee did nothing to give vitality to a document that might be said to have been ejected stillborn from the presses of the Government Printer. The majority of those who participated in the discussion were members of the Committee itself. They had had the doubtful advantage of hearing the evidence that is embalmed in a formidable-looking publication of some 750 pages, which very few people, even though they may be members of Parliament, are likely to trouble themselves to read. The discussion on the report afforded the opportunity to certain members to espound anew their own views on the subject of monetary policy and to proclaim the curious conclusions at which they have arrived concerning the present system of banking. Such an assertion as that made by Mr Langstone, that the trading banks had “netted” £46,000,000 in the eighteen months to July last, is, of course, simply fantastic, and is worthy only to be bracketed with the same member’s original discovery that in one week, shortly after it had opened its doors, the Reserve Bank had made a profit of a million—simply by writing figures in a book! If the banks that are operating in New Zealand were making such stupendous pi-ofits, as, in his innocence, Mr Langstone supposes, new banking companies would certainly be springing up overnight to share in the gains. Yet the two latest efforts to establish new banks in New Zealand have proved abortive. Mr Langstone, like other critics of the monetary system, seems to share the misapprehension, which is more commonly held than it should be, that the banks can conjure up money and create credit out of thin air.

The elementary fact is that the funds of a banking institution are provided by the shareholders and the depositors, and that the depositor retains the control of the money with which he entrusts it. A bank might be able for a time to provide a great deal —but not an unlimited amount —of credit by pursuing an easy money policy, scattering loans with a frpe and nonchalant gesture, but a bank which pursued this hazardous path would undoubtedly, at

the first breath of the chill wind of economic depression, meet disaster which its depositors would share with its shareholders. If, as the critics of the banks appear to believe, such easy money should be made available, public confidence would tend to shrink until what may be described as the national function | of the banking institutions would be rendered impossible. Further, if, as is urged as a corollary of this complaint, the banks were indeed withholding easy credit, not in the interests of their depositors, but for sinister profittaking reasons of their own, it seems obvious that the depositors, tiring of this policy, would withdraw their money and utilise it elsewhere. But the credit problem in New Zealand as , elsewhere is not at the present time dependent upon the amount of funds j banks may have to advance. The j real problem is to create a set of conditions which will justify the j use of additional credit in ordinary | business. The bank, in its own interests and in those of its customers, is restrained by common prudence — in fact, by the easily-grasped faculty of common sense —from extending unlimited credit where there is insufficient security. It has been the inclination of Governments and of sanguine individuals to obtain too much credit that in part accounts for the circumstances in which they find themselves to-day, and the position would doubtless be vei-y much worse for the individuals if the banks had opened their vaults to them.

Given public confidence, the banks can, as the chairman of the Chase Bank of .New York said before a Senate Committee recently, “safely and properly do many things of constructive importance and value to the community,” but they cannot simultaneously retain confidence and create unlimited credit. These few considerations of banking policy are not particularly abstruse. It does not require a financial wizard to understand them, though it almost appears that the trading banks might do well to hire instructors .to educate the public concerning the elementary rules of banking. That would form, perhaps, a more effective reply to the people who are characterising the banks as the Big Bad Wolf of the depression than the mute testimony of public confidence in these institutions that is contained in their deposit records. It is plain that the discussion of the Monetary Committee’s report in Parliament has not served the purpose of clearing the minds of the monetary reformers of the misapprehensions to which they are committed. The public should welcome the statement of the Minister of Finance that he cannot commit himself to providing an opportunity for the resumption and prolongation of a discussion which could only prove inconclusive.