BANK CREDIT

Otago Daily Times, Issue 22566, 9 May 1935, Page 12

BANK CREDIT

TO THE EDITOR Sir,—" There is," says the Welfare League. " evidence of too much loose thinking on the Bubject of bank credit, and in the face of eminent authority on the subject of the creation of credit out of nothing the league says, in effect, that "it cannot 'be done." That should, of course, settle the question for all time. Let us, however, look back a little way. About the year 1780 some banker 'unsoundly" (the adjective ie the Welfare League's) issued to certain of his clients blank forms called cheques in place of cash (notes or gold), enabling them to draw on the banker up to the amount of overdraft or the loan arranged for. This created a form of currency not contemplated by the Bank Act which was unsuccessfully opposed by the Bank of England, no doubt on the grounds of "sound finance " —and possibly some other motives —and thus arose the system of bank credits and cheque payments. Without this the industrial revolution could not possibly have taken place for the very obvious reason that the banking system, nailed to the doctrine of the gold standard, could not have fulfilled the necessary function of facilitating the necessary exchange of goods and services. The expansion of credit was whai enabled the develpoment of factories, railways, and shipping and colonial expansion. Here I wculd like to ask the league whether it now considers that departure from the canons of " sound finance " warranted or wise, and whether the picture of commercial England to-day shows any symptoms of " loose thinking." Did the banker create a credit out of nothing, or not? Obviously, he would not havs risked "creating a credit" if he had had sufficient " deposits" in his safe to lend his client. I could quote authorities in plenty for the statement that bankers do create credit out of nothing. But what is the use? "So far, then, from credit being a new solution, it is," says the league, " our old friend ' borrowing ' over again." Exactly. There is, however, an essential difference between "borrowing" from a bank, where interest and principle are demanded in return, and "creating credit by a stroke of the. pen " and getting the iuterest—the one by a privately-owned monopoly and the other by a publiclyowned one —particularly so when the people's community-created value is pledged as security for the loan as happens when a Treasury bill or Government loan is floated. In conclusion, may I quote from 6. D. H. Cole's "What Everybody Wants to Know About Money": "When the banking system extends its loans, it thereby adds to its deposits. Loans create deposits. To put it less accurately, but more popularly, the loans 'come back to it in the form of extra deposits. The volume of deposits is governed, in the first instance at any rate, not by the thrift and industry of individual members of the community, but by the policy of the banks." (P. 137.) , . Therefore all deposits lodged with the bank for safe keeping by individuals have been saved from gome previous cycle of production and originated in the first instance in a bank loan. As the league avers, " Our old friend ' borrowing' over again." One can furnish the league with facts and logic but not with the power of reasoning.—l am, etc., Student.