THE BANKING SYSTEM

Otago Daily Times, Issue 22612, 2 July 1935, Page 5

THE BANKING SYSTEM

TO THE EDITOR Sib, —It is only fair to suppose, when people honestly maintain such a thesis as that put forward by H. Gow in your correspondence columns in regard to the operation of the banking system, that the difficulty for them is in the meaning of the fundamental terms. To argue that banks only lend money deposited with them is to-day very much like contending that the earth is flat. I have read portions of a book—it was shown me as a literarv curiosity—which maintained that the earth was flat, and the arguments used by the author approached those of H. Gow in ingenuity and seriousness. i believe the writer was quite honest. There was. obviously no axe to grind in the matter. All the same, the earth is round, not flat, as many people know from having gone round it all the, way. Probably the reason why H. Gow writes to your columns to prove what the leading banking authorities have acknowledged to be not so, is that the word “ money conveys to this correspondent only one meaning—that of coined pieces of metal —or at least a commodity of some Kina quite tangible and limited in quantity. This is, as stated by H. Gow, the actual basis of our existing money system, and much ingenuity has been involved in erecting on this base a very precarious structure of what is called " credit, which is understood to be the ability, or a belief in that ability to produce, when called upon, the commodity itself. Commodity money is at best a crude device, inelastic and subject to many disadvantages, and the pity of it is to see on the one hand a mentality incapable of conceiving any other sort and on the other a world going to ruin because no other sort can be realised. People of the mind of H. Gow are forced to argue that a portion of this commodity can be at once lent and kept. They cannot explain except by a pure fiction how the total amount qf money has ever grown beyond, the amount ■of the commodity. They would find' it much easier to realise that the huge sum of promises-to-pay-mbney has, in fact, become monev, in the sense in whicrr 1 rofessor Walker defines money as ‘anything”—anything, mark you—‘ which, no matter what it is made of, everybody will accept in exchange for his goods. Ibis definition agrees with experience. A paper note or a cheque is as good_ as gold because people will accept it—whether it is convertible into gold or not. All it needs is proper authorisation. When in 1914 the Treasury notes were substituted for. gold as the Lacking of the Bank of England’s paper did they any the less than gold perform the functions of money? They were money, simply because it was so decreed, bimilarly, bank credit is money simply because we are accustomed to accept it as such. " The bulk of money to-day has no physical existence at all. It is imaginary money, created by the banking system and put into circulation by being lent out at interest. (A. deV. Leigh, secretary to the London Charabei of Commerce.) . . - The real backing to all money is the goods and services available in the community. Let H. Gow try the experiment of a rock in mid-ocean or some such place where there, is plenty of her commodity money and no goods no real credit. “If New Zealand were turned into. a.solid lump of gold, said Captain Rushworth once, “it wou.d not teed a rat.”—l am.-etc.. Veritas.