BANKS AND CREDIT.

Southland Times, Issue 22474, 9 November 1934, Page 5

BANKS AND CREDIT.

To the Editor.

Sir.—in your issue, 2nd November, under the heading, “Topics of the Times,” appears an article “nationalising banks.” Mr E. J. Garmeson, speaking at the 1912 Club, London, said that “The policy of nationalising banks had for some time a very pro-' minent place in the programme of the Socialist Party. Two reasons were put forward for the change. First, that banking was a monopoly in this country, and secondly, that banks used national credit. Both were untrue.” I say both were true and absolutely true. The banking system is a monopoly in every country, it creates and destroys credit at its own will and pleasure, dictates the policy of its governments, and holds the destiny of the people in the hollow of its hands. In concluding his speech, Mr Garmeson goes on to say it was not the credit of the community which banks used, but the credit which their own honourable history and practice had earned, which caused customers to _ entrust them with funds on terms which allowed these to be used for advances to trade and industry. Banks go to great pains to perpetuate the fiction that they are merely “the custodians of their customers deposit,” that they lend these deposits and that their profit consists of the difference in the rate of interest which they pay to depositors and receive from borrowers. This is untrue. H. D. McLeod, a leading authority on banking, in his bank textbook, “The Theory and Practice of Banking,” says on this point:— “The fact is that a banker’s profit consists exclusively in the profits he can make by creating and issuing credit in excess of the legal tender he holds in reserve.” (1) Banks do not lend money deposited with them. (2) Every bank loan is a creation of entirely new money (credit) and is a clear addition to the amount of money in the community. . (3) No depositor’s money is touched. All that a bank does in lending anybody £lOOO is to open an account in his name and write “Limit £lOOO across the top of the page. The borrower then operates on this credit by cheque. The fact that he CAN draw out the £lOOO in cash gives the banks statement a certain specious plausibility, but this facility is only possible by reason of the fact that it is the rare exception rather than the rule. Let us now marshal the evidence in support of the fact that banks create credit and do not lend deposits. The Encyclopaedia Brittanica, 14th edition, under the heading of Banking and Credit, says:— . “Banks create credit. It is a mistake to suppose that bank credit is created to any important extent by the payment of money into the banks. A loan made by a bank is a clear addition to the amount of money in community.’ H. D. McLeod in his textbook, “The Theory and Practice of Banking,” states: “The essential and distinctive feature of a bank and a banker is to create and issue credit payable on demand, and this credit is intended to be put into circulation and serve all the purposes of money. A bank, therefore, is not an office for the borrowing and lending of money but it is a manufactory of credit.” Davenport’s “Economics of Enterprise” states:— “Banks do not lend their deposits, but by expansion of credits create deposits.” Mr J. M. Keynes, the economist: — “There can be no doubt that all deposits are created by the banks.” The late Sir Eward Holden, an eminent British banker said: “Banking is little more than book-keeping. It is a transfer of credit from one person to another. The transfer is by cheque. Cheques are currency (not legal tender), currency is money.” R. G. Hawtrey, assistant secretary to the British Treasury, in his opening speech in the Hawtrey-Douglas debate at Birmingham, made this statement: “I agree with him that banks create money, and that trade depression arises from faults of the banking system in the discharge of that vital function.” • , Hon. R. McKenna, ex-Chancellor. of the Exchequer in the British Coalition Government (War period) and chairman of the Midland Bank, the largest trading bank in the world states in his book, “Post War Banking” (page 76): “The amount of money in existence varies only with the action of the banks in increasing or diminishing deposits. We know how this is effected. Every bank loan and every bank purchase of securities creates a deposit, and every repayment of a bank loan and every bank sale destroys one.” In other words, every time a bank loan is repaid, the money (being chiefly ledger entries) is cancelled out of existence* Hartley Withers, in his book “International Finance”, says: “A credit in the Bank of England is regarded by the financial community as cash and this pleasant fiction has given the banks the power of creating cash by a stroke of the pen and to any extent that it pleases, subject only to their own view as to what, is prudent and sound business.” (page 31). In short, a bank creates purchasing power and lends it (on real security) to its customers, who then become depositors. No wonder bankers assert that their only care is their depositors, since their depositors in the mass are their debtors!

Can ail the foregoing authorities leave an atom of doubt that banks CREATE the deposits they lend! The truth, therefore, is that because “immense power and despotic economic domination are concentrated in the hands of a few”, the people have not the means necessary for doing the work which is there to be done. While I do not agree with Socialism, I do say that the Government’s duty is to guard money and credit with that degree of control necessary to guarantee that finance will not be used to interfere with the life of the people; that it is one of the essential functions of the State to force finance to serve the good of the people. I am, etc., PLOUGH-BOY.