BANK DEPOSITS

Wanganui Chronicle, Volume 79, Issue 184, 8 August 1935, Page 6

BANK DEPOSITS

sir, "A .lepv.'ils IiIOUU in the bank, The bank lends it to B. who pays it 11, C, who deposits it in the bank. The bank then has £2OOO of liabilities and only £1001) ot assets from which to draw interest on £2OOO and it is bankrupt. ’ ’ I have quoted the above from Mr. Oswald Gardner’s letter of the 6th inst. on “Bank Deposits and Advances." I should not trouble to write about the matter, but that f fear being placed above Mr. Gardner’s signature; it may be given mure credence than its truth warrants. Surely ihc transactions mentioned by Mr. Gardner simply mean that the bank has taken on liabilities of £2OOO, being the amounts deposited by A and C (£lOOO each), and has asset- of like amount, consisting of £100" owed to the bank by B. plus the £lOOO deposited by C. Since the assets equal the liabilities kovv can lhe bank be bankrupt, as Mr. Gardner asserts? If “ asks for a return of his deposit of £lOOO, the bank still has the eash in hand to pay him. If A at ihc same lime calls on the bank for his £lOOO. the bank would naturally call on B to repay his advance to enable the bank to pay A. Mr. Gardner says jn addition that the bank has lo pay interest on £2OOO (A’s.and C“s deposits', while it is. only getting interest un the £lOOO advanced to B. He infers that the bank would be losing money. He overlooks the fact that the bank’s charge on advances is about double what it plays on deposits. Hr has also overlooked the fact that to complete lhe cycle the bank would probably find a fourth person D, to wnom it would advance the £lOOO deposited by and then obtain the higher rate of interest un that £100(i also. Mr. Howard I'. Douettr‘stated som° days ago that bank deposits were liabilities and that banks could not ad vance or lend liabilities. Why not? If Mr. H.I’.D. lent me £5 that would be a liability on my part, but if Mr. “Hard Done By’’ asked me for a loan of £5, offering say a £LS guld watch as security. I do not think I would hesitate about lending him the £5 I had borrowed from Mr. H.( .ID. Now sup posing Mr. H.I’.D. deposited £10(1(1 in the bank and the bank advanced it to me on the strength say of my insurance policy, what essential difference would there be in the principles involved in the two transactions? Now, Mr. Editor, if I have Ires passed unduly on your lime and spac? I will excuse myself with the plea, that though the principles involved are very elementary, yet it is essential that they should be. what they evidently are not. clearly understood by all.— I am. voiirs etc.. “READER.