DEPOSITS AND CREDIT

Wanganui Chronicle, Volume 79, Issue 186, 10 August 1935, Page 8

DEPOSITS AND CREDIT

B?ir.—l u Thursday’s “ Chronicle, H.U.D. asserts that most deposits he makes are cheque currency which origi- ’ ante with the banks monetising their customers’ wealth. The inference seems to be that banks create money and charge for the use of it; whereas the, function of creating money is a public one. The correspondent also asks, where do deposits come from? This is the xvay the banking system functions. Arising out of the confidence in the stability of the banks in •this and most civilised countries, it is I not the practice lo retain custody of one’s money, and the system has evolved of depositing it with the banks, where it is available xvhen required, 'i’he customer obtains the right to draw cheques ou the bank to the extent of his balance. The system effects great economies in the use of money. The banks have found from long experience that although depositors have the right

to withdraw’ balances deposited, in practicc they do not all do so at the same time. The banks know' the proportion of their deposits likely to be withdraxvn and maintain an adequate amount of legal tender money to cover this proportion. The actual rash deposited becomes the basis of a credit structure under which the banks make adxances. etc. It is must important to remember that thc ability of the banks to create credit is limited by the necessity to maintain a substantial portion of their deposits in cash. Now. when a bank makes an advance if is usually against adequate security. Thus it makes the assets of the customer available as purchasing power for the discharge of debts. But this bank credit is not “created out of nothing” as is so often claimed, but. is based upon the customer’s credit and expert knowledge as to his ability to meet commitments. Credit is available and utilised by every credit-worthy person in tin* com inunity, and it » greatly facilitates modern business. 'The banks share in this community credit prdbably more than most individuals, because of their size and the position they occupy. By sound and prudent management they have built up a reputation for stability that attracts deposits. A business man known to be capable, of good character and sound financially, commands a full share of this community credit every time he buys goods on credit just much as xvhen he borrows from the bank; whereas the 'man of straw does not share directly in its benefits. If ntiv nthnr uf innnP.v xvpi’p in use

any other system of money were in use surely some such principle xvould be an important feature of it. There is a legitimate use for credit in giving elasticity to the economic system. enabling better use to bo made of industrial equipment and labour. When the supply of money is sufficient

for all requirements of business, as it is at present, additions to it cause rising prices stimulating speculation. Ambitious persons then borrow’ freely, competing with one another to purchase as much property as possible to make a profit on a further rise. This continues until thc structure of credit gets top-heavy and tumbles with disastrous results. Economists are agreed that to prevent, such recurring periods of depression. it is necessary to avoid inflation of prices and credit. The most severe crises have followed war. due to abnormal credit expansion, and heavy borrowing by Governments to finance the war. for which the banks cannot be hold responsible.—l am. tc.. Howrrs nr.\. ! 8/8/35.