BANK DEPOSITS

Wanganui Chronicle, Volume 79, Issue 192, 17 August 1935, Page 8

BANK DEPOSITS

•Sir, Owing to my absence from Wanganui last week I have been unable tu reply t o your correspondent “Reader,” whose criticism of my letter appeared in your issue of the Sth instant. I must plead guilty to expressing myself very badly in my letter of the 6th. The question is: “Do banks loud deposits?” Including deposits of coin or bullion, which constitute a very small proportion of bank money, I submit not. “Reader” does not question the illustration but merely the conclusion drawn from it. Now, in the illustration the bank begins with a deposit of £lOOO, but by lending it to B, who pays it to who deposits it, the bank has liabilities of £2OOO. It surely will not be contended that the bank converts £lOOO into £2OOO. Where, then, does the extra. £lOOO come from’ The explanation is that the bank will not lend to II unless B produces security of at least £lOOO, and it is the title to this. security which I submit the bank converts into £lOOO of bank money. And the right of B to draw a cheque on the bank is preceded by a conveyance to the bank of security against which the banker agrees to grant and advance. So that, in the case of B and C the advance precedes the deposit. Where, then, does A’s deposit originate 1 ? Except in the case of a deposit of coin or bullion A deposit originates in the same way, namely by a conveyance to the bank of a title to wealth against which the banker agrees to grant an advance. The example given in my letter, 1 think, illustrates this and your correspondent assumes that the bank has first obtained securities in both cases. If advances originate in deposits then A’s deposit need not be preceded by an : dvance which was what I had in my mind when 1 wrote. 1 should have prefaced by illustration with: “Imagine, if you can, a deposit not preceded by an advance.” A deposit may be transferred as a loan from one depositor to another, but that is not a bank loan. In that case the bank merely registers the t ransaction. As to the suggestion that 1 overlooked the fact that the bank charges on advances exceeds that paid on deposits, I think the latter part of my letter shows that 1 did not do so. 1 have to thank your correspondent however, for drawing attention to what was an incomplete statement of the case illustrated.— 1 am, etc.. OSWALD GA RD A ER. August 15, 1935.