DO BANKS LEND DEPOSITS?

Wanganui Chronicle, Volume 79, Issue 204, 31 August 1935, Page 8

DO BANKS LEND DEPOSITS?

| Bir, —‘‘Header’’ is still in the fog I as to the above. This is his case:— “If I. borrow £5 from A, this becomes my liability, but there is nothing to stop me from lending that £5 to B, specially if 1 can get more interest from B than 1 pay to A.” Be further reasons; “ If a bank borrows money from a depositor for a term, at, Fay 3 per cent., what is to stop the bank from lending that sum out again for n same, or shorter, term, at say 7 per cent?’’ “Reader” now sincerely believes that 'no has given us an identical parallel. No, “ Header,’ ’ the issue at. stake is not as simple as all that. If it was, “Header’’ surely must know that there would be no need for eon troversy. “Header” has shown us one thing very forcibly; i.e., that his knowledge of the manipulation of the financial credit by the banks is very, very elementary, and he falls into a complete fallacy in trying to substantiate his stand. J. can quite understand how he feels. I was in the same groove until four years ago. Since then, however, 1 have received many mental jolts, and “Header” will get his jolts if he is really interested in the subject. But back to the core—when “Reader” borrowed £5 from A he had actual cash in hand, and he could certainly lend it to anyone he wished. But in a case c-f a bank the matter is vastly different. First we must know what are banks’ deposits made of. Over 05 per cent, of these are inad« up of banks’ credit. This in turn raises another question: What is bank credit? Here is a concrete example: “Header” goes to a bank lor a loan of £lO,OOO. The bank places 1 “Reader’s” securities in its safe, and its clerk is instructed to write £lO,OOO on the credit side c-f “Reader’s” ac count. “Reader’’ can now draw cheques for the full amount. What actually took place was this: “Reader” had tangible wealth, which lie could not turn into money (monetize), lie had to go to the bank (who are the only houses having a charter to monclizu wealth) who did the accommodating at so much per. Bank did not give “Reader” any money belonging Io anyone else, it did not have to. If it did, then it would have to make the transaction in its books to that effect. In other words, if the bank lent to “Reader” money belonging to its depositors, it would have to decrease the amount of its deposits by £lO,OOO. But the bank det's nobbing of the sort. The question now raises: Why do banks pay interest on deposits if they do. not lend them? Why do they not refuse deposits when they can create advances as themselves? The answer is vety simple. The £lO,OOO which “Reader” borrowed and spfcut naturally finds its Way back to bhc banks as deposits. The associated banks have to tolerate this credit. Why? Because they themselves nave createu it, and if they refuse to honour it nobody else would. This is the source ut 95 per cent, of banks’ deposits. The second reason is banks like to attract money on deposits; money so placed is frozen (out of circulation), wnich enables the banks to charge bigger interest on their advances. When “Reader’’ borrowed £5 from A his ledger showed: Liability £5. Assets (cash): £5. But when he lent the £5 to B his ledger would show: Liability, £5. Assets, an LO.U. for £5 to- B. Deposits (cash holdings) nil. His ledger would be certainly wrong if it still showed deposits at £5, because this is being loaned to B. He, of course, could not advance £5 to B and still have it in his possession. And yet he is unintentionally claiming this paradoxical and extraordinary procedure for the banks. If “Reader” is still in doubt let him investigate the system of banking accountancy. He will be very much surprised. When depositors bring mogey into the bank 95 per cent, of it is bank credit, cheques. We have already determined that this credit is bank created. The depositors do not bring any assets or securities to deposit with the banks. On the contrary, they bring “claims” against the bank’s assets. Depositors have surrendered their goods and services for this (bank) credit, and as banks were the issuers of ail of this credit they have to accept these claims against themselves. It is made up of no assets, no security—only a claim against the bank, whoso promise to pay upon demand is written on them. So how on earth can a bank lend claim against its own assets? J wish 1 could do it; so does every one else. Let us make it plainer still. 1 Depositors bring in cheques and bills to the extent of over 95 per cent. Now. “Reader’’ knows that these cheques go into the waste basket. There is nothing left in the bank outside of ligures in its ledgers indicating the amount of advances returned us deposits. Now, would “Reader” be so foolish as to suggest, that a. bank can iend these ligures? Assuming that he retorts in the affirmative, i.e.. that the bank can lend these ligures, well then, the bank would of course register such transactions in its books; i.e., it would have to decrease its deposit liguics to correspond with the size vf the advances. But this is precisely what “does not” take place. Ng- matter how small or how largo an advance the bank makes, it. does not have any bearings on its deposit ligures whatsoever. This proses beyond any shadow of doubt that banks can iio-t and do not lend deposits, but create them—costlessly to themselves—against the security of the borrower. Let “Reader” consult the “Encyclopedia Biitanica,” \ olumo page 48. In Hie article on credit he will find the fol lowing:—“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 bank. A loan made by a bank is also addition to the amount, c.f money in circulation.” The explanation offered by H. U.D., is very sound, but bit too technical. 11.U.D., is in standard six in economic language, while “Reader” is a novice, probably primer one. Thus H.U.D’s explanation went completely over “Reader’s” head, in other words he could not follow what H.U.D., was getting at. Let. H.U.D., remember that he himself was once where “Reader” is now, and in future he should try to explain in the elementary language what he means. In other words Ire should help “Beader” and co. rather than confuse them. “Reader’s” trouble is his honesty. He knows he cannot lend that which he does not own. lie knows hr cannot manufacture money to lend to other people at in-

terest; if he tried he would bo put to prison. Therefore, it never occurs to him that banks should have such an extraordinary and unjust privilege and naturally financiers hire the cleverest obscurantists ns writers—Welfare League offers a striking example of this — to encourage him and other citizens to go on thinking that they lend their deposits. As long as ho is so drugged he will never find out how easy they create credit. Their job is made easier because the average politician is equally ignorant, on money matters. Mr. W. Veitch offers a very striking example. He has been in the Parliament o\cr 20 years, including the beat in the cabinet aud yet he dees not understand how money comes into existance. Air. Forbes is equally as bad. However, he can be forgiven because ho has publically admitted that, he knows nothing about money; and if w« return him into power we deserve all we get, and then some. At least he is not pretending, and that is much mor< than we can say for Mr. Veitch. “BRUTUS,” 29.8.35.