THE RESERVE BANK

Wanganui Chronicle, Volume 83, Issue 258, 1 November 1939, Page 6

THE RESERVE BANK

Sir,-In my last letter I stated that the trading banks do not issue credit out of nothing and that it would anpear from the recent Reserve Bank legislation that the Government was about to cmark on a policy of "diluting” our currency. Again I stress that this proceeding is a new departure in so far as New Zealand is concorned. The money theories being advanced !o-day are, however, not new. His- ' tory records that it has been tried time and time again, but always with the same result. For instance, in the 18th century. France tried to extricate herself from her economic difficulties by calling in John Law, the Major Douglas of that day. but it was no use as the cure proved to be worse than the disea Also, a century ago. the islan » of Guernsey tried out a similar experiment, but no other community copied it, and the Guernsel islanders themselves have not repeated it. No doubt many people will recall that when the Monetary Commission was sitting a few years ago Major Douglas, who was in New Zealand at the time, was invited to give evidence. After one day of many embarassing moments for the worthy major, a very convenient cable arrived calling him elsewhere. His action did a great deal of harm tc the movement bearing his name, so much so in fact that it has been found necessary from time to time to make use of new slogans such as “Debt 1 Free Money,’’ “Social Justice,’’ “Costless Credit,” etc. “E.F.G.” persists in .stating that black is white and backs his arguments by quoting the words of Mr. Reginald McKenna. This practice of lifting quotations out of their context and thus giving them, as Mr. McKenna himself has said, a meaning which misrepresents his views, is an old dodge of Douglas Credit theorists. Also the term “credit” is very wide and consequently it becomes very easy to wilfully distort the meaning of any statement in which it is used. It would be true, for instance, to say that the banks can. if they so desire, contract and expand credit, but only to the extent of the resources under their control. Your own grocer can do this. To say that every loan always creates a deposit is incorrect. For example: A obtains a loan of £5OO from his bank and pays the money to R who lodges it at another bank in reduction of his overdraft. It is obvious that no deposit was created in this instance. In his final paragraph “E.F.G.” states that: “In 1914 the entire legal tender of Great. Britain was £75.000.000 and the total deposits of all institutions were about £1,500,000,000, yet at the end of the war the national debt was almost £8,000,000,000, which amount was almost seven times the entire money in existence at the commencement of the war.” To this I would ask, what of it? The national debt referred to was not created through any money transactions but was. in fact, the result of “chalking up’ ’the quantity of goods and services supplied, measured in terms c* e money, and can only be liquidated by repayment in kind. In short it should be realised that the trade of the world is carried on under a refined barter system and that money is merely a convenient intermediary. If this fundamental truth is grasped, the hypnotic influence of Ihe “Santa Claus’ ’theories will be dispelled. J wonder if “E.F.G.” realises that by quoting as mentioned above, he has unwittingly demonstrated the correctness of the very statement he endeavoured to disprove. It is necessary to have an elementary knowledge of what money really is before delving into the intricacies of high finance. In conclusion, let me quote rather an apt Chinese proverb which I recently’ came across: “If you don’t scale the mountain you can’t view the plain.” Yours, etc., “A.R.C.”