PRINCIPLES OF FINANCE

Evening Post, Volume CX, Issue 71, 20 September 1930, Page 8

PRINCIPLES OF FINANCE

(To the Editor.)

Sir, —May I assure your excitable correspondent, "The Public," that my letter to you was my own composition, that I am not, and never have been a bank officer, director, or shareholder, and that the sub-heading was inserted by your editorial department, and did not appear in the letter as submitted to you? There are only one or two points in your correspondent's reply to which I desire to refer.

Your correspondent obviously does not understand the meaning of the term "public utility" as employed in economic discussion. It carries no implication of benevolence. The railways are a public utility, so is a, water supply or gas company; so is the Union Steam Ship Company. A public utility is a service of such a nature that its policy operations and continuity are of vital public interest. A bank is a public utility in this, the only sense of the term with which I am acquainted, because it supplies the currency without which economic life cannot be carried on. It is for this reason that banking and transport services are in a different category from the merchant, the draper, arid the cobbler mentioned by "The Public." The gibes of your correspondent in this connection are therefore irrelevant, and based on a misunderstanding of language. It does not follow that a public utility is a benevolent institution, nor did I suggest that banks assume this role.

As regards passing on taxation, it is a fact of "demonstrable experience that in so far as taxation can be legally and economically shifted it will be shifted. Everybody passes on taxation when he can, so why single out the banks as special culprits?

The banks do not, as your correspondent maintains, "fix the value of money" at all. They are merely one factor in aggregate demand and supply. They have to bid for deposits against the State and other competitors, and the rate determines itself by supply and demand. The rate payable for deposits, in conjunction with the movement of London balances and tha importation position, fixes the rate payable for overdrafts.

There is no catch in my statement that the only valid basis of computation of business profit is the ratio to aggregate proprietors' funds employed in the business. This is a self-evident proposition. Your correspondent is in error in thinking that in the Dominion bank capital is increased by capitalising reserves into bonus shares. Share capital is subscribed as such, and reserves are built up not only out of profits, as your correspondent suggests, but out of premiums on new share issues paid in by subscriber^ and carried to reserve account. In any case, amounts carried to reserve out of undistributed profits consist of money which belongs to the shareholders, and which, if it had not been so carried, these people would have had available for some other inter-est-earning investment, but which they have elected to re-invest in the bank, thus strengthening the bank as an earning proposition. To deny earning potentiality to such reserves is to fly in the face of facts, financial principle, and common sense. Earning power depends on the amount and application of capital, not on the source from which that capital is derived.

Your correspondent is a vigorous writer, but it is all noise. It is plain that he is ignorant of the elementary principles of finance. Invective is no substitute for logic and knowledge.—l am, etc., FAIR PLAY. 19th September. .