BANKS AND CREDIT.

Evening Star, Issue 22144, 26 September 1935, Page 8

BANKS AND CREDIT.

TO THE EDITOR. ... Sir, —The letter signed “ Psychol ” in your issue of the 19th intimates that he once asked a bank manager: If *2O men each deposited £I,OOO, and one customer required £20,000 to build’ a bridge, the deposits of the 20 men being lent, what would he do when several of the 20 depositors required their £1,000? The bank manager is declared to have found this question unanswerable. There is no doubt that such a proposition would be difficult to entertain,' but the real answer to that is that no banker would take 20 deposits of £I,OOO each and lend them out to one borrower on long terra. Such a policy would go right counter to the established principles of banking of all time. Indeed, it would go counter to common sense. To receive money at short call and lend it all on long time would not be banking, and it would not be business. In the first instance, a bank retains in cash, in some form or other, front 10 to 12 per cent, of its total deposits; a considerable proportion is loaned out at short call. In the case of New Zealand banking, in consequence of the exports to the United Kingdom, credit balances naturally accumulate in London, where they are let out to borrowers for periods which extend from overnight money —that is, from 4 o’clock one afternoon to 10 o’clock the next morning, up to a period of three months, bv the purchase of British Treasury ‘bills. Other moneys are loaned out to industry, which loans have a life of from several weeks to several months, while in New Zealand advances are made to farmers, which extend from season to season in some instances, while in others an overdraft becomes almost a permanent loan. Further still, the banks take up Government securities with the object of holding them until maturity, with the difference, however, that should money be required for other purposes these stocks could be realised on the exchanges. . . The art of banking consists in so managing the investments that money will always he available as and when required by the depositors. I trust that this explanation will avoid misrepresentation by your writer “Psychol-” It is better, I think, to remain on the ground and deal with facts than to float off into the “ astral ” of hypothetical speculation, which has no relationship to the real facts.—l am, etc., Mercatoh. September 25.