The Guardian AND EVENING STAR, With which is incorporated “The West Coast Times.” WEDNESDAY, MARCH 2nd, 1921. BANKING.

Hokitika Guardian, 2 March 1921, Page 2

The Guardian AND EVENING STAR, With which is incorporated “The West Coast Times.” WEDNESDAY, MARCH 2nd, 1921. BANKING.

In these days of economic difficulties banking procedure counts a good deal, and it is just as well to understand the intricacies of tho business. The position is rather clearly outlined in a recent United States financial paper, and it is worth while to reprint the article as-some public intimation ot what goes on in every Linking house dealing with the business of the public in an individual way. A bank of itself, says tlie writer, does not create wealth It is not nil industry; and it does not carry on production, and it cannot irself supply wealth to the eommunitj. Il is a receptncfe, a reservoir of the floating, liquid, wealth of the community. Its function is to aid production and trade bv making this floating wealth more available and more useful than it could lie without; being gathered together. It is an agency for the more efficient use and handling of the community’s wealth, but not for making wealth by any magical method, such as the printing press affords, or by creating deposits through loans Tt is important to keep this in mind, because whenever people begin to complain that the banks or the government should make money easy, it is time to utter a warning. Sound banking requires that sombodv shall put a dollar of wealth into the bank for n 'ei\ dollar that the bank loans out, and when we speak* of wealth we include the paper representatives of the liquid wealth which is moving in trade. The wheat, meats, cotton, lumber, coal, and merchandise of all kinds that are being transferred, are creating and depleting bank deposits as they move Tt. >■ through them that pools of deposits or Tending power are created. When prices rise* the deposits are increased, and as the prices fall they are decreased. Those fluids are the basis < f ! the hanking business. Deposits that arise in this way represent real values which may he loaned and shifted about I with safety. Rememl>er all the I nns that if you want th 0 banking business to he kept on a safe basis it must eonfina itself to funds of this character, received from tie' i:"blic. Whenever ihe banks begin to c reate deposits, or ’coney, by manufacturing credit, they a e dealing in some unsubstantial, fictitious and charged with possibilities of mischief. Now, bearing in mind the sound rule of bank inti, that a bank shall deal only with the funds deposited in its keeping it is evident that while one bank may lie fully loaned up, another may have a surplus, and the first hank may boirow temporarily off the second. The situation is no different from what it would be if tlie banks were consolidated. Tin's principle is the basis of our American reserve system. A greater Jegiec of flexibility is given to the banking system by the consolidation of reserves, and the service to the public is better. But it never was intended that the reserve system would violate tlie fundamental principle of banking, that the public itself should supply the loanable funds. The reserve banks were intended to for all the member banks what each of the latter banks do for the community in which it is located. Under the old system, where each bank stood alone, a. run on one for casli might easily close it, and thus spread a panic The reserve hank was intended to serve as a protection against panics in the same way that a reservoir of water serves as better protection for a town against fire than a cistern ill house In addition to being simply a depository, however, the reserve bank is an-

thorised to issue currency. This was not intended ns an independent means of creating credit, hut for the purpose of giving greater facility in handling deposit. There is no fundamental difference from the standpoint of a bank, between a deposit-liability and a nonliability, and the note-issuing power provides a means by which deposits can be converted into currency. It is a means of protection to the hanks. When it is understood that th e banks are properly restricted in their loans to the amount of liquid credits which the public deposits with them, vague criticism localise they do not supply credit indefinitely, will cease. Tlie banks in one section can he helped out by banks elsewhefp who have a surplus, but they cannot manufacture credit without entering upon dangerous policies, nor should the funds so advanced lie tiisl up in such a manner that they cannot b r recalled for use in handling the (*urrent trade where they belong. A hanker of an important Western American city, who had made loans freely to local bankers in neighbouring territory, recently sent out- a letter asking that the loans he repaid in part, as they were needed in carrying on the industries and commerce of that city, which., in turn was an essential factor in marketing the crops of the territory. This letter was criticised as a levcla.tion of hostility towards tho country districts and favoritism toward the city industries, a construction wholly unjustified. A banker is under obligations to the customers who provide the funds in his custody, and to make the most, equitable and helpful distribution in his power, but it is a mistake to suppose that he lias a power to grant credit at will He can dispose of what tho community puts in his hands, so long as the owners leave it with him, and he may to some extent borrow for them, but there his power ends. Each community in the long run, and for the larger part, must supply its own .banking, funds by means of its production and savings. Tt cannot- expect to withhold its products from market for an indefinite time and go on buying things bv means of outside help.