BANKING

Rotorua Morning Post, Volume 2, Issue 363, 26 October 1932, Page 7

BANKING

. Published by Arrangement with. the N.Z. Farmers' Union, Auckland Provinee.

TRUTH ABOUT IT COMPUCATED OPERATIONS REALLY SIMPLE IN REALITT. , BANK LOANS ARE INFLATION. Those who are trained to think in a certain way are very hard to convince of any truth that is apparently not in conformity with their fixed ideas. ' If men helieve the world is flat, even though it he sailed round, to them the world is still .flat; th'ey will quote the Almighty Himself in their favoqr, as if He, who is Truth, eould give men, brains and eyes and ears which contradict and corrupt the verities and do the only thing impossible, make Him deny Himself. Men have always heaped unto themselves teachers who save them the trouhle of thinking for themselves. T.hey call these experts. The experts invent a jargon and malce it a habit of speaking unintellighily, and the people, hearing something they cannot understand, imagine it' wisdom. The "science" of banking is essentially one where awe and wonder are excited by operations (differing not at all from the pieking of a pocket 'except th'at all p'ockets are picked instead of one), by inspiring offiees and a paraphernalia of ceremony amounting to a ritual. Were a bank to commence operations, in any country, with a million of capital, it being the first and only bank, its operations can be examined without the confusion brought in by there being many banks, when the advances of one become perhaps the deposits of another. It will be convenient to lump all the bank's customers in. one and call them Borrower and Co. The Bank, let us call it the "London and Auckland Bank," brings one million in gold and puts this in its vaults, for we are now dealing with absolutely legitimate, everyday, banking, without any fiduciary issue or other contraptions ' to bring f urther grist to the banking mill. Borrower and Co. deposit securties worth, let us say, in the eyas of the bankers, two million pounds. The bank advances one million pounds. Bank Doesn't Lend. What does the bank advanee ? Does the bank lend its gold? No, or that would be the end of its business until the gold was returned, to be loaned again. The bank will do absolutely nothing but enter in its books an item authorisirfg "loans" to Borrower and Company. Subsequent action rests with Borrower and Company, who, being in business for more than their health, write cheques totalling, in the end, one million pounds. Their cheques have value. They have a ' claim on anything that is for sale. These cheques are redeposited in the bank, in our illustration (or in "banks" as a matter of fact), and they will be redeposited as fast as the payments they represent are mad'e by one person to another. In the process of this game, certain "promises to pay," qr^ bank-notes, eosting practically nothing, are called for, and in pre-war banking rules, the number of these that might be on issue was not allowed to exceed in face value the gold which the bank held, in countries where the gold standard was in operation. Now, the proportion. of notes that, on the average will be required to finance a certain amount in cheques is known, to several deeimal points. The London and Auckland Bank now holds (1) a million in gold, (2) ,a million, less whatever may be in transit, of deposits, and the books show Borrower and Company as owing the London and Auckland Bank a million. The bank is, of course, responsible for depusits to depositors. The bank finds safety in numbers, depositors are many. Understand also that Borrower and Company are really a lot of borrowers, not lilcely to take action in the same direction at one time. The Bank of London and Auckland is in a sound position; it can double its loans on the strength of the million deposits plus its gold. Have not the depositors "lent" the bank the ! money which they "saved?" : And should not the bank lend that '• money again, so that it can earn inter- [ est and pay interest to its depositors ? j The Bank of London and Auckland 1 1 does so. All banks do so. Until j thirteen to fifteen times as much, [ eh'eque business is "flowing," the banks are absolutely safe. Years go by and from the exeess of interest on I "advances" over that paid on "de- j posits, the bank will say, and prove j

by its accurate hook-keepdng, reserves are created, property is acquired and the banks have a hold over businesses all down one side of each street and all up the other. How was it all done? Wh'o paid? Clearly, from the start to finish, the banks have found nothing at all. The bank's gold has not been touched. It has not parted with as much as could be seen under a powerful microscope. But property has changed hands. The bank has itself become ilch in real things, which yield it tribute. The banks object to "inftation," but only when it suits them. Every bank loan is "inflation,"" even though it eventually produces goods. To create money is to increase the amount of claims against all the existing goods and services in the country, for money is such a claim and more money is a dilution of the existing money's claim. This would be only a minor evil if the extra money kept pace with the new goods and services that mankind is for ever bringing into being. Clearly, none but the State, meaning the people as a wh'ole, should have the right to increase and reduce the values of all that the people own and all that the people do for each ot'.ier in useful services. Yet that right is precisely the one exercised by the banks and which gives the banks such a grip on the people. When Borrower and Company issued ch'eques and notes — money — to the tune of a million, they increased whatever money there was in existence and altered the values of all the goods in the country- In doing this, they ineurred a debt of qne million to fhe bank, not to the nation. The bank did not liquefy its own gold, because, if so, it could not have liquefied the same gold again and again as it issued more and more loans. Having reached- the limit of expension of credit, the bank can point to its thousands of depositors and to its thousands of shareholders and can ask — why do you accuse me of being a danger ? Are not most of those who deposit with me, or who hold my shares, small men ? " Truly, but the men who control banking poliey are not small men. The next stage in the "cycle" is the withdrawal of credits and the consequent scarcity of money. What is left is then worth much more in goods. The borrower^ are ruined and their securities become the bank's' rich pickings besides falling to those who have stable credits. When too much money is malcing bank credits cheap ordinary business dictates the elimination of some of the money as a means of making credits dear again. In New Zealand, banking policy is prohably brought into line with overseas praetice, without local rhyme or reason. ' Realers will note that bank balancings are not called in question. The only thing wrong is in the odd assumption that what is the bank's is its own, and what is the public's also belongs to the bank. The bank starts with a million in gold, which it does not toueh, and its ends with everything. This is not legend. It is absolutely incontrovertible fact.