Finance--Public and. Privite

Industry and Finance.-- 1. - .

WHENEVER the 'point is raised that industry fails to 'procure from banks all-that is required in the way of .credit facilities, there are one or two points which I think :must occur to the mind of most persons. In the first place, it will probably be asked, in what do these credit ?facilities. consist, and whence are they obtainable ? In _the second place, if, as has sometimes been suggested, credit can be expanded at will, surely the banks who obtain remuneration in the shape of interest for the credits granted would be only too glad to dispose of as 'much of it as possible. With regard to the first point, viz., of how the credit - facilities come into existence, we can imagine perhaps for the sake of argument a new bank or lending institution starting in business with actual capital which has been subscribed by shareholders, so that on the first day of commencing--business, the credit facilities consist of the :Capital of the bank.

BEGINNING OF THE SNOWBALL.

Very quickly, however, the credit facilities, or the power to lend, become expanded. For the sake of example rive will take two transactions which may occur on the first day of the bank opening its doors. John Brown, believing in the new bank, comes in and places to .a current account the sum of £100 in Treasury Notes. :.The bank then in addition to its .capital has also the £100 belonging to John Brown, which it promises, however, to repay. at demand. Immediately afterwards, another _new customer enters, furnished with good credentials, and instead of depositing requires an advance cf 11,09 against good security. Although the deposits at ilia moment at the bank are trifling, the capital resources :permit the advance to be made, and moreover it is covenanted that the new customer—whom we will call SMitli---akeePs his account with the bank, and accordingly there is placed to his credit the sum of £1,000 on current account. . . .

The days pass, and both the loan activities and the liability on deposits increases. Because, however, of the liability of the bank to meet its deposits at any time in cash, it is vital that the proceeds of the:deposits should be employed in such a way that while earning interest for the bank's shareholders, there should never be any .fear of failure on the part of the bank to. meet the demand of the claim of its customers. Immediately any doubt on that score arises trust in the bank disappears and with it the very basis of credit-facilities.

."` THE QUESTION OF LIMITATION. B Ht, it will be aSked, cannot the matter be continued indefinitely on the snowball principle ? That is to say, if every time money is borrowed fresh accounts in the bank are opened, surely the bank might continue its lending indefinitely ? The reply is in the negative, and the main explanation is to be found in the necessity for the banks, having to pfovide for a certain proportion of their resources_ to be based upon actual cash holdings, and it is here that we begin to come up against the central organization affecting the supply of legal tender throughout the country.

CASH RESOURCES.

So long as credit is absolutely unimpaired, the cheque system of the country, of course, very largely takes the place of currency, but in the last resort the bank depositor: wants. tAi be assured that as against the total of his deposit he can be sure of obtaining the necessary amount of legal -tender tender to give • him an unquestioned command_o.ver the necessary goods and services required. That supply of legal tender is, however, limited by statute. - That is _ to say, over and beyond a certain total, the N.Ote Issue of the country, which is legal tender, cannot be expanded except against the holding of a corresponding amount of :Mil.

- THE CENTRAL SYSTEM.

So it will be seen that we are now driven back in the "argument Upon the -central currency system, which, In its turn, is based upon the Gold. Standard: The Gold Standard itself is neither more nor- less than a legal obli- igatioti to 'meet upon -demand legal- tender by gold pay- -ments, this definition being only modified under the present Act by the Bank only being required to pay in bullion and for a minimum amount of 400 ounces troy of fine gold, a modification which has been imposed to facilitate the substitution of the £1 and 10s. note for actual gold currency in circulation.

THE USE OF RESTRICTION.

Why, however, it may be asked, should there be a limit to the amount of legal tender ? Granted that there .is a limit to the power of the banks to lend owing to the restrictions as regards legal tender, is any useful purpose served by those restrictions in the Note Issue, which admittedly, place some kind of restriction upon the credit facilities or the lending power of the banks as a whole ?

The point is, of course, as I said last week, a highly controversial one, and again, too, I must apologize to . those who are highly trained in these matters for the crude and elementary manner of presenting the case. Surely—so it is urged by those_ who would pursue a policy of inflation—if there were to be a great increase in legal tender :irrespective. of -.the gold: against it, we should have a great increase in purchasing power, -a stimulus to consumption, and, therefore, also a stimulus to trade activity ?

EVILS OF INFLATION.

A partial answer to the question is furnished by the experience of the inflation period during the War. During that period the Gold Standard was abandoned and legal . tender limitations more or less disappeared, while the State adopted the role of the unlimited borrower, with the result that banking deposits were hugely expanded and—I was going to say " purchasing. power,'.'. but that would have been wrong—the quantity .of credit increased so greatly that undonbtedly a stimulus to 'eonstiniptiOn was given. -It was a stimulus, however, which was far ahead either of productive power or of willingness on the part of the producer to meet -demands at reasonable prices„ and the net result was that, roughly speaking, it was necessary to have about three times the quantity of credit to purchase the same amount in goods and services as it was previous to the credit expansion or inflation period.

FOREIGN COMPETITION. ,

Thus, very quickly, the supposed increase in pur- chasing power became no increase at all. Worse than that happened, however, and would happen again under any system of undue credit expansion. A moment's thought will show that when prices rise too greatly in a country, not only is the consumer or purchaser finally penalized, but if any other country's prices are lower and production is cheaper because this process of inflation is not going on, then those countries not only cease to purchase our high-priced articles, but they compete with us in other markets and not infrequently in our own markets themselves. Thus there is danger of reaching a stage when, as a result of prices being above the level of other countries, our imports are so stimulated and our exporti are so dis- couraged that we begin to be in debt to the countries all round us, and find difficulty in making payment for the vast amount of goods and other. necessaries which under any circumstances have to be imported every year.

LEGITIMATE CREDIT EXPANSION.

But, it may be asked, as the population and wealth of a - country increases, does it not follow that some kind of expansion in currency and credit facilities are required ? It certainly does, but such expansion, to be of a healthy character, requires. to be the outcome of real production, and in the case of a country like Great Britain, which is so_ largely -dependent upon foreign -countries 'for -food stuffs and raw material, it _ is particularly essential that the expansion in currency and- credit should proceed on these lines, and that as a result we should be able to command such extra stocks of gold as may be necessary for credit and currency expansion. So, it comes to this, first that the- country which placed 120 kind of restriction upon its credit and -currency faci- lities would be on the high road to ultimate financial and social chaos. Second,-that the banking and currency system of a country should be framed with special regard to the requirements of that country, and should be designed to afford the best and most enduring facilities, for wealth production of every kind. That the system in Great Britain up to the period of War provided these conditions there is little doubt, the wealth, prosperity and general standard of living in the country affording eloquent testimony. To-day the picture has become clouded by a series of events which have made an upheaval m economical conditions all over the world. Nevertheless, as I endeavoured to show last week, the depression which exists in some of our key industries can certainly be attributed to causes wholly unconnected with the Gold Standard or monetary policy, while, on the other hand, recovery in prosperity in many other directions, and especially in our financial activities— which bring much wealth to the country—can undoubtedly be directly connected with a sound currency and banking system. ARTHtTR W. KIDDY.