Answer to Correspondent. Bank Loans and Deposits
To the Editor of the SOCIALIST STANDARD
As an old reader of the “S.S.” may I be permitted to express disappointment at your treatment of Mr. Edwin Wright’s contribution on the Gold Standard?
One feels that the point he raised requires greater consideration than it received at your hand.
His case is, as I understand it, that the actual deposits of cash received by banks is a negligible quantity relative to the total deposits as shown by their balance sheets, and that consequently we have to look for the bank’s main source of revenue, not from a profit made as a result ol the margin between deposit-rate and bank-rate, but from the fact that they are in a position to loan considerable sums in excess of the actual deposits upon which interest is paid.
It is true a bank does other work besides the granting of loans and overdrafts. The buying and selling of investments, discounting bills, etc., play a part in a bank’s activities, and consequently the statement made by Mr. Walter Leaf, and quoted by you, is not an indictment the theorem, “Every bank loan creates a deposit” ; it merely points to a possibility, under certain conditions, of bank deposits and loans, and advances to vary inversely.
That the main proposition, however, as advanced by your correspondent, and so generally accepted in the Socialist and Labour movement, should have been rejected and subjected to scorn by you, is beyond comprehension.
Mr. Nicholls intervenes in order to explain what another correspondent meant when he wrote, “Every bank loan creates a deposit.” Two things are possible : either Mr. Wright meant what he wrote or he meant something which he did not write, We, having no other evidence of Mr. Wright’s meaning than his letter, took it for granted that he meant what he wrote and replied accordingly. (See January “S.S.”) We quoted the reply given by the late Mr. Walter Leaf to the same proposition. It is, of course, possible that the person to whom Mr. Walter Leaf was replying also did not mean what he said but something else, but evidently Mr. Leaf felt about that just as we do.
Mr. Nicholls tells us that Mr. Walter Leaf’s reply “is not an indictment of the theorem ‘Every bank loan creates a deposit’ ; it merely points to a possibility, nder certain conditions, of bank deposits, and loans, and advances to vary inversely.” May we remind Mr. Nieholls that the proposition put forward by Mr. Wright was not the proposition that “some bank loans, possibly, under certain conditions, create a deposit,” but that “every bank loan creates a deposit.” Mr. Walter Leaf gave a definite illustration of a £29 million increase of loans and advances being accompanied by a £25 million decrease in deposits. That meets the proposition put forward by Mr. Wright it does not meet some other proposition which Mr. Nicholls says Mr. Wright meant to put forward. It was not intended to.
Now for Mr. Nicholls’ own trouble. He thinks that Mr. Wright meant to say that
“The actual deposits of cash received by banks is a negligible quantity relative to the total deposits shown . . . and that they (the banks) are in a position to loan considerable sums in excess of the actual deposits on which interest is paid.”
The first part of the statement is not in dispute. The second part, even if it were true, has no direct bearing on the first part, although in Mr. Nicholls’ letter they are joined by the word “consequently.” In the first part he refers to “cash,” while in the second part he refers to “actual deposits on which interest is paid,” but these are not the same thing, the latter being a much larger sum than the former.
We notice that Mr. Nicholls only tells us what he thinks the banks “are in a position” to do. He does not commit himself to telling us that they do it. If he meant (but forgot to state) that they do in fact “loan considerable sums in excess of the actual deposits on which interest is paid,” we shall be pleased to see his evidence for that assertion.
Mr. Nicholls wants us to accept his unsupported assertion without any evidence whatever, except another assertion (itself untrue) that in the “Labour and Socialist Movement” (by which we presume he means the Labour Party and its affiliated bodies) this view is “generally accepted.” Even if the Labour Party were agreed on this question instead of being divided as on most questions, it is indeed a novel doctrine that the Socialist Party ought to accept Mr. Nicholls’ errors because those errors have been endorsed by a number of non-Socialist organisations. We cannot even promise Mr. Nicholls not to disagree with them again, though this may cause him still more surprise.
Knowing the usual fate of people who intervene in other people’s quarrels, we are now expecting to hear from Mr. Wright that his letter meant what it said, or at any rate, not what Mr. Nicholls says it was intended to mean, and that Mr. Nicholls’ letter is itself in need of inspired interpretation.