1930s >> 1930 >> no-307-march-1930

Answer To Correspondents: “Bank Loans and Deposits”

“Bank Loans and Deposits”
Mr. Nicholls (London, N.4).
We see no reason to believe that the late Mr. Walter Leaf meant anything but what he said. His words are quite plain—“The banks are strictly limited in their lending operations by the amount which the depositor thinks fit to leave with them.” (“Banking” p. 102.) And, “the banks can lend no more than they can borrow—in fact not nearly so much ” (ibid). There is nothing in the context to indicate that he could possibly have meant anything else. You ask, “is it possible to make any normal person believe that there is a moneyed class in this country willing to remain depositors in the Big Five to the extent of upwards of £1,000 million.”
If you will look up the latest balance-sheets of the “Big Five” banks you will see that their deposits total well over £1,600 million. The total of their loans and advances is only £880 million.
The relationship of gold to deposits is a quite different question. Banks pay interest on deposits not merely on the amount of gold they happen to hold.
Ed. Comm.
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Mr. F. L. Rimington.
See reply to Mr. Nicholls. Ed. Comm.
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Mr. Edwin Wright.
You based your case on a statement (“every bank loan creates a deposit ”) which you attributed to Mr. McKenna. We did not attempt to meet the point merely by quoting a different opinion expressed by the late Mr. Walter Leaf, but gave as well the evidence on which he based his opinion. We notice that you ignore this evidence.
Mr. McKenna’s present views and the practice of the bank of which he is Chairman, certainly do not correspond with the theories which you say were held by him. At the Midland Bank annual meeting (22nd January) Mr. McKenna made the following statements in his address (See Times, 23rd January):—

  It is a common notion to judge from speeches and letters in the Press, that the banks have an inexhaustible power of lending money to industrial enterprises, and that any industry suffering from general depression could be restored to prosperity if only what is termed a more generous policy were adopted by the banks. (Laughter!) A moment’s reflection, however, will show that the banks have no inexhaustible fund to draw upon. The sums they lend are balanced by amounts due to depositors, who would certainly not rest content unless confident that their money was being wisely used and could be repaid to them at any time.

According to the theory which you say Mr. McKenna held, the banks ought to be able to create deposits at will and thus draw upon “an inexhaustible fund.” It is evident that Mr. McKenna, like the late Mr. Walter Leaf, does not share your view.
Ed. Comm.