The Washington times., 1935-03-27

Lswis s<%III, Han be loaned. Then
this new de.
posit will be loaned, and be re-
deposited in a third bank. And so
on!
Thus, they say, by writing up
deposits we can have any amount
of "circulation" we wish.
OF course, they then argue
that the Government must take
over the banks in order to con-
troll this easy money mill which
they imagine to exist.
There are two basic errors in
all this: ID. One is that "depos-
its" are not good, and do not fur.
nish the basis for sound loans, un.
less they are either cash (stand.
ard money!, or are based upon q
productive use of credit. "Depos-
it's" having purchasing power can"
not be manufactured at will.
(2). Deposits cannot be loaned
to individuals unless these is q
demand for credit for productive
purposes. If business is poor, and
currency is of doubtful value,
there is apt to be little demand
for business loans. This is true
even when, as today, deposits"
are manufactured and written up
on bank books in huge amounts.
Look at the facts of bank credit.
Obviously, no single bank can
lend anything like 10 times its
deposits. Can you imagine q
bank having only one million
dollars deposits, but lending 10
million dollars? Don't you know
that business men get deposit
loans in order to check them
out? A bank can safely lend
not much more than one and
One-tenth times its deposits.
1t can lend 10 times its re-
serves, but reserves are not de-
post credits. They must be
cash or its equivalent.
Nor can a thousand banks do
any more, except as they are able
to pool their individual reserves.
If they have deposits which are
not being loaned, and for which
they have more reserves than re.
quired, they can turn these excess
deposits over to central bank.
These excess deposits may be
called "excess reserves" and may
be borrowed, indirectly by other
banks. But when any bank lends
more than it's excess reserve, it
has a deficit in its reserves.
We start with reserves"
Experience shows that banks
may safely accept deposits chat
is, assume deposit liabilities) up
to or 10 times reserves. And q
large part of these deposits may
be credits extended to business
men,-that is, be derived" from
loans.
But experience also shows that
total loans (and inveStmentS)
should not exceed total deposits
more than about per cent.
So you see that it is reserves"
which limit bank deposits, and
deposits in individual banks limit
their loans.
But more than that, you must
remember that when Bank A
makes a deposit loan, and the
borrower draws checks, it's de.
positS are reduced. This de-
crease in Bank AS deposits tends
to offset any increase in the
deposits of Bank B which may
occur when the borrower spends.
Experience shows that only 20-25
per cent of loan deposits stick in
a bank. Loans are limited by
the deposits which stay in the
bank.
Finally, remember that if de-
poSitS are used, and actually
turn over" in business, prices are
apt to rise. That reduces the
purchasing power of the dollars
which are spent and redeposited.
Thus they are not good for an
amount of deposit credit equal
to the amount of purchasing
power of the original deposit.
But, when all is said, the
basic fact which destroys the
notion that deposits can be
piled on deposits, is that a de-
pOsit to be good must be
either ~ cash Tor its equiva-
lent), or (2) the result Of a
productive business operation,
or 81 the anticipation of cash
taxes to be collected by
solvent government.
Other deposits" are but
illiquid debts, and decrease
banks real ability to lend. They
eat into real bank reserves. To
base fresh deposits upon them
by extending loans, merely builds
up a pyramid of paper.