The Washington times., 1935-03-23

Lewis Haney Bankers are
specialists in credit, and the LA
bilities they carry in the shape Of
deposits" are chiefly the result
of credit.
For example, manufacturer
wants to buy materials and hire
labor. He explains his condition
and plans to his banker. The
banker enters a deposit credit"
on his books, against which the
manufacturer can draw checks.
Thus the manufacturer gets the
means of securing goods and serv'
ices now. In return, he gives his
note to the bank, and the bank
also enters on it's books a loan"
Back of such a business
credit, therefore, lies the pro-
ductiOn of the manufacturer
the materials, labor and busi-
ness skill he uses. Bank de-
pOSitS made this way really are
much the same as If the busi-
ness man had deposited a part
of his business with the bank.
We may think of the mass of
such deposits as being the steel,
cloth, shoes, groceries, ETC., de-
pending on the kind of busi-
ness, which lie back of the
business mans note.
One of the great functions Of
banks is to pass on the soundness
of such loans, and to decide how
much deposit credit to let business
men have.
The deposit credit can then be
checked out by business men. and
the checks so drawn become de
posit currency" Such currency
enables business men to pay labor
and buy materials.
To a large extent it supple
ments money. for the banks are
able to clear" most checks with
out any cash being actually used
as in case one business man
pays another by check, and the
latter uses this check to pay of
a loan he has received from a
bank. =,
Above all, note that deposit
credits of this sort are based
upon goods and services. They
arise out of productive business
transactions. Deposit currency
and checks are good as long as
they are based upon good ousl'
ness.
And banks do a great service
by enabling business credit to be
pooled, and checks to be cleared.
But this function of banks
may be prOstituted. and deposit
currency may become danger
Gus.
For example, a government
may induce the banks to ex"
tend deposit credit to it, with
out giving a note secured by
productive use of labor and ma
terials. Such deposits do not
represent business, and the
checks drawn on them have a
significance very different from
those drawn by business men.
This is especially true when
the government is running on
a deficit, and is thus really in
solvent.
When a bank makes a buSi'
ness loan and extends deposit
credit to a business man, there
underlies the transaction a de-
finite business enterprise, which
is likely to enable the retirement
of the loan in a short time. The
skill, energy and integrity Of (D
the business borrower, and (b)
the bank lender, are working con-
stantly to make the credit good.
All this means "liquidity." And
the volume of deposits (and OF
deposit currency) is almost au'
tomatically adjusted to business
requirements. Assuming honesty
and efficiency, no initiation can
result.
But when a government gets
deposit credit, it may use pres
sure, and it may draw its checks
for wasteful political purposes. or
for expenditures which at least
bring in no net money income.
There may be no basis for ret1r-
ing the loan, particularly if taxes
are high and the government Is
spending more than its income.
The deposit credit then ceases to
become "a business proposition.
Then deposit currency" Is
based on nothing but Govern
ment debt.