Page 3569 - Week 12 - Thursday, 20 September 1990
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When money is lent by a bank it passes into the hands of the person who borrows it without anybody having less. Whenever a bank lends money there is, therefore, an increase in the total amount of money available.
The barrister, H.D. McLeod, in a British royal commission, was selected to prepare a digest on the law of bills of exchange, notes, et cetera. His book, published before 1897, of over 1,400 pages and entitled The Theory of Credit, has, on page 607, the following statement:
1. Bankers are not dealers in money. They never lend money. The sole function of a banker is to create and issue credit, and to buy money and debts by creating and issuing other debts in exchange for them.
(Quorum formed) There has been talk of whether or not State and Federal governments can create money. The sovereign States of the Commonwealth of Australia have the constitutional right to carry on a banking service within the borders of each State for the State's own needs. This was validated by a number of rulings of the High Court of Australia, for example, in the famous bank nationalisation case in 1948, 76 Commonwealth Law Reports, pages 337-338. I quote:
It is open to the States, at all events in contemplation of law, under the exception of State Banking, to provide for their own needs.
It is important to make a differentiation between cash - notes and coin - and credit. For this I refer to the Year Book of Australia, by the Australian Bureau of Statistics in Canberra, for 1986. At that time the ratio of dollars of legal tender to credit was $77.08 for every $1 cash.
The Right Honourable Reginald McKenna, one-time Chancellor of the Exchequer and Chairman of the Midland Bank in the United Kingdom, addressing a meeting of the shareholders of the bank on 25 January 1924, stated:
I am afraid the ordinary citizen will not like to be told that the banks can, and do, create and destroy money. The amount of money in existence varies only with the action of the banks increasing or decreasing deposits and bank purchases. We know how this is effected. Every loan, overdraft or bank purchase creates a deposit, and every repayment of a loan, overdraft or bank sale destroys a deposit.
That came from Post-War Banking by Reginald McKenna. The July 1938 issue of Branch Banking, a United Kingdom bankers' journal, stated:
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