HC Deb 20 June 1961 vol 642 cc112-4W
Captain Kerby

asked the Chancellor of the Exchequer, in view of the fact that the amount of paper money in circulation on 31st May was £2,325,361,499 and that private banks, under the statutory requirement to hold 8 per cent. cash cover for credit loans, are thus able to issue means of exchange up to an approximate sum of £29,000,000,000, yielding about £1,450,000,000 per annum in interest, whether he will take powers to ensure that a proportion of this interest is secured for public use.

Mr. Selwyn Lloyd

I am afraid that I do not accept my hon. Friend's facts, figures or conclusions.

The banks are under no statutory obligation to hold a fixed proportion of their assets in cash. By convention the London clearing banks hold the equivalent of at least 8 per cent. of their gross deposits—which amounted to £7,350 million on 17th May, 1961—in the form of coin and Bank of England notes in their tills and deposits at the Bank of England. These two groups of assets together constitute their "cash"—amounting to £593 million on 17th May, 1961—and the 8 per cent. is known as the "cash ratio". The total amount of notes in circulation is irrelevant in this context, since the greater part of it is in the hands of the public outside the banking system. What counts for this purpose is the amount of notes and coin actually held by the banks themselves and their deposits with the Bank of England, upon which they can draw to replenish their holdings of notes and coin as may be necessary to meet the requirements of their customers.

For reasons explained in the Report of the Committee on the Working of the Monetary System (Cmnd. 827, paragraph 376): the effective base of bank credit has become the liquid assets instead of the supply of cash. The London clearing banks work to a conventional minimum ratio of liquid assets to gross deposits of 30 per cent.—the actual ratio on 17th May, 1961, was 31.5 per cent. The total amount of advances outstanding on 17th May, 1961—ignoring items in transit—was £3,446 million.

The answer to the last part of the Question is no. I would remind my hon. Friend not only that the services which the banks render to the community are an integral element of a complex economic and monetary system such as ours but also that about one-third of the banks' total assets consist of direct or indirect lending to the Government, that the banks are subject to official restriction through the special deposit scheme as well as by the traditional instruments of monetary regulation, and lastly that the banks are liable to Income and Profits Taxes.