Who Keeps His Money in the Bank? Author(s): Ashok V.

Desai Reviewed work(s): Source: Economic and Political Weekly, Vol. 3, No. 3 (Jan. 20, 1968), pp. 197-198 Published by: Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4358155 . Accessed: 25/01/2013 17:33
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Economic and Political Weekly is collaborating with JSTOR to digitize, preserve and extend access to Economic and Political Weekly.

http://www.jstor.org

This content downloaded on Fri, 25 Jan 2013 17:33:22 PM All use subject to JSTOR Terms and Conditions

Who

IKeeps

His

Money
Ashok V Desai

in

the

Bank?

Pendharkar had concluded (Special Number, August 1967, pp 1567-72) that there is a leakage of cash from banks to the rest of the economy. While cash holdings do limit bank advances, the quantumnof deposits is determined not by advances but in virtual independence from the quantumn of advances. The bulk of bank deposits is provided not by large scale industry and trade but by individuals who may be inexperienced savers, honest rich men or small traders. One cannot help wondering who in India shows growing attachment to an inferior asset like bank deposits.
ACCORDING to basic monetary theory, banks can create deposits, subject only to a limit imposed by their cash holdings. The assumptions behilid this generalisation are: (1) cash is issued only by the government. and its supply is exogenously determined; (2) cash is held by banks only, and not by the public; bank deposits are the only form of public money; (3) banks lend only to the public, and not to the government; thc demand for bank advances at (4) the current rate of interest is infinitely elastic; and (5) the government balances its budget, and finances all its expenditure out of taxes. It does its financial transactions through banks. On these assumptions the total deposits will be equal to banks' cash holdings divided by their cash ratio. In this model, cash has no resemblance to the cash of the real world. It can be only a sort of talisman put aside by bankers whenever they give an advance; or it might be a token the banks are required to get from the government for every rupee they wish to advance. SECURITIES, CASH NOT Regulation of cash supply is a way in which government can control bank deposits. But normally governments regulate money supply by fiscal measures or open market operations. Thereby, they influence the quantum of cash and deposits together; they do not bother to vary bank deposits indirectly through banks' cash holdings. When they are unable or unwilling to achieve their object by fiscal or monetary means, governments restrict of their assets with bank advances. The equivalent figure for trading companies was 17.5 per cent. Yet their bank balances amounted to only 3 per cent and 2.1 per cent of their total assets, respectively.2 Thus, the large industiies and traders use banks as a permanent source of finance, and not as the giver of temporary accommodation. If they were the only customers, banks could not run on deposits: they would close down unless they found some longterm finance. Who then keep deposits in batnks? A part of the net finance (ie, deposits PENDHARKAR'S MODEL minus advances) is provided by finanIn Pendharkar's model,1 there is both ciers, who find deposits convenient for ,a cash ratio and a liquidity ratio; but large paymiients and as a liquid hnoard; approved securities are available on a part is provided by professional firms. tap, so cash holdings are the only But the overwhelming bulk is provided limiting factor on bank deposits. The by individuals. Scheduled banks carried cash ratio of Indian banks being about deposits of Rs 2370 crores on March 31 6.25 per cent, the increase in their 1964; of them, individuals owned deposits should be about 16 times the Rs 1166 crores. Of bank advances of increase in cash supply. Pendharkar Rs 1865 crores, they took only Rs 102 finds that the actual increase has been crores.3 only a third to a fifth as much. He concludes that there is a leakage of BULK FROM INDIVIDUALS cash from banks to the rest of the Why do individuals keep such large economy. deposits in banks? The transactions There is a sense in which Pendharkar's demand for money cannot be the whole conclusion is correct. Of all the possi- explanation. Bank3 serve mainly nonble factors, it is cash holdings that agricultural people, few of whom need limit banks' advances in India. The to keep more than fifteen days' income limit is not placed by the supply of irnmoney. If the Rs 1166 crores held by approved securities, which has risen individuals had been for transactions much more than their absorption by purposes, their income would have been banks in recent years or by the demand at least Rs 28,000 crores--50 per cent for advances. more than the national income and But Pendharkar is wrong in implying three times the non-industrial income that advances create deposits, albeit in 1963-64. with leakages. For the quantum of Starting from the other end, the indeposits is determined in virtual in- come generated in professions and dependence from that of advances. liberal arts, government service and Most of the advances are given to domestic service in 1963-64 was Rs 2410 industries, traders and financiers. At the crores.4 Total wages and salaries paid end of 1964-65, large manufacturing cut in large industry and mining would public companies owned Rs 571 crores be about Rs 1300 crores;5 small etnterto banks, and financed 18.9 per cent prises might have paid out another banks' advances to the public by forcing them to lend part of their resources to the state. This might be done by fixing a statutory liquidity ratio, whereby a certain proportion of the deposits must be invested in specified government securities, or by asking the banks to put a part of their deposits with the central bank. The situation then approximates to the model described earlier, with the difference that it is the supply of specified securities that limits deposits, and not cash supply. 197

This content downloaded on Fri, 25 Jan 2013 17:33:22 PM All use subject to JSTOR Terms and Conditions

January 20, 1968 Rs 500 crores, and dividends might have come to about Rs 220 crores. Thus, the total annual income of urban individuals other than traders must have been in the neighbourhood of Rs 44004500 crores, and their fortnight's income less than Rs 200 crores. Much of their transactions money would be held in cash. So their bank deposits used to finance transactions would be under rather than over Rs [00 crores. There are two further possibilities about bank deposits. Firstly, they might be held as a form of wealth. Since the interest on bank deposits is much lower than on industrial shares, debentures or deposits, only two kinds of individuals would keep their savings in banks: small savers who have never had anything to do with the capital market and who know nothing about investing, and very rich but honest people who pay taxes at rates which make gross rates of return on investment irrelevant.

ECONOMIC AND POLITICAL WEEKLY The other possibility is that the deposits are held by traders for tranisactions purposes. The national income arising in the production of goods for the market must have been about Rs 6000 crores in 1963-64, rising at the rate of Rs 1000 crores a year. T he final price of these goods wouild be much higher than the producers' price, and they might be traded a number of times before reaching the final consumer. Besides, trade would also take place in intermediate goods. So Rs 15-20,000 crores is not an improbable figure for the internal trade of the country, nor Rs 2-3,000 crores for its monetary requirements. Most of this trade is in the hands of sole proprietors, who might well account for a large part of the country's deposit holdinDgs. This is sheer speculation, however. We are in no position to identify the deposit holders, whether they are inexperienced savers, honest rich men or traders; but we cannot help wondering who in India shows growing attachment to an inferior asset like bank deposits.
NoTEs

1 V G Pendharkar, "Bank Deposits in the Indian Economy: A Note on Creation and Leakages", Economlic and Political Weekly, Special Number, August 1967, pp 1567-72. 2 "Finances of Indian Joint Stock Companies, 1964-65", Reserve Bank of Itndia Bulletini November 1966,
pp 1333-42, staleWent 3.

3 "Trend and Progress of Banking in India", 1964, pp 14-15. 4 CSO, "Estimates of National Income" 1964-65", Delhi 1966, Table 2. 5 Calculated by applying to value added as given by "Estimates of National Income" the ratio oft wages and salaries, bonuses and welfarc expenses to value added in the Reserve Bank sample of public and private limited companies (RBI Bulletin November 1966, p 1282; December 1966, p 1451).

INCANDE-SCENT WVELLMWAN 'ELECTRIC BOX TYPE FURNACES ARE INSTALLED BY ENGINEERING INDUSTRIES MWAJOR
....... ........... .............. ......... ...... ... ............ ....ments ... .. ............ ..... ... ...... .......standard ........ ... ~ ~ .............. ..... ...... .and .... .... More and more major industries are using Wellman Incandescent Standard Electric Box Type Furnaces. Normalising, Annealing, Pack Carburising, Re-heating, ~~~~Hardening, these are possible in the box type unit. For economical mass production or obbing shop versat'iity these furnaces are equally suited. With small modification furnaces can be adopted for heat treat~~these gas requiring protectiMe atmosphere. ~Wellman Incandescent also manufacture electrode salt baths for all recog'ynde harden~ ~ nse tramnsicldn ing, isothermal annealing, straight hardenin forced air circulation furnaces for tem~erig,subcritical annealing, ageing, solto treatment of aluminium alloys. Some industries served by Wellman are Engine, Automobile, Ball & Roller Bearing, Foundry, Machine Tool, Spring, Tools & Dies, Transformer, Tube, Wire,

~~Fogin-all

.......................Aero
U..

~~~~~~Metal Working.

dtalsplas FMUThe

wit

INDIA 'VIWELLMAN INCANDESCENT LTD.8

aigo

tet

acta1

198

This content downloaded on Fri, 25 Jan 2013 17:33:22 PM All use subject to JSTOR Terms and Conditions