19 JULY 1935, Page 35

New Era Bankirig ?

Political Factors rirgAT the present conditions in the banking world, as indeed in so many other directions, are abnormal everyone probably admit. What, however, is more difficult to determine is whether the abnormality ! is a mere Passing phase or whether the present or somewhat similar conditions are to become more or less permanent. If the point had to be decided by a reference to past history the evidenee, of course, would be overwhelmingly Ij favour of present conditions being temporary with an ultimate tendency to revert to the normal. Some forty years ago we had money rates as easy as they are today with British Funds and kindred securities much higher than at present (the, Income Tax, however, was then Only 8d. in the g as compared with 4s. 6d. today). The period of these abnormal conditions extended over two years and towards the end of it there were many who affirmed that, while there would doubtless be an Ultimate reaction both in money rates and in securities, there would be no return td either the high money rates or to very low prices for Government 'securities. As a matter of fact, however,' not many years passed before money rates rose sharply and there was something like a slump in Government securities.

INCREASING STATE CONTROL.

In view, therefore of past experience it would certainly be foolish to assert definitely that we have entered Upon a new era of finance and banking, but at the same time I think the possibility that we have done so should be frankly recognized. For there are circumstances attending the present developments in money and !credit which are unprecedented in character, and among these must be included the fact that when from 1894 to 1(396 we experienced' phenomenal ease'in money and a 2 per cent. Bank Rate we and other leading countries were on the gold standard and thatfitet alone played its part in bringing about the inevitable reaction towards the normal. Today, however, everything concerning gold standards and monetary and currency policies may bp said to be iti the melting pot. The one thing which clearly emerges is that monetary and credit conditions aie now controlled to an .extent to which they have never previously been controlled by Governments. As a result developments in banking today are determined to aitt extent to which they have never previously been ' determined by political factors.'

POLITICAL FACTORS.' ' At the 'present moment - thee 'Political influences dominate the banking and • monetary situation in two Ways. in the first place the unrest in international , 1ilitics with its effect upon public. confidence plays a g eat part in checking individual business enterprise w!ich in its turn partly explains the absenee of smaller demands for banking loans for business purposes. In the second place it is the policies of Governments as ex- Pressed in tariffs and exchange restrictions which are largely responsible for the severe contraction in inter- national trade, while finally, it is an open secret that the Governments of the leading countries determined some tWo years ago to frame their monetary policies on lines calculated to lead to a great expansion in credit and a consequent ease in the monetary situation. That such ease has assisted our own Government and that of the United States to effect profitable conversion schemes we know very well, but it has also been largely responsible for the glut• of money and not only have the-rentiers and holders of . lit ! I capitol suffered through - reduction pa , , • . or interest on their investments told- ke reduction in the r4te of interest on their bank deposits to the phenomenally lqw level Of i'per cent:,' but also very little corresponding ' relief has sofar been obtained along the:lines of a reduction iri the Income Tax. . .

! From a subsequent article it will be seen how these c nditions have brought about a radical change in , 1: h1, nkers' balance-sheets, So that in spite of a huge' ' i crease in deposits, bankers' .loans and advances have 1 c ntracted, while on the other hand there has been an unprecedented rise in the holdings of long-dated investH inents, and these changed conditions are scarcely adequately, off-set by the advance which has taken place in tha' actual holdings Of cash.

, SOME POSSIBLE DANGERS.

Meanwhile, although no one regrets more than the! banker that the increase in deposits, should uot ••have; been accompanied by an expansion in the advances, the' uninstructed public is, naturally perhaps, inclined to point to these great accumulations of deposits as repre- senting unused resources which ought to be available for stimulatiag enterprise. Of course those who are familiar, with the facts know perfectly well that it is not fresh, or cheaper banking facilities which are required to stimulate trade but the removal of those political factors to which I have referred and which completely prevent ! that revival of confidence which is absolutely necessary for the stimulation of individual enterprise. It is not 1- ' only the uninstructed public, however,- and the extreme • sOcialists who are disposed from time to time to make the present abnormal conditions the basis of attacks upon our banking system, but economic theorists both in writing and in speech are disposed to adopt the con- ' elusions that we have entered definitely upon a new era. , of finance and, banking, and that somehow or other this great accumulation of funds must not be allowed:: to go unused. And we know that so far as our extreme!!! socialists are concerned the nationalization of banks !H might easily lead to banking deposits being used in !, ! directions entirely inconsistent with the principles of 1H sOund banking or of sound finance. 1 . :

. BANKERS' RESPONSIBILITY.

! I consider therefore that there was never a moment 1 when it was more necessary for bankers themselves to !I be ready, not merely to defend our banking system, but •!! tO demonstrate more clearly and fully than I am able ! to do in this short article what are the real causes of today's stagnation in world trade, a stagnation which.' . ti cOnstitutes the main explanation both of the high; , figures of unemployment and of the record totals of banking deposits. Nor in this connexion is it possible !! , I tO forget that ere long we shall be in the throes of a,„ General Election, and while I believe that the wild, speeches of Sir Stafford Cripps and some other Socialist 11, f! i l , leaders have really done much to weaken the cause o !h those who are working for the nationalization of the banks, I quite agree with the remarks which were made by Mr. R. G. Meuzies, the. Attorney-General for the, Australian Commonwealth, at the recent dinner which'. ' was giver to the•Rt: Hon: J. A. Lyons by the Australian : Bankers in London. In the course of his speech Mr;' : Menzies said banks and bankers had become the object' I of.. political controversy. In his opinion the banks . could not go on saying indefinitely they took no part in'''

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. political controversy, when the community as a whole ! was thinking of banking and bankers. If they wanted • j .to have some intelligent consideration of their problems, a then the banks would have to begin to discharge their I educational responsibilities, tO the voters not only in , Australia but-in Great Britain.

Personally I do not believe for one moment that the British public will endorse any Socialist plan at the next j election for a nationalization of the banks. Instinctively the idea will be repugnant, but in this matter we need something more than • instinct and old custom as a safeguard. The arguments against nationalization.' are convincing, and the danger which would be threatened to the depositor is a very real one, but what is needed is not merely the recognition of that fact by banking . experts or even by bank depositors but a recognition by the masses of the community that the .danger is one , , whieli Would threaten ernployment' itself.

'ARTHUR WC. KIDDY.