1 MARCH 1930, Page 25

London as a Monetary Centre

Will it be Challenged ?

THAT many of our industries at the present time are suffering from keen' foreign competition is generally recognized. Is there a prospect of our great industry of Banking and Finance suffering from similar competition ? I think there is, though at the moment the conditions can, perhaps, best be described as chaotic and as Marking a transition stage. There are, however, certain aspects of the situation which it may be well to note, even though for the moment it is difficult to determine their full force and significance. In this short article I can only suggest a few main points for consideration.


Before the War London was admittedly the leading financial centre of the -World. The superiority of its banking system was universally recognized ; it was the leading Gold Standard country and free gold market of the world, while our surplus savings, plus our banking resources, -appeared to be sufficient to finance our own requirements and those of other countries, our loans to which brought us, in return, a great deal of trade helping to swell our exports. The War, as we know, caused a complete upheaval of these conditions. Not only' did the general trade and economic balance change in favour of the United States, but the stores of gold accumulated by that country during the War and the years immediately following made it possible for the 'Cnited State to be 'recognized 'as the leading monetary or lending centre, her claim, moreover, for some time being supported by the further fact that she was the only country really working on the Gold Standard. Moreover, for a brief period she further supported the claim by making large, loans to other countries, and chiefly to Germany, while by the manner in which she held Europe to ransom in the matter of War debts she obtained a further stranglehold over the foreign exehanges, which increased, or should have increased, her position as a monetary centre. Not only so, but, other things, being equal, her claim was in a sense further supported by the fact that Great Britain was no longer in the position to lend abroad to the same extent as before the War.


And yet, as we know, there was a sense in which America two years ago began to break down as a money centre. Such was the' rise in her money rates following the great speculation in Wall Street that instead of being a lending nation, she became a borrowing nation, capital flowing to New York from all parts of the world to take advantage of the high money rates. In other words, despite her great wealth and notwithstanding huge stores of gold, she required the aid of foreign capital to finance the position. Indeed, at this particular moment a great deal of the old bill discounting and acceptance business came back -to London, because money rates were easier at that centre.

CONDITIONS IN FRANCE. - Turning aside for a moment from the American position, we shall find it interesting to glance at developments which have taken place in France. Less than three years ago, even banking experts in this country took an alarmist view of the French monetary position, believing that the flight from the franc might bring actual financial ruin to France, where the position had been aggravated, moreover, by a huge expansion of credit, insufficient taxation by the 'French Government and a huge expansion in the French floating debt. Yet within, a few months this extra- ordinary situation was solved by drastic action on the part of the Poincare Government in placing heavy taxa- tion upon the people, in redeeming floating debt, and finally, taking advantage of the 'depreciation in French currency occasioned by the flight from the franc, by per- manently devaluing the franc and leaving the authorities with unprecedentedly large French balances in foreign countries. By these means, France, if not actually becoming a money centre or a lending country, has secured a position which gives her enormous power over other foreign monetary centres by reason of the enormous balances which she is able to move at will from centre to centre.


If we turn to Germany we find quite an extraordinary and abnormal situation, and one which again largely centres upon a devalued currency. Germany, by wiping out the value of the pre-War Mark, made it inevitable that she should borrow abroad, not merely to make her Reparation payments, but to get the necessary capital whereby she could restart her industries. Other coun- tries, and notably this country; France and the United States, having determined that Reparations were essential and that the financial resuscitation of Germany was also essential, for the past few years have been lending money to Germany to an extent which has moved the exchange sufficiently in her favour to give her a control from time to time over the gold supplies of other countries. Therefore, it may be said that for some two or three years this market has been more or less menaced by high money rates in New York, following the boom in Wall Street, constant borrowings by Germany to an extent moving the exchange in her favour, and tactics on the part of France which have meant the steady with- drawal of French credits in the shape of gold, so that from one quarter and another the Bank of France accumulated an extra £80,000,000 in gold during last year.


It was under conditions such as these that this country returned to the Gold Standard in 1925, and it can be admitted that over a most difficult period the London Money Market has held its own quite well, especially in view of the fact that d'ining a part of this period, at all events, we have lent quite a fair amount to foreign countries in long-dated loans in addition to the constant placing of short-term balances at foreign centres. Nevertheless, the situation which has still to be faced is an interesting and, in many respects, an embarrassing one. Germany, it is clear, must continue to borrow if she is to make her Reparation payments. In many parts of the world there is great need for new capital. Not only is our own lending power clearly of a very limited character, but although the boom in Wall Street has been broken for the moment and money rates in New York are easier, there are no very definite signs at present of such a sur- plus of credits at that centre as to warrant expectations of a pronounced demand for high-class investment stocks, even of a local character, to say nothing' of foreign obligations. Competition, in fact, at the moment, seems far more keen in the matter of securing gold for central banking reserves than in making fresh loans.


It is amidst conditions such as these that a new element is about to be introduced into the international Money Markets in the shape of the new Bank for. International Settlements. That Institution has, to -all - intents and purposes, already come into being, the Articles of Associa- tion- having been drawn up and • the charter granted, while, as already known, the Head Office is to be - at Bale, in Switzerland. This week the Governors of the six Central Banks, who are virtually the proprietors of the new Institution, meet in Rome to consider the ques- tion of inviting two American directors to join the Board, and these will doubtless follow quickly the appointment of a permanent President or Governor and a permanent General . Manager. How fax this new Institution will ease the international monetary problems of the future, such as those which are involved in the German Reparation payments, the service of the various War debts to the United States, the loan requirements of various borrowing countries, and economy in the use of gold for international settlements, remains to be seen.


With the best will in the world towards the new Inter- national Bank and its functions, bankers here may, perhaps, be excused for concentrating their attention mainly upon the prospects of whether London will or will not retain its position as the great monetary centre of the -world, for it is well known that in the -past that position has meant not only prosperity to the banking industry- but prosperity to-the- country generally. Few, I think, would like to determine what the next few years will bring forth in the shape of international monetary developments, or would care to dogmatize whether, as suggested in the opening lines of this article, our monetary industry, like our industrial and manufacturing industries, is to be severely affected by foreign competi- tion.


It is natural, perhaps, and at all events, thoroughly typical of our race, that we should be somewhat inclined to scorn the dangers of our banking and monetary supre- macy being challenged, just as until recently Lancashire has given scant heed to the fact of foreign _ competi- tion affecting the cotton industry. When we look at the United. States, for_ example,, we are disposed to main, thin that American bankers have made, so far, it coinpara: tively poor use of the opportunities given to them for establishing New York as a monetary centre and have preferred the excitements -aridprcifit4 arising out of a Wall Street boom to an adequate recognition and discharge of the responsibilities of a great banking centre. It is urged, too, that Lombard Street by generatiOns of experi- ence has acquired an expert knowledge of -monetary, banking and currency affairs, which is, so to speak, inherent in the blood and which other countries have tried in vain to copy. The advantages enjoyed by the United States in the matter of gold supplies, a huge favourable trade balance and enormous natural resources in the country, together with all' the advantages which arise from mass produetion, are vaguely recognized. Still, it is urged not only that American bankers have not the same instinct for international business which is found in London, but that- the very fact of 'the many possibilities of profitable employment of capital within the country is likely to prevent, the United States from adequately discharging the functions of an international centre.


It is admitted that in France there are all the possi- bilities attaching to thrift and the long stoeking, so that it is felt that, given the- necessary encouragement from the central. authorities, the problem of financing some of the world's requirements in the shape of new loans may be- met out of French resources. When, however, there is talk of Paris becoming a real monetary centre, it is sometimes pointed out that the character of the people, the lack of machinery in the Money Market, to say nothing of the discredit attaching to so recent a devaluation of the currency, must prevent France from successfully filling the rale of a great monetary centre. It must not be. forgotten, however, that those who hold these views with regard to France a year or two ago also held the view that -long ere this France would be in a semi-bankrupt position owing to the flight from the franc and the unsound conduct of the national finances. In both of these respects; however; there has been a remarkable change in the .positioit, and it will be well to recognize its . There is,' • however, yet another' 'deeper and 'chore practical reason Why it is Well-that we should' in good time reflect upon the 'future possibilities of London as a monetary centre. Both as regards France arid' the United States there are at least certain forces working to promote- their power' as Monetary- centres. These forces are- industry; thrift 'and-thriving trade. As one well% I think, has consistently emphasized thelinportant part played by sound banking and finance in the past prosperity of the country,_ I am bound, however, also to recognize that the ability .Of -London to dischare the responsibilities of a financial centre was, in its turn, largely due to a sound industrial position and to an adequate export trade. The ...question to-day for con- sideration is whether our industrial position' and_ indus- trial forces are being so undermined as to threaten :the ability of the banking system by itself to maintain all the essentials of a great monetary centre and free. gold market. Skilful banking has done much during the past fourteen years to hold the fort in most difficult circumstances, but if the fort is -to be perthanentlY and securely held we must see a sufficient revival in irilliiitry to reduce the present figures of unemployment, and- to .give us once more an adequate volume of exports. ..to compensate for the constant expansion in our impoits.