22 OCTOBER 1937, Page 39

The, Banking and

, -

Financial Outlook

IF I were to take as a basis for consideration of the general banking and financial outlook the line pursued by the Chancellor of the Exchequer at the recent dinner at the Mansion House to tht Bankers and Merchants of the City of London, it would be easy to paint a bright picture with thoroughly hopeful prospects. We know, however, that conditions have to be very unfavourable to prevent a Chan- cellor from adopting an optimistic tone on those occasions when he is addressing the business community. In saying this, however, it must not be supposed that I am suggesting that Sir John Simon gave a distorted picture when addressing the bankers on the seventh of this month. Although, perhaps, I may be more especially in sympathy with the Governor of the Bank when, in the course of his few remarks at the Bankers' Dinner he professed inability to see through the mist of the future " with any certainty what- ever," Mr. Norman was able to give complete support to the Chancellor of the Exchequer in all that he said with regard to favourable conditions of home trade and even with regard to some improvement in international trade.

Nor is the present situation one where bankers have reason to express dissatisfaction with regard to the immediate trend of profit-earning power, for, with the value of money slightly on the upgrade, with bankers' advances increasing, and with a better tendency of prices in gilt-edged securities, I should say that there is every prospect that, barring accidents in the short intervening period, bankers' profits for the current year should equal, if not exceed, those of the preceding year, while the recent issue of new capital by the Midland Bank is suggestive of a belief on the part of bankers that fresh capital can be profitably employed. Some allowance, however, has to be made, for Government securities have fallen in price during the year.


And yet, notwithstanding the many favourable factors in the situation, such as increased home production, the decrease in unemployment and the moderate improvement in international trade, the fact remains that there are factors which make the outlook obscure. A year ago, when writing the first article in the October Financial Supplement of The Spectator, it was possible to speak of all the favourable factors just enumerated, and in addition to record a con- tinued upward movement in securities. British Funds had certainly reacted moderately, but in most other departments of the Stock Exchange prices were still tending upwards, and that circumstance was not without its influence both on spending power and upon what may be termed the psychology of financial and business enterprise.

During the past six months, however, there has come a complete change over the markets for public securities, which haVe received damaging blows from many directions. First and foremost, there has been the intensification of inter- national political unrest, with acute situations in Spain and the Mediterranean and the outbreak of war in the Far East. This latter development has been so important a factor that I believe that readers of the Financial Supplement will note with interest the articles which appear later dealing with the economic situation both in China and Japan.


In addition, however, to adverse political influences, markets here haire been. vitally affected by the unexpected developments in the United States. I have referred many times in my weekly articles to the fact that the forces employed by Washington to bring about a rapid revival of business in the United States were scarcely of a character to command confidence in its continuance, and a growing recognition of that fact, combined with uncertainty as to the nature of future Washington policies, has been responsible for a set-back in business activities in the States, which' has been accompanied by an almost catastrophic fall in' American securities. It is probable enough that this fall has been quite out of proportion to any set-back in legitimate trade in America and has been due to the excessive speculation in American railroad and industrial shares, prompted during the early part of the year by extravagant anticipations of industrial activity in the autumn. Moreover, this speculative buying of American securities, so far from being confined to Wall Street, was indulged in freely by London and by some of the other Continental centres. Consequently, in addition to the other adverse influences responsible for the great break in Stock Exchange securities during the past six months, a prominent place has to be given to the effect of the great slump in Wall Street, while at the moment of writing the situation has not been improved by the revised budget estimate indicating the prospect of a deficit larger than the President had expected.


It is evident, therefore, that the financial and banking outlook contains much that is obscure, but, always barring some serious development in international affairs, I am inclined to think that the outlook is rather more hopeful than is apparent on the surface. No doubt the fall in securities and even the fall in prices of commodities, together with a recognition of the many factors which have to be taken into consideration, have seriously disturbed the psychology of markets, and that is a point by no means to be disregarded. On the other hand, there are favourable points which must not be ignored. The Stock Markets themselves are probably in a healthier condition than a year ago, for it is now evident that, even if there was not what is known as a weak " bull" account on the Stock Exchange, securities had been largely bought by those hoping for quick profits rather than by genuine investors. Today, however, prices of industrial and other shares have been brought down to a level attractive to the genuine investor, and while the fall in prices of commodities may have hit speculative buyers, there are many industries which should benefit materially by its effect in reducing costs of production, or, at all events, in preventing the great rise which at one time seemed to be inevitable.

Moreover, this is a change which in the long run seems to be more desirable from the banker's point of view than the continuance of boom conditions. The risk of unsound banking advances is thereby greatly diminished, while the continued activity in home trade and the moderate improve- ment in international trade give promise of a further expan- sion in banking loans for sound and safe business. It is, however, the political factor which is the main key to the situation, for, so long as the political strain in Europe con- tinues and there is no cessation of the war in the Far East, it is useless to expect progress in international trade activity to go very far.