23 JULY 1927, Page 21

Central Banking Co-operation

Its Advantages and its Drawbacks


ON another page of this Supplement Al be found an article by Mr. J. C. Backhouse dealing with the problem of gold supplies. In the course of his article, Mr. Backhouse stresses the need for economy in the matter of inter7 national gold movements, and to that end refers to the need for do-operation between the central banks of the various countries. Prominence has been given recently to this question because a conference has lately been held in New Y6rk, attended by the 'Governor of the Federal Bank of New York, the Governor of the Bank of England, the President of the Reichsbank and the Deputy Governor of the Bank of France. I think, however, that far too much stress has been laid on this conference, because most of the gentlemen named have, within the last four or five years, frequently met in twos and informally exchanged views with regard to the financial situation and various points where their respec- tive banks might co-operate.


On the present occasion, however, a greater interest has probably been taken in this particular conference because of the presence of a representative of the Bank of France, and because it followed close upon the disclosure of a monetary policy in France which has resulted in that country obtaining an enormous accumulation of credits abroad. Moreover, France has recently used a considerable portion of those credits in the purchases of gold, with the result that higher rates of interest have had to be imposed at foreign _centres- than might otherwise .have been necessary. That the policy of France, which is doubtless inspired by special political and financial considerations, will be greatly influenced by the recent conversations may perhaps be doubted, but it is certainly the recent developments in France which have aroused particular interest in the conference in New York.


Remembering that these pages are read not merely by habitugs of the London money market, but by those less intimately acquainted with international finance, it may be well to speak in rather simple language, first, with regard to some of the circumstances responsible for the movement in the direction of co-operation between central banks ; second, with regard to the difficulties attending such co-operation; and third, with regard to some of the advantages which might conceivably accrue; whilst in the fourth place, •I shall venture to suggest certain drawbacks and possible dangers.

A TRANSITION PERIOD. • Although it is now nine years since the close of the War, it may be said that the various monetary centres are still passing -through a transition period. - For while we may talk easily about the resumption of gold standards and the return to more normal conditions, the fact is that all systems have been rudely disturbed, and that we are Still in the process of evolving new methods, the value and durability of which have still to be tested. This is probably true of 'prosperous countries, such as the United States, as well as of the many countries in Europe which • haye suffered so severely by the War. In the United States the prosperity has been so over- whelming,, and the change-over from the position of a great.debt&.'C6untry to -That of :creditor nation has been so sudden, that the monetary authorities are obviously almost as much concerned with the enor- mous expansion in the assets and liabilities of the country, and the huge accumulations of gold, as some of the European nations are concerned with their impoverished national revenues, unfavourable exchanges, and the great increase in both internal and external indebtedness.


From the outset it was fairly clear that the measure of Europe's financial recovery as a whole must depend very largely upon the extent to which the two great monetary centres, London and New York, were able and willing to render assistance ; and what would have been the state of Europe to-day, but for the timely help organized by the Bank of England working in co-operation with the banking authorities in New York, it would be difficult to say. Nevertheless, as conditions in Europe have gradually improved, and international trade has increased, other problems connected with international settlements haVe arisen. And in particular it has been perceived that for a long while to come European monetary centres must necessarily be handicapped by the huge annual payments to America, both in connexion with fresh requirements of goods and-services fronT that country and with the settle- ment of War indebtedness. Moreover, this situation haS been further aggravated by the unwillingness of the United States to lower its tariffs, thereby impeding the process of settlement by Europe through the adequate export of goods and services. These are conditions and problems which the heads of the great central banks can survey in thoroughly dispassionate manner, and one can perceive directions in which some of the difficulties at all events might be lessened through mutual understandings and mutual co-operation.


When considering some of the difficulties attending co-operation between the central banks of the world, one is at once impressed with the similarity between politics and finance. There is, in fact, a similarity between the aims and objects of the League of Nations and those of the informal league of International banks. Like the League of Nations, International bankers, by the very nature of their operations, are disposed to think internationally as well as locally, and are better able than many in their respective countries to perceive that the seeking of the good of all is usually the best policy to be pursued even for their own particular country. Nevertheless, the fact remains that just as there are many who, while regarding the work of the League of Nations with sympathy, are not disposed to follow its policy beyond a certain point, and still less to trust it too completely as a bulwark of peace, " so in all the countries concerned there is a disposition at times to regard with suspicion the question of mutual co-operation between the central banks. In commercial circles in particular, it is recognized that international commercial competition is at times almost akin to war itself, and the central banks arc therefore reminded that their first duty is to their own country, and not to. international interests as a whole, and it is just as well that this point should be very frankly recognized, because we know that it contains some truth. In the long run, any of the central banks would find it difficult to pursue a particular policy, if there were to be a strong feeling against it in the country of origin, and nothing is to be gained by ignoring the fact.


That certain definite advantages might accrue from co-operation between central banks can readily be admitted. Among other things, it might be well that there should be a very clear definition of what constitutes a really effective Gold Standard, especially in everything pertaining to international settlements. At present, for example, Germany is certainly not a free gold market, while even in the pre-War days the Bank of France was noted for placing all kinds of obstacles in the way of gold withdrawals, even in the face of an adverse exchange. On occasions, when we had an overwhelming trade balance in our favour and were the world's bankers, it was not then, however, a very difficult matter to take upon our shoulders the task of meeting the world's requirements of gold, and, to that extent, of financing the shortcomings of France and Germany. To-day matters are very different, and if there is not to be a free movement of gold on the part of those countries, nominally, at all events, on a Gold Standard, the strain on this country promises to be severe, involving the continuance of high money rates, especially if on the other hand there is to be a claiming of gold irrespective of exchange conditions. In some respects, of course, the position is not dissimilar to the controversy between Free Trade and Protection, but whereas the fiscal question is dominated completely by politics, the question of international gold movements and the definition of what constitutes an effective Gold Standard are matters in which the central banks should have some voice. Of course, there are many ways in which in perfectly legitimate fashion inconvenient gold withdrawals might be avoided under a close co-operation between central banks, but for the reason which will appear later, I am inclined to think that such co-operation should not be used too, freely, and that, when it is used, all the fa_ should be disclosed. Another direction in which mutual co-operation between central banks might be useful is in creating a wholesome public opinion against anything in the nature of unsound finance on the part of the Governments of the various countries. Even during the last few years we have had a practical illustration of the power exerted by central banks in this direction. In those cases where loans have been made to some of the Central European Governments it has not merely been the loans themselves which have been of assistance, but the fiscal reforms which have been insisted upon by the central banks in the lending countries before the loans were granted.

(Continued on page 163.) Finance—Public and Private Central Banking Co-operation,-(continued from page 142).

ESPECIALLY in everything pertaining to the currency systems of a country and note issues, is it desirable that arrangements should be in the hands, not of Governments, but of central banks, and in that connexion, also, it is doubtless desirable that the central banks should be closely in touch, inasmuch as not only the effect locally of monetary policy and currency systems in respective countries has to be borne in mind, but also the influence upon international finance and especially upon price levels of commodities. Finally, there is no doubt that, at all events under normal and peaceful conditions, mutual understanding between the central banks, which play so important a part in prevailing credit, should tend to the promotion of active trade in all countries in the sense of promoting easier average monetary conditions, or at least of obviating the tendency towards spasms of exceptional stringency. There can at times be such a thing as an unnecessary war of money rates between countries, and an unnecessary scramble for gold supplies, and if in place of such unnecessary war and scramble, co-operation can be substituted, it is easy to see that at times unnecessary monetary stringency might be avoided. It is doubtless considerations such as these which will be in the minds of the central banks who have recently been discussing international problems, in New York, though it is probable that the abnormal conditions prevailing in France may also have served to demonstrate the difficulty at times of subordinating special local requirements to the general principle of co-operation between central banks in the interests of international finance as a whole.


But while fully recognizing the advantages which result from closer co-operation bet°ween the great central banks, it seems equally important to recognize certain drawbacks Which may attend such mutual understandings and agreements. In the first place, the arrangements must almost necessarily be of a secret character, and one result must be to increase the power, both individually and collectively, of the central banks. That " knowledge is power " is indisputably true in the world of finance, and while, needless to say, lam far from suggesting that such knowledge or such power would be wielded unworthily by the heads of the great central banks, I think that the enormous extent of the power should be very clearly recognized, because it undoubtedly confers a power comparable to a financial dictatorship.


Moreover, so far as the • general trader and the public are concerned, these very arrangements tend to obscurity of outlook, for the effect of natural forces may be completely offset for the time being by international central banking arrangements. -If, for example, we should be passing through a period of such acute industrial depression as to threaten not only adverse exchange Movements but a heavy gold efflux, it is conceivable that the worst effects of such a crisis might be materially Softened by arrangements, . say, between the Bank of England and the Federal Reserve Bank ; but whether in the long run such softening and obscuring of the situation is desirable is somewhat open to question. For it might well be that a full revelation of the position occasioned by gold expansion and dear money rates might prove to be the very best cure for our local troubles, and it might be found that under the " softening " process we had Only secured relief from the strain of crisis at the expense Of a long-drawn-out trade depression. Indeed, we might 4ave actually followed the course which, in the long run, ererved the interests of competing commercial markets.


Of course .it can be, _urged, -and, quite properly, that another advantage of the .close understandings between the central banks is that of enabling each central insti- tution to get a much, clearer view of the financial position all over the world, thereby enabling it to shape a wise monetary policy. Even here, however, it is well to recognize that this clearness of vision by the central institutions may be secured at the expense of sonic loss of vision to the ordinary business man. At the present time, for example, the Bank of England, because it acts so largely as the agent of other central European banks, and also as agent of the Federal Reserve Bank, in all purchases of bills and gold on their account, must be in a much better position to shape its policy than would be the case if these purchases were conducted on the pre-War method through other banking channels. Never- theless, to the Money Market and the ordinary public, the difficulty of intelligently reading the situation, whether from weekly bank returns or from the daily movements of gold or bills, is greatly increased. The definite knowledge that a particular country is pur- chasing gold or bills, as the case may be, is a very useful guide to the situation for the business man, and moreover he is able to draw a very clear distinction between such pUrchases by a foreign country and the purchases of bills by the Bank of England on its own account.


I do not forget that in an earlier paragraph I suggested that the net result of closer co-operation between the central banks might be an economy in credit to the advantage of the trading community as a whole, but as against that probability have undoubtedly to be set the drawbacks I an now referring to ; while in addition, it is not only impossible, but it would be unwise to ignore the possibility, it might be said the probability, of complete co-operation between central banks on points of policy breaking down hopelessly under local political influences'. In the last resort, it must be the prime business of each central hank to promote the welfare of the businesS interests of its own country ; indeed, it could scarcely be otherwise, as a central bank is the final custodian of the liquid wealth of the inhabitants of the country, and its charter and powers are conferred by the Govern- ment of that country. All who are concerned with the promotion of sound finance are desirous that the central banks should not be dominated in any way by Govern- ments, but that fact does not in the faintest degree lessen the responsibility of each central bank to the interests of its own country, and a vivid sense of that responsibility must not be obscured even by the vision of the good which might be attained through freedom in every- thing pertaining to international trading and finance. Especially, and in view of the democratic tendency of the present age and the Challenging of sound monetary policy, I would urge that, wherever possible, secrecy in everything pertaining to international finance should be avoided, and that in bank returns and in other ways the position should be made easy to follow, if not for the ordinary man in the street, at all events for all those whose business makes it necessary to obtain some- thing like an intelligent idea of monetary prospects based upon the actual economic conditions of the country. Otherwise a position might be reached when the power of our monetary authorities would be challenged and menaced even though that power might be indisputably engaged in furthering the higher interests of the com- munity as a whole. There are, of course, certain opera- tions in finance where secrecy is essential to success, but so far as broad principles of the daily operations of finance are concerned, I believe it will be found to be in the public interest that those principles and the method of working should be expounded as clearly as possible even to the man in the -street.