'BANKERS AND THE COMING TRADE REVIVAL BY ARTHUR W. KIDDY.

I. THE PERIOD OF DEPRESSION.

AT a moment when trade depression is the outstanding feature of the situation, when the total number of the unemployed is steadily rising, and when there is at least 11, fear of a stoppage in the Coal Industry, it may seem out of place even to speak of a trade revival. Quite apart, however, from the fact that it is not infrequently the " unexpected that happens," and without unduly emphasizing the well-worn saying that the " darkest hour comes before the dawn," there are several very good reasons for considering at the present juncture the relations of banking to the trade and_ commerce of the countrY, and especially. • to consider - the , question whether we are fully_ prepared (a) to,' give all possible encouragement to the first beginnings of a trade revival, and (b) easily to finance trade activities if these should assume really large dimensions. In times of excessive trade expansion and in " booms " in general, we are counselled to make all preparations for the possible slump, but I am not at all sure that it is not even more necessary during a period of prolonged depression to look ahead and prepare for changed conditions. For in reality, and from the banking point of view, it is the " changed conditions " which constitute the need for preparations, the period of adjustment being frequently a difficult one.

INFLATION—CONTRACTION—EXPANSION.

Moreover, I suggest that apart from these general considerations there are at least two further reasons which justify a careful consideration of the subject which `forms the title of this article. For some few years we have been experiencing if not actual deflation, considerable 'contraction. There has been contraction in Floating ,Debt, in banking deposits, in prices, in production, in 'currency, and in almost everything save, perhaps, consumption and prices of Stock Exchange Securities. What then is to be the position, when contraction gives place to expansion, in the matter of our ability to give the necessary banking and credit facilities ? Further, this question seems to gain in emphasis from the fact that during this past year of trade depression we have already, seen a remarkable expansion in bankers' loans, and by way 'of preparation for considering the problems of " to-morrow ' it may 'be useful to study the position to-day, as reflected in the bankers' balance sheets for the past two half-years of what, taken together, is generally ,regarded as a year of exceptional trade depression. CONDITIONS AS VIEWED THROUGH BALANCE SHEETS.

In a subsequent article we are reminded by a well- known practical banking expert, Mr. F. E. Steele, that the strength of a bank is not to be gauged entirely from a study of the balance sheet, and, of course, he is right —there are other matters to be taken into consideration. When, however, we' are studying, not the balance sheet of one bank, but statements by all the banks, the figures usually reflect to some extent the general trend of com- mercial and financial conditions throughout the country. Is some great boom either in trade or securities col- lapsing ? The fact is usually shown in a contraction both of loans and deposits. Is the reverse the position of affairs ? We generally observe an expansion in these items. That trade expansion should cause an increased demand for loans is patent to everyone, but to those who do not happen to be familiar with the manner in which the loan creates deposits, perhaps I may be allowed to offer a word of explanation upon a matter which, of course, is familiar to all connected with the money market. If A' borrows from his banker a certain sum, that amount goes at once to his credit and therefore if the amount is, say, £1,000, the balance sheet of that particular bank will at once be altered in the sense that both deposits and loans will have risen by £1,000. And if on the following day A writes a cheque for £1,000 and pays it to B who keeps his account at another ,bank there will still be an increase in the aggregate of deposits of the banks, because while A's bank will now show an increase of £1,000 in loans and no change' in deposits as compared with the previous day (isolating, of course, all other transactions) the deposit of another bank will have been increased. And it is with the aggregate of balance sheet items with wideb we are now dealing.

In the followirig seven ,short tables the reader Will find set out some of the main items of the balance sheets of the ten clearing banks, the position on the 80th of last month being compared with six months and a year previously. °The first two tables show the liabilities of these banks on the deposits .placed with them and on their " acceptances," and the remaining five give details of how the greater part of the banks' resources have been used in the -matter of loans, bills discounted, investments, cash held, etc. Let us see whether in these figures we find a reflection of the trade depression which has been so marked a feature of the period to which they relate.

Doc..31st, June 30th, 1924. 1925: £ £ Bank of Liverpool and Martins .. 61,767,347 61,290,0 20 58,050,861 Barclays Bank .. 295,698,106 301,026,825 298,947,270 Coutts and Co. .. • - 16;879,658 17,164,935 17,717,444 Glyn, Mills and Co... 31,426,234 30,153,507 27,838,489 Lloyds. Bank .. 336,132,554 339,989,727 338,371,355 Midland Bank 358,416,828 355,774,872 348,359,435 National Provincial Bank 258,291,377 254,921,144 254,290,570 National Bank .. 39,731,141 39,512,415 38,340,892 Westminster Bank.. 270,186,028 272,832,400 269,015,340 Williams Deacon's Bank .. 34,204,502 34,836,369 32,944,598 1,702,713,773 1,707,502,214 1,683,876,254 TABLE IL ACCEPTANCES, ENDORSEMENTS, ETC.

June 30th, Dec. 31st, June 30th, 1924. 1924. 190.

80,772,865 115,721,587 s7,31o;a2

. .

Bank of Liverpool Martins ..

Barclays Bank .. . • Coutts and Co. ..

Glyn, Mills and Co. • • Lloyds Bank .. Midland Bank .. National Provincial Bank National Bank . Westminster Bank Williams Deacon's Bank.. 4,910,582 8,254,768 4,470,245 9,252,346 11,308,303 10,980,330 34,556 20,555 4,839 1,680,562 1,882,344 1,600,289 15;468,167 22,701,940 19,930,519 30,437,632 39,203,319 29,482,109 8,460,276 12,948,372 9,285,478 162,000 987 --. 9,363,502 16,430,325 11,175,673 1,003,242 2,970,674 1,380,640

and

• •

TABLE I. DErosrrs.

June 30th, 1924.

£

TABLE III

CASH IN BAND AND AT BANK OF ENGLAND.

June 30th, Dec. 31st, June 30th, 1924. 1924. 1925.

£ £ £

Bank of Liverpool and Martins 7,073,590 7,781,370 6,341,166 Barclays Bank 43,660,536 45,997,586 44,044,078 Coutts and Co. .. 2,272,323 1,957,125 2,179,604 Glyn, Mills and Co. 5,430,472 5,621,176 4,360,605 Lloyds Bank .. 35,525,663 42,005,032 36,429,832 Midland Bank — 54,806,195 60,876,592 51.563,186 National Provincial Bank 29,374,478 30,920,371 28,891,246 National Bank .. 4,481,622 4,642,141 4,124,402 Westminster Beak .. 27,883,336 34,185,041 32,382,310 Williams Deacon's Bank.. 3,855,383 4,330,282 4,052,545

214,363,598 228,316,716 214,368,974

TABLE IV.

MONEY AT CALL AND SHORT NOTICE.

June 30th, Dec. 31st, June 30th,

1924. 1924. 1925.

£ £ £ Bank of Liverpool and

Martins .. 3,533,479 3,606,664 4,286,933 Barclays Bank .. 19,886,454 20,347,095 20,549,615 Coutts and Co. .. 2,584,150 2,502,700 2,911,250 Glyn, Mills and Co. 6,432,000 6,278,200 2,894,150 Lloyds Bank .. 15,579,808 21,913,353 22,548,452 Midland Bank .. 18,330,271 16,926,145 16,101,353 National Provincial Bank 16,409,066 15,997,118 18,150,630 National Bank .. 3,440,591* 3,613,336* 3,840,041?

Westminster Bank .. 18,657,725 23,399,849 24,298,584 Williams Deacon's Bank.. 3,359,297 3,514,495 2,332,165

108,212,841 118,098,955 117,913,173

Including Treasury Bills and short-dated securities. t Including British Treasury Bills.

TABLE V.

BELLS DISCOUNTED.

June 30th, Dec. 31st, June 30th, 1924. 1924. 1925.

£ £ £

Bank of Liverpool and Martins . Barclays Bank .. Coutts and Co. ..

Glyn, Mills and Co. ..

Lloyds Bank .. Midland Bank .. National Provincial Bank National Bank ..

Westminster Bank .. Williams Deacon's Bank.. 232,181,821 219,232,738 198,409,124 TABLE VI.

LOANS AND ADVANCES.

Bank of Liverpool and June 30th, 1924. Dec. 31st, 1924.

£

June 30th, 1925.

£

.. 37,940,348 37,431,444 37,651,175 Barclays Bank .. 142,338,491 140,078,976 149,603,033 Coutts and Co. .. .. 7,056,154 7,583,484 7,597,629 Glyn, Mills and Co. 7,124,563 7,340,743 9,626,585 Lloyds Bank .. 154,265,880 164,714,331 176,688,694 Midland Bank .. .. 194,613,157 190,691,323 198,027,998 National Provincial Bank 129,364,266 131,242,924 132,823,115 National Bank.. .. 16,485,498 16,285,399 16,559,963 Westminster Bank .. 108,639,387 121,946,012 128,678,661 Williams Deacon's Bank.. 20,583,183 18,683,878 20,495,059

818,410,927 835,998,514 877,751,912

TABLE VIL

hivesnamrrs.

June 30th, Dec. 31st, June 30th,

1924. 1924. 1925.

£ £ £

Bank of Liverpool and Martins 9,195,072 9,503,748 8,000,735 Barclays Bank .. 63,499,955 62,806,250 58,552,255 Joutts and Co. .. 4,173,727 4,183,729 4,277,680 Glyn, Mills and Co. 9,979,128 9,358,829 9,271,356 Lloyds Bank :. 86,187,163 69,916,464 54,338,955 Midland Bank .. 40,445,238 42,725,269 35,647,575 National Provincial Bank 47,242,728 42,587,820 40,102,278 National Bank 17,574,712 17,391,033 16,406,310 Westminster Bank . • 55,931,007 53,307,671 50,034,441 Williams Deacon's Bank.. 5,155,267 5,631,107 4,600,911

339,383,937 317,411,920 281,232,496 RISEIN LOANS : FALL IN DEPOSITS.

At first sight the figures in the foregoing table would appear to be in flat contradiction of almost everything

3,975,189 28,768,289 1,331,719 2,084,664 45,559,443 47,367,287 38,498,546 2,778,363 69,552,433 2,265,888 3,415,813 2,201,521 33,248,646 27,667,530 1,341,222 1,318,149 1,148,347 1,590,107 43,890,956 48,684,415 50,818,762 41,043,679 37,093,884 36,513,986 2,880,324 2,719,670 41,970,486 34,342,723 3,424,298 2,327,344 Investments in affiliated banks are excluded from the above figures.

which has been said in the earlier paragraphs of this article. The loans and advances have risen greatly, trade depressitin notwithstanding, but so far from this rise in loans having been accompanied by a corresponding jump in deposits there has been an actual fall. The reader, therefore, may well ask what is the explanation of this apparent topsy-turvydom, and above all he may want to know why, when there has been trade depression, the loans should have expanded ; indeed, he may quite fairly question the dictum laid down earlier by the writer that the balance sheets of the banks constitute a useful guide to the trend of financial and commercial activities throughout the country.

SALES OF INVESTMENTS.

Before dealing with what is really the most importanti and practical part of our inquiry, namely, the cause ofi the great rise in the loans, let us see why it is that this' rise, whatever- the cause, has not been followed by a big rise in deposits. If the reader will glance at Table VII. showing the-investments, the cause will soon be revealed. During the year, the banks mentioned in the table have sold their investments to the amount of £58,000,000. Now, a moment's thought will show what effect this has on o deposits. If a bank's customer sells his securities to another customer, no effect whatever is produced on the total of deposits for the buying and selling transaction balances. If, however, the bank sells its own securities, and the public buys, the effect necessarily is to reduce deposits by the amount of the sale. Incidentally, there- fore, it will be seen that in selling securities the banks themselves bring about a certain amount of deflation. It will now be recognised that inasmuch as the banks have sold investments totalling £58,000,000, the point- to be settled is, not why deposits have fallen by £19,000,000, but why they are not down much more. And the main explanation, of course, is to be found in Table VI., which: shows that foans and advances have risen by £59,000,000.. That is to say the loans have, to a very large extent, created fresh deposits, taking the place of those absorbed by the sale of investments by the joint stock banks.

CONFLICTING FACTORS.

In the second section of this article dealing with the problem of financing future trade developments the question of the recent sales of investments and the rise in loans and advances will be examined more closely. • Meanwhile a word may be said with regard to the develop- ments of the past year, both as regards the banks and the discount houses, for no review of the monetary and banking situation is complete which does not take into consideration the important part played by those institu- tions in the general organization of the Money Market. One point which will be noted in Table V. is the falling off in bills discounted, both as compared with six and twelve months ago, and to some extent no doubt, a smaller holding of Treasury Bills is responsible, but it is probable that during the last six months as a result of slack trade there has also been a smaller supply of commercial bills. So far as actual profits are concerned, neither the banks nor the discount houses make any declarations at the June half-year, while as regards the interim dividends there has been practically no change from a year ago, and indeed there are few signs at present of higher distributions at the end of the year. On the one hand the slight rise in the value of money must have increased the margin of profits, while the opportunities for lending to the Stock Exchange have probably been as great, if not greater, than a year ago. On the other hand, there have probably been two directions in which the banks at the end of the June half-year have k constrained to make some provision for contingencies. Bad trade sometimes (though not, perhaps, more than the " boom " periods) is the forerunner of bad debts,': and at all events the contingency has to be borne in mind. It is probable, too, that the level of gilt-edged securities on June 80th was not quite up to the six months previous; and while in the interval stocks may have been sold at a profit, the banks usually go on the cautious plan, even at the June half-year, of making provision at the time for any depreciation which may have occurred. (The concluding portion of this article will be found on page 171 of the current issue of the Spectator.)