- FINANCE—PUBLIC AND PRIVATE.
THE BANKING POSITION.—II.
GROWTH IN DEPOSITS CHECKED—SMALLER NOTE CIRCULATION—REDUCTION IN TREASURY BILLS —SOME PRACTICAL CONSIDERATIONS—POSSIBLE EFFECT OF TRADE REVIVAL—BA—NICING CAPITAL.
(To THE EDITOB Or THE " SPECEITOH."1 SIR,—For some time past the London Clearing Banks have resumed the practice of publishing monthly balance- sheets, the figures, moreover, being based upon what is . known as weekly averages. It is, of course, impossible .to make a clear comparison between these " average " figures and those of the full balance-sheet at the end of the year, but all the same they give a rough indication of the position to-day, and inasmuch as the publication of these monthly balance-sheets has now been proceeding for a twelvemonth, it is possible to note the comparison with a twelvemonth ago. I am inclined to think that in some respects the figures are suggestive and even instructive.
, If, for example, we take the total average deposits for the month of May—the latest available—of the ten clearing banks, we find that the figure is 1,790 millions. This compares with 1,791 millions in March, 1,847 millions in February, and 1,872 millions in January. No doubt this shrinkage in April was partly connected with the ingathering of the tax revenue, in which connexion it is only fair to point out that the figure for April of last year was also abnormally low. Nevertheless, the fact that the latest total of deposits is greatly below not merely the average of the three preceding months, but of the nine preceding months, is rather suggestive of a certain amount of deflation having at last affected the banking deposits which for so many years have expanded largely as a result of war inflation.
Moreover, it must be remembered that evidence of deflation is also to be obtained in other directions. During the past year the Bank of England Active Note Circulation has declined by about £7,000,000, while the Currency Notes Outstanding have fallen during the twelvemonth by about £36,000,000. Finally, it may also be noted that commodity prices have experienced a remarkable shrinkage during the year, the Index Number of the Economist for the month of May being 4,285 as compared with 4,929 a year ago and 4,357 at the end of December last. With Inch movements as these it would be surprising if banking deposits themselves had not at last shown some shrinkage.
In the activity of the banks as expressed in discounts and advances there has also been a slight decline, the average total of discounts in the case of the nine clearing banks for the month of last April being £323,000,000 as compared with £442,000,000 in January, while the advances, which for April totalled £763,000,000, were about 1869,000,000 a year ago. It is true that the present total of discounts is still above the level of a year ago, but it is quite evident that the great rise in discounts, which is shown in the December balance-sheets, and which I stated in my letter last week was' due to the acquiring of large lines pf Treasury Bills, has been enormously reduced owing to the banks having now relinquished a large portion of their Treasury Bills for the new Treasury Bonds yielding a higher rate of interest. Indeed, quite as remarkable as the other changes which I have enumerated has been the decline in the actual total of Treasury Bills outstanding. A year ago they amounted to £1,173,000,000, but now stand at about 1771,000,000, being a drop of nearly £400,000,000 foe the year. Needless to say that no corresponding keduction has taken place in the National Debt itself, the Treasury Bills having been for the most part replaced by the Treasury Bonds. Nevertheless, the change is one which has materially affected banking and monetary 6onditions. and has also marked a step in the direction of deflation, because in spite of what I have said about the banks taking many Government bonds, the net result of the past twelve months' developments has undoubtedly been to lessen the volume of purely banking money in Government securities and to increase the volume held by the general public.
There are, I think, at least two practical questions which arise from these changes in currency and banking figures during the past year, and during the past six months in particular. One question is whether they do or do not indicate any revival in trade ? I cannot think that they do, though it does not necessarily follow that a revival may not be at hand, because there is general agreement that a rally in trade will have to be very pro- nounced before its effects are disclosed in the banking figures. Moreover, in this connexion the latest Board of Trade Returns, showing an expansion in our imports of raw materials, were undoubtedly encouraging as indicating preparations for greater trade activity.
Another and still more practical question is whether the banking figures suggest that in the event of any important trade revival there would be any early restraint imposed on the movement by a strain on credit or banking facilities ? On this point I know that opinions differ greatly, but personally I am inclined to think that the margin between the present apparent plethora of credits, and comparative scarcity, should trade revive, may be much smaller than is apparent on the surface. Since, however, this opinion may be chal- lenged, I will say at once that it is based very largely upon the fact that, on the whole, the trade depression itself has had less effect upon the banking figures both as regards deposits and advances than might have been supposed. No doubt to some extent this may be due to the fact that many of the advances or credits are of what is sometimes described as a " frozen " character, that is to say that owing to unfavourable commodity markets they have not yet been liquidated. I am inclined to think, however, that it may also be due to some extent to gilt-edged securities having partly taken the place of commodities ; in other words, that just as the rise in commodities was helped by banking loans, so to some extent, but not to the same extent, the advance in gilt-edged stocks may have received similar assistance. The point is an important and an interesting one, because in so far as stagnant loans on commodities are concerned it is conceivable that banking liquidity, in other words the supply of banking credits, might be actually increased to the extent that any trade revival liquefied such positions, and the point is undoubtedly one to be borne in mind as likely at least to modify any curtailment of credits which might be occasioned by fresh trade demands for loans.
Of course, in this matter much depends upon whether commodity prices themselves rise quickly in the event of any trade revival, because as a matter of fact it was the abnormally high prices of commodities rather than the abnormally large turnover in trade which led to the break- down in 1920. All that can be said perhaps in this con- nexion is that as regards the fall in commodity prices, and the rise in securities, the movements have been so violent during the past twelve months as to suggest at least the likelihood of a reaction. On the whole, therefore, and regarding the matter on the broadest possible lines, I am inclined to think that while an important trade revival might not show the same strain on banking re- sources which was experienced two years ago, it would be found that our lending resources on lines consistent with what is regarded as sound banking have scarcely expanded to the extent required by post-War conditions when once international trading is freely restored.
In the excellent article which accompanied the survey of the banking position in a recent number of the Economist some stress was laid, and I think rightly laid, on the fact that while our banking position is so sound as a whole, there is undoubtedly room for an expansion in the ratio of paid-up capital and reserves to deposits. In 1900, for example. that ratio was about 131, per cent. in the case of the English banks, but owing to the great expansion in deposits it was only 6i. per cent. in 1921, and even that figure showed a little advance on the total for 1918, when the ratio had fallen to under 6 per cent. It is true that some of the banks have added to their capital through issues of bonus shares and just a few have actually made issues for cash. I cannot help thinking, however, that having regard to the great responsibility of the banks in adequately financing the trade of the country, it might be well that opportunity should be taken from time to time to make further addition to capital resources, thereby automatically expanding the power of the banks to increase their loans when necessary withot.ip any loss of strength in the balance- sheet.—I am, Sir, yours faithfully,
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