17 SEPTEMBER 1921, Page 11


CTo sae Enrroa or THE " ezzernoa."1


SIR,—The traders of the country have recently been told that what they have been suffering from is a " cyclical fluctuation " in the general movement of the material prosperity of the world, and they have thereforebeen offered the consolation that, at any rate, the disease may be regarded as temporary. A study of the said fluctuation necessitates a backward glance to the boom conditions of the latter part of 1919 and the first four or five months of 1920, and Mr. J. M. Keynes, whose diagnosis of the change in trade conditions since that time was expressed in the terms just quoted, went on to accuse merchants and middlemen of having made great mis- calculations by entering into commitments on a scale much in excess of the current rate of consumption and at a price level above that which the currency systems of the world could support. Mr. Keynes has, of course, been accused of the easy wisdom which follows the event ; but as we have only the past from which to draw experience for guidance in the future, I make no excuse for returning to the study of a phase in economic history upon which new light is thrown almost daily as additional statistical data relating to that period becomes available. Too little attention has, I think, been given to the part which was played by the banks in this country in regard to the trade boom. The banks have in the past been freely accused of starving British home industry and utilizing their resources almost exclusively in overseas trade. The facts were, of course, that bankers were assisting, in the creation of markets abroad for British products which were exchanged for our necessary imports. It is the loss of these markets as a result of the war which is mainly re- sponsible for the depressed condition of our trade to-day and the difficulties attaching to a settlement of our accru- ing financial liabilities to the United States and other countries to which we are still indebted.

In the two years which followed the Armistice, however, banking in this country underwent a very great change in its relationship to domestic industry. The war had left bankers with their balance-sheets apparently very much strengthened as regards the amount of cash they held. Recent statistics show that between 1913 and 1918 bankers' cash holdings were more than doubled, their amount having risen from about £340,000,000 to £690,000,000. Now this great increase was not, of course, due to any influx of gold to the country, nor did it represent even an increase in actual wealth. It was simply the amount by which the Government's payments out to bank depositors exceeded the sums which it drew from banks or their depositors, either in the form of taxes or of loans. In the same period the deposits in the banks rose from about £1,200,000,000 to £2,400,000,000, this sum being an index of the extent to which Government expenditure had added directly to the purchasing power of the community. Thus the wealth of individual bank depositors had been approximately doubled in the course of five years of the most intensified economic destruction that the world has seen so far. But it is not so much this obvious paradox to which I would draw attention in connexion with the trade boom as the situation in which the banks found themselves at the end of the war through the possession of vastly increased cash resources—namely, the power thus placed in their hands to expand their loans to the extent of about five times the amount of this additional cash before their proportion'of loans to deposits would be raised to the pre-war normal. Incidentally, the latter part of the war nod had been productive of bank amalgamations between he big institutions to an extent which would hardly have 1, een considered possible before ; and amalgamations of the ad must have a curious effect upon the psychology of the anker himself for the reason that they bring us nearer that. dangerous ideal of the banking " reformer," the ntralized and monopolistic bank. That kind of bank would never have the slightest compunction about extending its advances, because if it were the only bank available to the community any increase of its advances would merely add a similar amount to its deposits and leave its cash resources unaltered. Bank amalgamations have not gone to this extreme, it is true, but when five banks have taken the place of twelve it is obvious that if all are extending their loans, the only check to undue expansion will be the spectacle of the increasing deposits to which their more or less stationary cash will show a dwindling proportion. The banks certainly cannot be accused of having with- held accommodation to the trader in the two years which followed the Armistice, for in 1919 they extended their commercial advances by some £400,000,000 and in the following year by approximately £200,000,000 more. These loans were a direct cause of trade activity, for they were borrowed to be expended within the country on new factories, the adaptation of war factories, the installing of plant, and the provision of stocks of materials for the expected great demand for British products. At the same time, in the first half of the year 1920 nearly £200,000,000 was raised by publics new issues of capital for the purpose of direct employment in industry. These issues formed a net addition to bankers' advances as far as trade was concerned, so that, roughly, we have the spectacle of expen- diture in this country of about £800,000,000 in a period of about eighteen months: What this meant may be roughly measured by comparison with the value of our export trade, which, excluding re-exports, was just a trifle under £800,000,000 in 1919.

If any charge, therefore, can be made with justification against British bankers in respect of the trade boom, it is that they did not take a big and broad enough view of the basis of the trade activity itself. Each application brought to them for an advance may have been perfectly sound in itself, but the circumstances which produced this appearance of soundness are now seen to have been them- selves resting upon an insufficiently secure foundation. The bankers are not altogether to be blamed ; on the one hand they had ample cash resources, and on the other merchants and traders were clamouring for credit to enable them to take advantage of the rising prices in commodities —a rise which at the start had the sound basis of real demands for British products from certain depleted and war-wealthy foreign markets. But as the movement gathered force its momentum was due far less to genuine demands than to the activities of fortune-seeking specula- tors and the holding up of goods which gave rise to excessive orders by merchants, because of the rationing principle adopted by manufacturers in their endeavours to expand the scope of their order books. The cardinal mistake was made by the Government of delaying any serious attempt to fund the Floating Debt, which was the main cause of the enlargement of bankers' cash resources during the war, until the late summer of 1919, by which time the trade boom was under way ; and, as is always the case when a trade revival is occurring, unless it is accompanied by gross currency inflation, security prices were already beginning to decline, so that investment in gilt-edged securities offered but mediocre attraction for the employment of liquid capital in comparison with the profits to be made in trade. The trade boom has not yet spent itself, but it has left its aftermath of frozen credits, so that while we have the spectacle of a million workless men, the aggregate advances of the banks are contracting but slowly. Since the begin- ning of this year the loans of the clearing banks have only declined by about 5 per cent. of the amount at which they stood at the beginning of the year. This is one great obstacle in the way of any serious attempt to reduce the Floating Debt in a single funding operation, the other being the lack of confidence on the part of the investor in the Government's financial administration. The Govern- ment's Treasury Bond issue which has now been on offer since July 14th has met with but mediocre success, in spite of conditions favourable to investment markets as a whole, the total subscriptions up to last Saturday handed over to the Exchequer having amounted to just under £20,000,000. The terms of that offer were generous enough, and it is understood that the present series of bonds will probably be withdrawn about the end of this month. It is known that there are many other borrowers waiting to appeal to the London market ; but even- in default of any indications of a more rapid liquidation of the frozen credit positions, the Government will, in my opinion, be wise to keep an offer of some kind more or less continuously before the investor so as to attract new investment money as far as possible. If only there were signs of a real determination on the part of the Government to curb its extravagance, I believe that the supporters of the " investment on tap " principle of funding would see their views thoroughly vindicated. While the floating debt remains at its present level, largely represented by Treasury Bills in the hands of the banks, the way is open for a repetition, though not perhaps on the same scale, of the conditions of 1919-20. Trade activity is by all means to be desired if it is on a sound basis, but the present necessity is for a further reduction in the selling price level so that we may regain our export trade. A domestic trade boom based on another orgy of lending and speculation will only raise home prices to the detriment of the remnant of our foreign trade, and reverse the healthy movement now in progress towards a lower level of wages and of the cost of living. Active home trade, unaccompanied by healthy overseas trade, is nothing but the " taking in of one another's washing." Yet the first Eigns of reviving trade are already being attended by the dangerous public hope that, chastened by their experience of last year, bankers may not be " guilty " of what has in- sinuatingly been termed " imprudent prudence."—I am,