anking on the Monetary Curb

t BY JOHN HUNSWORTI-1 17 is now just over a year and a half since the monetary weapon was withdrawn from the museum where it had lain as a relic of far-off (lays the r and enlisted as an instrument against the inflation permeating United Kingdom's domestic economy. Not since 1931 had so sharp and fundamental a change been made. The easy days of cheap and automatic short-term credit were ended. The rigid structure witinlioney rates was mollified and the money market was imbued their a degree of flexibility unknown since 1939. The banks found ,bills asset structures changedswiftly by the funding of. Treasury r into Serial Funding Stock, and the attention of each bank was focused on the ratio of its liquid assets to deposits. The effectiveness of the money weapon, was soon in evidence, and the Government's confidence in it was shows. by the second increase rn flank rate, from 2i per cent. to 4 per cent. with a corresponding ;1,42 Introduced. n all money and discount rates, when the 1952 Budget was to aHigher loan charges and intensified credit restriction—due both with more rigorous application of selective control in accordance general Government directions and to the greatly reduced nia_rgin of each bank's excess liquidity—were before long reflected sa4 steady reduction of aggregate bank advances. Deposits also e Ted a moderate fall in the opening months of 1952. These trends have not continued, however. The 1952 budget was Mad' milder than had been expected. It was indeed far milder than appeared wise for many months subsequently. The problem of high ke iment expenditure was left untackled. The curb on credit wit vcs not extended to the public sector of the economy. All the retrenchment had to be absorbed by the private sector.

LOWER LEVEL' OF ADVANCES

Aggregate bank advances continued to fall until last December, When the trend was reversed. A similar movement was shown in the )anks' holdings of commercial bills. Over the period from December `the following tio April the trend for each category was upward, but during eerneAlowing month there was a fall: As far as advances were con- trhi d, this could be mainly ascribed to repayments made by the

;, hi Electricity Authority from the subscriptions of the public to its recent loan issue.

has the accommodation afforded to the nationalised public utilities i -as prevented the reduction in bank advances from assuming ,4rge privar proportions. The official policy of restricting loans to he Without sector while Government borrowing is allowed to continue Utilities, similar restraints has been carried to the sphere of public Personal which have received high priority in permitted borrowing. ,. and professional loans were the first to feel the effect of "gilt n• credit conditions, and they have continued to decline. Aggre- gate advances to commercial and industrial borrowers fell during 1952 tight though some part of the contraction was due not directly to r money conditions but to lower commodity values and a 8(11.1,1Ctiklening of trade. In recent months, as the economic prospect been, the country has seemed less tenuous, and as also the banks have

, less anxious about their liquidity ratio, there has been a tendency to look more favourably at applications from the private sector for

accommodation. • , , spite this easement, however, the recorded advances of the t.,iee clearing banks and their holdings of commercial bills together fiaAeTt:ei i n monetary inted.last month to £240 million less than in November, 1951. chief' the previous seemingly inexorable rise in bank advances this as thle the r'tarY policy, in the execution of which the banks have been the e lower cost of financing inastrial stocks, which has facilitated agent. The actual measure of this success cannot be determined, must to some extent be recorded as a success for orthodox Paymentof some advances, has been occasioned by influences wide r than domestic monetary policy.

TREASURY DEMANDS

'being many months in 1952 it seemed that the banks' efforts to cut 1. supplies of credit ,in the private sector of the economy were I rendered worthless, from the point of view of the country's recovery, by the seeming irresponsibility of the Government in re-creating credit for and through the public sector. The rise in Government borrowing from the banking system was clue both to an increase in the Government's need to borrow more M total and to a reduction in the funds available from other sources. The increase in the need to borrow arose from the failure of Exchequer

receipts and payments to match the Budget estimates. There was a reduction in the surplus of revenue over current expebditure, and there was a considerable increase in loans to local authorities for housing and other purposes.

Meanwhile the changes associated with the improvement, in the balance of payments reduced the Government's 'scope for borrowing outside the banking system. In 1951 the growing external deficit

brought large sterling receipts to the Exchange Equalisation Account as the gold and currency reserves were drawn down. The rise in

the amount of sterling held in the Account reduced the Government's need to borrow from the banks and elsewhere. 'Since the middle of 1952, however, the outflow of gold and foreign exchange reserves has been reversed, and the holdings of sterling by the Exchange Equalisation Account have correspondingly fallen. The Governthent has accordingly been constrained to provide funds internally to finance the country's surplus on its overseas accounts.

The Government's need for ready money has been met largely by loans from the banking system. The clearing banks' holdings of Treasury bills rose from £749 million in November, 1951, to £1,231 million in September, 1952, after which they fell as a result of the second funding operation within twelve months. In the clearing banks' statement of balances for May, holdings of Treasury bills stood at £1,014 million; some £180 million more than a year pre- viously. On the same date the banks' investments were £190 million more than a year previously, this being mainly explained by the increase following the conversion of Treasury bills into Serial Funding Stock in October. Apart from this large addition, investments have shown relatively small fluctuations since December, 1951.

The divergent movements of bank advances and Government accommodation have meant that gross bank deposits did not long show the declining trend that seemed likely when orthodox monetary policy was first refurbished. Indeed since last December the level of deposits has been running considerably above that of a year -ago.' But despite this, and despite the record level of the note circulation , over the past year, inflationary pressures have not been rampant in the economy. A large surplus of receipts over payments in the private sector has been more than enough to cancel out the big deficit in the public sector.

INVESTMENTS AND EARNINGS The new monetary policy led to an important departure in the valuation of some banks' investments for balance sheet purposes. The market prices of Government securities showed considerable falls in early 1952 as yields were adjusted into line with the new interest rate structure. When the banks came to make up their half-yearly balances on June 30th, they were therefore faced with'the prospect of making transfers from inner reserves to meet the depreciation of their gilt-edged holdings or foregoing the accepted practice of showing investments below market value. Four of the " Big Five " banks broke with tradition and quoted invest- ments at or under cost and below redemption prices. Despite the recovery in gilt-edged prices later in the year, this formula was again adopted in the year-end balance sheets of the four banks, and may be assumed to have come to stay.

It is a feature of the present day that aggregate investments of the eleven clearing banks form the largest single item among the assets. For more than one reason bankers would prefer to see a smaller proportion of their total funds placed in Government securities and more engaged in providing finance for industry and trade. The earnings of the banks have not failed to be stimulated by the rise in interest rates. This should not be over-emphasised since banks are in effect borrowers as well as lenders. But gross banking earnings did rise substantially in 1952, and they have doubtless continued to make a favourable return this year. The National Provincial Bank created a mild sensation by paying a higher dividend for 1952, after having paid the same rate for twenty years. This was followed by a similar rise ill the distribution of the National Bank, and shareholders of other banks must be anxiously waiting to see if these examples are to be followed by other banks.

QUESTION OF CHARGES Some criticism has been levelled at the bunks for not using their higher earnings to. ameliorate bank charges. , The topic of charges is always a contentious one, and last year's upward adjustment suffered the natural resentment of the public to any increase in price. In his recent presidential address to the Institute of Bankers, the chief general manager of Lloyds Bank, Mr. A. H. Ensor, revealed that the total increases in the published profits of the clearing banks would amount to no more than a few pence per account. But, most significantly, he envisaged the possibility, if 'running expenses and staff costs continued to rise, that banking might become too expensive for the ordinary private customer. The banks must indeed strive hard to ward off this possibility.