Banking in the British Commonwealth
ay J. 0. N. PERKINS %tics the overseas countries of the British Commonwealth are highly dependent upon their international trade, the main forces affecting their banking systems are, naturally, the changes in their export '1 comes and their imports. This is especially true of the sterling countries of the Commonwealth ; Canada—the only Commonwealth f,nuntry that is not in the sterling area—possesses some special .9atures and will be referred to separately later in the present article. Por the sterling area, 1952 was a year of adjustment to the lower export incomes that resulted from the collapse of the post-Korea Doom. The high import demand generated by that boom lasted well Into 1952—especially in Australia and New Zealand; so that while imports into many sterling countries remained high, the value of their exports of primary products, such as rubber, tin, wool and jute, d fallen severely. There resulted a dangerous drain upon their flternational reserves—that is, both upon the London funds (or 'sterling balances") of the individual countries and also upon the Central gold and dollar reserves of the sterling area.
A DELICATE PROBLEM ink he banks in these countries were therefore faced by large falls their deposits—as the balance of payments deficits of their n9nntries reached the maximum—and in their reserves. Meanwhile their ir advances remained high in order to finance the exceptionally high level of imports in the early part of 1952—especially in Australia and New Zealand. In the course of 1952, however, as imports fell to more normal levels and export earnings recovered, the strain on the banks' liquidity was relieved ; by the first half of 1953, advances and v deposits had returned to a more comfortable relationship. The monetary authorities had a difficult task to perform. For they 1..1(1 to walk gingerly along the tight-rope between too much disinfla- tt and not enough. They had clearly to stand ready to assist the ks if unemployment rose too high or if too sharp a fall in their 1„. vances seemed likely. But at the same time, it was clear that only they were prepared-to attack the root of the trouble by allowing seine ce etne disinflation could their balance of payments be restored to a healthy condition. In Australia—where the decline in bank liquidity Was especially severe—the Commonwealth Bank released consider- able sums from the banks' special accounts (funds in which are effectively "frozen"). The Reserve Bank of New Zealand gave some assistance to the banks at the time of greatest strain on .-reserves, whilst in India, Pakistan and South Africa the central banks helped by rediscounting commercial bills (and in India and Pakistan also of usance promissory notes) on an unusually large scale. In general, such assistance sufficed to tide the banks over the difficult period in those countries where export earnings subsequently recovered—notably the wool-exporting Dominions.
INDIA'S STERLING But in India, Pakistan and Ceylon the fall in London funds has Continued, partly because the' prices of jute and rubber have con- tinued to be low; and in Pakistan the situation has become especially acute because the Pakistan Rupee is definitely over-valued at the Present prices of Pakistan's exports. The banks in the colonies did not, in general, suffer so greatly from the fall in earnings of primary products from the high post-Korea Ievels, though there was naturally an appreciable decline in business between 1951 and 1952. The inflation generated by the boom and the x clellsequent reaction were not as severe as in the Dominions, partly eause the monetary systems of the colonies are such that their reserves of sterling were built up to a very high level in 1950/51 and Were not eaten away by an upsurge of imports on a scale relatively as great as in Australia and New Zealand. Moreover, the system of Marketing boards in West Africa has continued to build up reserves against future price falls. And—with the exception of -Malaya—the colonies have not suffered' such severe reductions in their export f, incomes as have most of the independent members of the sterling In general, the monetary authorities of the independent sterling unties have during the past eighteen months followed the example area. Consequently, their sterling balances have continued to rise. lg. the United Kingdom in raising interest-rates and in discouraging by other means the expansion of advances, whilst endeavouring to encourage savings. This has been one of the main ways of imple- menting the disinflationary policy agreed upon by the Finance Ministers' Conference of early 1952. India and South Africa have both raised their interest-rate structure more or less in step with that of the United Kingdom, whilst Australia and New Zealand have followed suit somewhat more hesitantly. By the end of 1952, long- term interest rates on government securities in the dominions were closely comparable with those in the United Kingdom. The excep- tion was Ceylon, where the rate of interest for long-term government borrowing has been kept rather lower than in other sterling countries.
DISINFLATION IN NEW ZEALAND An interesting experiment in disinflationary monetary control has taken place during the past year, in New Zealand, whose use of statutory reserves ratios has-not been paralleled in any other sterling country—though Ceylon and South Africa have made isolated changes for special purposes. As a means of discouraging the trading banks from further expansion of their advances, the proportion of their deposits that they must keep in cash balances with the Reserve Bank has twice been raised (in August, 1952, and in May this year). Although the actual cash balances held by New Zealand banks are, and have almost invariably been, well above the statutory minimum, the use of this weapon has naturally caused them to exercise the required degree of caution—both because their reserves may well fall near the minimum at times of seasonal stringency (as in March, 1952) and also because there is always the possibility of further increases in the statutory minimum ratios if the banks do not toe the line that the monetary authorities are clearly laying down.
• AUSTRALIAN CHANGES But perhaps the most important single development in banking in the overseas Commonwealth during the past year has been the legislation in Australia that came into force at the end of April, 1953. These amendments to the existing statutes have two main objects. The first is to reduce substantially the extent of the powers of the Commonwealth Bank to call assets of the trading banks into "special accounts" (where they cannot be used as the backing for the extension of the banks' advances). Further, there are provisions for limiting the increase in the banks' potential liabilities. The motive for this reform was to remove a weapon which—it was feared —might be used by a future Labour Government as a means of destroying the powers of the private trading banks to compete with the trading department of the Commonwealth Bank : as direct attempts by the last Labour Government to nationalise commercial banking failed, the Liberal Government wished to remove a potential means of securing a similar end by indirect means. The trading banks' fear that the. Commonwealth Bank might use its special position to attract business to its trading department by unfair forms of competition provided the motive for the other main change. The Commonwealth trading bank is now to be separated from the central bank at all except the highest levels of policy-making; it is also to be treated exactly as any other trading bank for the purposes of operating the special account system, though such has in fact been the practice—though not the legal position—for some time past. How far this will prove to be a purely nominal change or how far it will affect the Commonwealth trading bank's policy—in the direction of causing it to compete either more or less fiercely with the private trading banks remains to be seen.
CANADIAN POLICIES Like the sterling countries of the Commonwealth, the Canadian monetary authorities have been trying to steer a careful course between inflation and deflation during the past year. But in marked contrast to the sterling countries, Canada has made considerable use of monetary weapons to restrain inflation for some years past. The greater variety of her exports and her greater reliance upon domestic trade and on trade with the United States across the common land-frontier are only two of the factors that make it difficult to draw lessons from Canadian experience• and apply them to other Commonwealth countries. But the flexibility of Canada's monetary policy has frequently been illustrated and provides food for thought for other Commonwealth countries that are now tasting the possi- bilities of the use of monetary weapons. For example, the prompt removal of controls on consumer credits in Canada during 1952 served to offset the disinflationary effects of the American inventory recession. In contrast to the experience of other Commonwealth countries, Canadian bank deposits continued to rise in 1952. In fact, at the very time the sterling countries are still using monetary weapons to restrain inflation and to help to reduce their balance of payments,.deficits, Canada is in the happy position of being able to operate—in certain ways and on some occasions—in the reverse direction. But envy at Canada's natural advantages—or undue pre-occupation with the ways in which her economy differs from theirs—ought not to blind the sterling countries to the fact that a -firm monetary policy over an appreciable period has helped to keep the Canadian balance of payments strong, and that herein may lie some lessons for the other countries of the Commonwealth.
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