Lombard Street After the War

A Steady Recovery

By ARTHUR W. KIDDY.

PREVIOUS to the Great War of 1914-18 the London Money Market enjoyed undisputed supremacy as the leading Money Market. of the world, it being, indeed, often des- cribed as the world's monetary centre, and also, and as a natural consequence, the chief leading lending centre.

The four years' conflict which disturbed many things, perhaps disturbed nothing more greatly than London's claim to this supremacy. Great Britain for some years was unable to maintain all the obligations attaching to the Gold Standard, and while there was a complete return to that standard more than three years ago, so greatly was the position changed by the impoverishment of Europe, on the one hand, and the enrichment of the United States—largely owing to its three years of neu- trality—on the other hand, that, of necessity, the United States for a considerable period became the chief lender to foreign countries. Not only were the investing re- sources of her nationals enormous, but her huge accumu- lations of gold gave to her Money Market a stability enabling her to lend enormous sums abroad without any particular apprehensions with regard to the effect on the exchange.

U.S. AS LENDER.

Moreover, it was doubtless also recognized by the monetary authorities on the other side of the Atlantic that so long as the investments were sound in character, there were no better means for the United States of consolidating the new strength of her economic position than by making these foreign loans. And for two reasons. Not only was there a prospect of the income on such foreign investments constituting a kind of per- petual bulwark for the American exchange, but it was also recognized that no small part of Britain's commercial prosperity in the years preceding the war was directly connected with Britain's loans to foreign countries. Hence, the United States, which from the moment of the war was aggressively active in everything pertaining to the prosecution of its overseas trade, perceived the extent to which her trade might be further stimulated by foreign loans.

FREE GOLD MARKET ADVANTAGES.

_Moreover, for a prolonged period after the war these foreign lending activities of America and also the growth of business in the New York Money Market were still further stimulated by the fact that money rates in Europe were materially higher than in New York, while the fact that between 1919 and 1925 New York was practically the only really free gold market gave to that market alrhost everything that was conducive to the building up of :a great monetary centre. Indeed, when allowance is made for the many factors contributing towards the establishment of a great Money Market on the other side of the Atlantic, the only matter for wonder is that London should have retained the great position which it un- doubtedly continued to hold even during the years when the Gold Standard was temporarily abandoned.

BRITAIN'S TASK.

There were two main explanations, however, of the great prestige which the London Money Market con- tinued to hold even during the -years -of its greatest ad= versity. The first was the general recognition that Great Britain had accomplished—and had accomplished largely by reason of its sound banking and monetary- system—a task in the financing of the war which no other country could possibly have achieved. If, for example, the position had been reversed and America had been the nation at war, there can be no question that even allowing for her natural resources and her improved (but new) banking system, she would have been utterly unable to finance the conflict on the scale upon which it was financed by Great Britain from 1914 to 1917 inclusive.

EXPECTATIONS OF RECOVERY.

Another explanation of the maintenance of the prestige of 'the _London market is to be found in the general recognition--by America and of other- countries that -Great - Britain would resume her full obligations connected with the Gold Standard at the earliest possible moment. So strongly indeed was that belief held that there was a sense in which no -real shock was 'ever imparted by the unavoidable temporary departure by London from the full free Gold market. It was in fact perceived that the circumstances were not merely of an abnormal, but of a wholly unprecedented character, and the feverish haste with which America set herself—quite legitimately, of course—to capture Foreign trade, and if possible to create 'a Money Market in New York, were in themselves evidences of an expectation that it would not be long before not merely the prestige but the active operations of the London Money Market were resumed.

A TRYING PERIOD.

Nevertheless, the years intervening after the close of the Armistice were dark years for Europe and the full brunt of the storm expressed in the chaotic Continental Exchanges was felt by this country. It was indeed during this period that we experienced the greatest depres- sion in sterling, so that at one time the British pound was only worth a little over 13s., as measured by the American dollar. Not only were Foreign Loans in London out of the question for some years, but the Mercantile Bill in Lombard Street well nigh disappeared, its place being taken by Treasury Bills, and while at this period dealings in Foreign Exchange began to take very largely the place of transactions in Bills of Exchange, the violent movements in the Continental currencies made such transactions more in the nature of speculative operations than ordinary business transactions.

THE BEGINNINGS OF RECOVERY.

From about the year 1920 onwards, however, conditions in this country began to take a somewhat more favourable course, although the prolonged effects of inflation cost us dearly, and real progress was delayed for some time by the premature and artificial boom of 1919, when, with little attention paid to the diminished purchasing power of Europe, an attempt was made to start active trade with phenomenally high prices of commodities, a move- ment which ended in a collapse in 'prices followed by a period of considerable industrial depression. On the other hand, forces were at work bringing about some economy in national expenditure, and a cessation of Gov- ernment borrowing, and with the cessation of the infla- tionary movement a gradual, but real, improvement in the financial state of the country commenced. Moreover, it was a prelude to an improvement in the general state of affairs in Europe, for it was owing to the joint efforts of this country and the United States that Austria and other Central European States were able at last to re- habilitate their finances, and at a later stage even Germany herself owed the beginnings of a new order of things and the establishMent of a stable currency to the efforts of Bankers led by this country and the United States through the operation of the Dawes Plan.

AMERICAN INVESTMENTS ABROAD. Meanwhile, the growth of prosperity in America was such as to occasion a gradual overflow of her investment resources into the bon& of other countries. The process, naturally enough, was a SlMi one because, previous to the War,-it might fairly be said that the American investor had scarcely a shilling invested outside his own country. In the first place, the investments offering at home were so ample as to leave no occasion for seeking foreign Bonds, while in the second place the general disinclination of the American citizen to be concerned with foreign affairs acted as a constant deterrent to placing his money in foreign investments.

• THE MOVEMENT. SPREADS.

Another factor, however, was operating in the New York Money Market as well as actual prosperity, that factor being the huge accumulations of gold, which, although to some extent sterilized by the Federal Reserve Bank:nevertheless-had-the effect of occasioning Jew:money. rates and a certain amount of inflation. Consequently, high-class investment securities in Wall Street began to rise to a level giving the investor so small a yield on his capital as to occasion a desire for something of a more lucrative character. Accordingly, a movement began in the direction of foreign investments, and to such dimensions did the movement grow that within a few years American nationals had purchased foreign securi- ties to,the equivalent of many hundreds of millions ster- ling, while as the movement gathered pace, and more especially after Germany had begun to recover under the operation of the Dawes Plan, very large sums were lent to Germany in long-dated loans and short-term advances.

SETTLING WITH AMERICA.

In the meantime events in this country had been shap- ing in a direction calculated to enhance the prestige of Great Britain and to stimulate the confidence of the American investor. Some six years ago, roughly, the lead was given by this country in the matter of the settlement of War obligations by the prompt acknow- ledgment of our War debt to the United States. Indeed, we really went to still greater lengths, because in our desire to aid our Allies in the War we offered to take part in a mutual cancellation of war obligations, which, if it had been carried out, would have meant a greater sacri- fice on our part than on that of the United States. When, however, it was found that such an arrangement was not acceptable to. Washington, Great Britain proceeded forthwith to fund her indebtedness on terms which were mutually and quickly, arranged,, and the result was undoubtedly to give a stimulus to financial confidence generally, and also to aid the recovery which was already taking place in British credit and in the forces making for a recovery in the sterling exchange.

BRITAIN'S RETURN TO GOLD.

Then in the Spring of 1925 came the actual return of this country to the Gold Standard. So confidently had that event been anticipated by foreign countries, and especially by America, that for some time previous to our actual return to gold the New York exchange had been moving to the parity of London, and immediately upon our taking the definite step of returning to gold, the old parity was virtually re-established. It is true that the return to gold was accompanied by the precaution of an arrangement with American bankers and with the Federal Reserve Bank for the right for three years to draw on dollar -Credits for a very large amount, but proof of the preparedness of Great Britain to return to gold was soon furnished by the fact that the question of making any use of the credits never arose.

OUR TRADE DIFFICULTIES.

Not very long after our return to gold, another War restriction was removed in the shape of prohibition of flotation of Foreign Loans in London, and while at first these flotations were confined to the one or two important Loans of the League of- Nations, the movement became more general with the passing of time, while the financial activities of Lombard Street, both as regards dealings in Bills and in legitimate Foreign Exchange business, began once more to assume large proportions. There is very little doubt, however, that during the years 1925 and 1926, at all events, the strength of sterling was due in no small degree to the continued activity in American Loans to foreign countries, for largely by reason of labour disturb- ances and failure to produce cheaply in the staple indus- tries, our visible adverse trade balance constituted one of the worst features of our situation. On the other hand, such was the steady increase in our financial activities that invisible exports largely in the shape of financial securities and financial profits served to pretty well off-set these visible adverse balances in the actual movement of goods. During the two years following the return to the Gold Standard, however, financial compe- tition with other countries was a good deal handicapped by the fact that, partly by reason of the cautious policy following upon our return to gold, the value of money in London was for the most part well above the level of New York, and indeed the very fact of the higher level of interest, not merely in this country, but in Europe generally, constituted one of the causes of the continued outflow of American capital into French investments.

A NEW FACTOR.

Considerably more than - a year - ago, there were two further developments, which may be said to have had a material effect upon the general international monetary situation; and in particular to have at last so affected the monetary position in the United States as to occasion some shifting of the huge, stores of gold so long accumu- lated in that country. One of these developments was the extraordinary and "sensational recovery in [the franc, a recovery which, to express the matter briefly and crudely, was brought about by the closing of previous ' bear' speculations in the franc, the opening of specu- lative positions for the rise, and a general transfer of foreign currencies to France on the expectation of a per- manent improvement in the value of the franc. As a consequence of those purchases, combined with the tactics employed by the Bank of France, there was ultimately placed in the hands of the French Central Banking Institution enormous holdings of foreign credits largely of a sterling and dollar character.

AMERICA LOSES GOLD.

At about the same time, America was also undergoing certain changes in the direction of increased speculative operations at home, combined with a continuance of the extensive buying of foreign securities ; and the Federal Reserve Banks, which had put down their rate of interest to a low level, began to raise them, with the result that for nearly twelve months the value of money in London has tended to be well under the level of New York. Moreover, in spite of the raising of the Federal Reserve rates, gold began to flow steadily from the United States to foreign countries, more especially to France and to Argentina, but also to other countries in Europe, with the result that the total withdrawals probably amounted in less than a twelvemonth to over one hundred million pounds. At first it was thought that the gold exports would have little effect upon the monetary situation, but these expectations had not allowed for the great growth in many forms of speculation in the United States which were destined to make great demands upon mone- tary accommodations and to occasion an enormous rise in the loans by the Federal Reserve Banks to the Member Banks.

GROWTH IN LONDON ACCEPTANCES.

As a direct result of the money rates in New York remaining for a considerable period above the level of London, the financial activities of New York may be said to have declined in two directions, although, of course, at the same time, financial activity as expressed in Wall Street operations increased enormously. In the matter of lending abroad, however, there was a distinct pause, and simultaneously there was an increase in the loans made by Great Britain to foreign countries. Even more striking, however, was the effect upon the actual Money Markets themselves, the Bill business in New York suffering a material setback, while recent figures show a material expansion in the growth of the Acceptance business of London banks; in the figures of the Clearing Banks, for example, made up to June 80th last, the total liabilities on Acceptances and Endorsements were £149,000,000 agiinst only £87,000,000 in the previous year, and even after making all allowances for the totals in many instances, including foreign exchange transac. - tions, there can be no question as to the great advance which has taken place in the volume of Acceptances, while that increase has probably been even more marked during the last few months. Similarly, there has also been an increase in the volume of Discount business transacted by the London banks, some of which is undoubtedly to be connected directly with the recapturing of its pre-war business in commercial bills. Indeed, if comparison were made at the present time of the figures of Acceptances and Endorsements with the pre-War period, quite an extraordinary expansion is shown, but such a comparison is not altogether a possible one because of the manner in which the foreign exchange transactions now play s4 great a part. • SELF CONGRATULATIONS PREMATURE.

It must not, of course, be supposed that this article is intended to convey the idea that Lombard Street has recaptured its war-time supremacy, or that the phase through which we may now be passing necessarily con• stitutes a kind of turning point, marking on the one hand a retrogression of the financial power of New York, with a correspondlng progression in the prosperity of this country. There are many considerations which would forbid any such conclusions, chief among them perhaps being the unfavourable Economic position of the country as reflected in the depression in our staple industries, while not only has the United States obtained a huge preponderance of power by the prosperity and trade secured during the War period, but in addition to the enormous direct War obligations of the Allies, rendering financial tribute necessary for many years to come,' America has also greatly consolidated her financial and economic strength by the repurchase from this country during the War of her own Railroad securities and by the enormous loans made during the past five or six years to various Foreign countries.

SOME PRACTICAL CONSIDERATIONS.

Nevertheless, I think that there are two practical points which emerge from a consideration of the steady return of Lombard Street to its pre-War acitivites. One of these is that it is to such activities we owe very largely the fact that the unfavourable visible trade balance has not been more directly reflected in unfavourable con- ditions as regards the Sterling Exchange. Another point is that we are perceiving more clearly that financial activities are in themselves a great- industry, and it is clear that their position, as forming part of our invisible exports, is greater than has been generally supposed. Yet another point is that what we have accomplished in the world of finance might surely to some greater extent have been accomplished in the sphere of industry, but for the many handicaps which industry has suffered both from the attitude of labour and Trade Union restrictions, and also from the shortcomings which have constantly been revealed in the efficiency of our industrial organizations and management. And finally, perhaps, the point may be urged as to whether it should not now be the chief concern of banks and financial institutions to discover how far the growing strength of Lombard Street and of our banking and financial position generally may be used in aiding industry.