com P ANY MEETING

MIDLAND BANK LIMITED

BANKS' INDISPENSABLE SERVICES AVOIDANCE OF INFLATION RIGHT HON. R. McKENNA'S ADDRESS THE ordinary general meeting of shareholders of the Midland Bank Limited, was held on Friday, January 26th, at the head office of the bank, London, E.C.

The chairman, the Right Hon. R. McKenna, said : Banking provides an indispensable service alike in war and peace. By effi- ciency in conducting our business we can help the flow of essential industry and ease the course of daily life, and we can assist in the vast volume of transactions on Government account which war inevitably entails. We have been glad, in particular, to take our part in carrying out the measures adopted for controlling foreign exchange transactions and the new capital market. We are bound, like everyone else, to encounter difficulties: our men are called up; air raid precautions have to be maintained; delays in communica- tion and the removal of the clearing from London hamper us; and we are afflicted by the doleful shades of the black-out. But what- ever difficulties may confront us, the board, the management, and the staff are determined to overcome them.

There is, secondly, a less obvious way in which the banks can serve the nation in the present struggle; they can help to delay or even avoid the onset of the bugbear of inflation. Inflation, if it comes, will be due to the growth of consumption, civil and military together, beyond our capacity to produce. The military demand must be satisfied, and in the long run, if no other means can be found to bring the total demand for goods within the limit of pro- duction, inflation, with its accompaniment of rising prices, sets in as an automatic check on civilian consumption. The wise course is to prevent or limit inflation by every prudent means of diverting goods and services from civil to military purposes.

WAR DEMANDS

May I digress for a few minutes on this subject? The reality be- hind all questions of war finance is the huge demand which war- fare makes on the power of the nation to produce goods for imme- diate consumption. The demand can be met to a large extent by the expansion of production to the uttermost through the use of additional bank credit. Not only can the recorded unemployed be absorbed, but numbers of men and women not hitherto engaged in productive work can be drafted into industry. Up to the stage of full employment there need be no inflation, as the enlarged bank edit may be offset by greater output. The demand can be covered am in part by using up stocks and in part by realising invest-

nts abroad to pay for additional imports. But before long. the

int is reached at which the Government must restrict civilian nsumption.

The attack is made in various ways. Rationing is the most rect and obvious method; but as consumption depends upon e means to pay for it, the main assault is on the purchasing wer of the people, a larger share of which must be diverted to e Government. Heavy taxation is brought into action, and is ollowed by borrowing from the public, accompanied by a vigorous mnai. gn to promote saving and investment in war loans. It is this diversion of purchasing power from the people to the overnment that the banks can give practical assistance. They n restrict loans for non-essential purposes, and thereby effect the uble object of curtailing purchasing power for purely civilian urposes and increasing their own capacity to lend to the State

d to Government contractors.

GOVERNMENT'S PURCHASING POWER

The Government must pay for its supplies, and if taxation and !rowing from the public furnish insufficient means, resort must had to the creation of new purchasing power by borrowing from

e Bank of England and the joint stock banks. But new purchas- power created without reduction of civilian purchasing power increase in production brings us to the threshold of inflation. e inflation would become rapidly accentuated if the process, nunonly stigmatised as the vicious spiral, were allowed. to e freely into play — a spiral in which rising prices e followed by higher wages, to lead again to still higher Ices as costs rise, and so on. But the means of restraint, if not prevention, are at hand. The Government has made agreat yance in recent years in the management of monetary conditions. ith full powers at its command and wisely used, it can determine e degree, if any, of inflation that will be permitted. Inflation is relative term, and the word reflation might more properly describe movement, such as we have had already, beginning from a low sis. It is possible that a moderate raising of the general level of ces, with due safeguards for those living near the subsistence el, may he no more than a healthy stimulus to energy in supply- the needs of war.

Nevertheless, we must not be blind to the possibility that the war, if it is of long duration, may demand more drastic methods. Per- haps nothing less than the compulsory saving of all increases of in- come will be needed to secure the full necessary diversion of spend- ing power from the public to the Government. Judging from comments in the Press, I conclude that public opinion is not yet ripe for the imposition of a scheme of compulsory saving. But should we ever be engaged in another great war, which may Heaven avert, I believe we should at once turn our minds to a plan of the kind proposed by Mr. Keynes. We should probably find, indeed, that the Treasury had already worked one out in detail, and that the Government of the day would include it among its first war measures. 1 he British public are steadfast in patriotism, and when they understand the need are ready to submit to any sacrifice; but it is hard to break away from established habits and standards of living, and the economic reasons why we should do so are not easily comprehended. Yet, just as other encroachments on liberty during the war have been not merely accepted but welcomed by the public, so I believe this last one, when better understood, would be accepted also. It would be more equitable than inflation, more practicable than still further taxation, and at the end of the war, when industry is no longer engaged in making arms but has turned again to the building of houses and the manufacture of the pro- ducts of peace, the war savings would give to all the means to share in the new output and to invest, if they so wished, in the capital needed to set the wheels of peaceful industry in motion.

I come now to the direct contribution of the bank to the fighting forces. Already fourteen hundred men, nearly one-eighth of our entire male personnel, have joined the services, and we must anti- cipate a further absorption as more are called to the colours.

The bank's contribution to the war effort does not end here. Very many of our staff, both men and women, have volunteered for part-time national service.

POSITION AND PROGRESS OF THE BANK

Turning to purely domestic affairs, the past year has brought a number of changes on our board of directors Since our last meeting death has, to our deep sorrow, deprived us of our colleagues the Earl of Denbigh, Mr. Fox and Mr. McBain. We feel their loss and miss their counsel. Their places have been filled by gentlemen whose services will be of great help in the successful conduct of our affairs. The Earl of Caithness has gained a wide experience as a director of the North of Scotland Bank; Sir Thomas Brocklebank is already known as an outstanding leader in business; and the high character and ability of Sir Eric Phipps have been a national asset for many years.

One other change has to be recorded. Mr. Bradshaw has felt it necessary, for reasons of health, to retire from his position as one of our deputy chairmen, an office he has filled with distinction ever since the Midland, by its amalgamation with the Central Bank of London in 1891, established itself in the capital. We are grate- ful for the loyal and invaluable service he has given to the bank for nearly half a century and are fortunate in retaining his co- operation as a member of the board. In his place as deputy chair- man we have elected Mr. Walters, who now serves with Mr. Christopherson. Mr. Walters came to us 21 years ago on our amalgamation with the London Joint Stock Bank, of which he was already a director, and we have had every opportunity to appraise his exceptional qualities both as a banker and a colleague. We trust he will long be able to give us the benefit of his active par- ticipation in the business of the bank.

On the outbreak of war we put into force pre-arranged plans for a partial decentralisation of head office management. Three of our general managers, with their assistants and staff, moved to pro- vincial centres in the areas covered by their respective groups of branches. The arrangements made necessary by the emergency have disadvantages, but these have been overcome by the readiness with which everyone, even at much personal inconvenience, has worked to maintain full efficiency. Far the larger part of the head office organisation remains in London.

The shortage of personnel due to the withdrawals for military service is being made up in part by additional temporary recruit- ment of junior clerks and female staff. The possibilities in this direction, however, are limited, and we have had to rely chiefly on the co-operation of the reduced permanent staff, helped in some degree by the reduction in banking hours and the closing for the time being of a number of sub-offices. The staff have been required to forgo part of their holidays, while for many of them living con- ditions have become more difficult as a consequence of emergency measures. These requirements have been fulfilled with ready under- standing and good will, and in carrying them out we have again received the helpful collaboration of the Staff Association. I observe with great satisfaction and report to you the fine co-operative spirit animating the whole staff.

THE BANK'S PROFIT

In view of the additional outgoings necessitated by war, it is not surprising that our net profit, at £2,181,000, shows a decline of L264,000 on the year. This is due partly to the higher rate of income-tax, provided for before arriving at the published figure, partly to increased working costs, and partly also to smaller earn- ings from London's overseas banking business. If we add to the profit for the year the balance brought into the account, we have £2,810,000 available for distribution. Past allocations to reduction of bank premises account have been so substantial that we do not consider any further immediate provision to be necessary; but in view of the uncertainties of the time we have again devoted £500,000

(Continued on page 158)

COMPANY MEETING

MIDLAND BANK LIMITED

tCominued from page 1571 to reserve for future contingencies. The interim dividend of 8 per cent. less income-tax absorbed L879,00o, and we propose a final dividend at a similar rate. Owing to the higher tax, this will re- quire the smaller sum of £788,oao, and the slightly increased balance of L642,000 is left to be carried forward.

I ought perhaps to point out that the gross dividend for the year is actually a little higher than 16 per cent., since income-tax was deducted from the interim dividend payment, in July last year, at the rate of 5s. 6d. in the pound, whereas the September Budget raised to 7s. the rate at which profits were liable to tax from April 6th last. Any dividends paid out of the current year's profits must be expected to suffer the full deduction of 7s. 61. in the pound imposed in the last Budget in respect of the coming fiscal year. The addition of 25. to the income-tax rate is a war charge, and having that in view me directors, whose fees were voted by the shareholders as free of all income-tax, voluntarily decided to pay the additional tax themselves, and thus relieve the profits of the 'bank from further outgoings in respect of tax on their fees.

BALANCE-SHEET

As regards the balance-sheet, you may recall that a year ago I spoke of the decline in deposits then taking place, which marked the first step in the process by which foreign-owned sterling funds were converted into other currencies. This movement continued until the spring of 1939, when the temporary character of the shrinkage became evident and a natural re-expansion took place. A check to the expansive movement occurred just before the outbreak of war, and it seemed that the rise in Bank rate might betoken an official policy of restriction. It shortly became clear, however, that the authorities were merely following long-standing precedent with regard to the action appropriate to a crisis, and the expansion of deposits was resumed in full force as the cash basis was enlarged and the supply of Treasury bills grew with the increasing require- ments of war finance. The outcome of these varied influences was that we ended 1939 with deposits at £4961 millions, £331 millions higher on the year and back to the balance-sheet record of Decem- ber, 1937. Although the total is about the same as two years ago, its composition is different in that a much smaller fraction consists of fore gn-owned balances. Our cash, at £571 millions, represents over 111 per cent, of deposits. The further diminution in the volume of trade bills has been more than compensated by the great en- largement in the supply of Treasury bills so that our total bill holding has increased substantially. Taking these items to- gether, and adding money at call and short notice and balances with and cheques on other banks, a total of 341 per cent, of our deposits is covered by cash or by assets shortly convertible into cash. This figure is considerably higher than a year ago—higher, indeed, than the standard to which we work in ordinary times.

INVESTMENTS AND ADVANCES

The two largest items among our assets show opposite move-

ments. Investments are stated at £41 millions less on the year, and in noting this decline it must be remembered that full provision has been made for their reduced market value. On the other hand, advances show a substantial increase to £2201 millions, thus being restored to the highest level in our history. The expansion of bor- rowing requirements may be attributed particularly to armament work, and latterly to the sharp rise in commodity prices. For

reasons already mentioned, we feel bound to examine applications for advances with first regard to national needs. Acceptances and confirmed credits have further declined, but the movement covers a marked change in the method of financing foreign trade. The widespread disturbance and uncertainty have led traders to resort more and more to confirmed credits, the amount of which has risen substantially. Moreover, engagements on account of customers are higher on the year, this movement also being traceable partly to arrangements made to cover special risks arising from the war. Liabilities on forward exchange con- tracts are less than one-half of the amount recorded a year ago, the result of official restraint noon international transactions, im- posed at first informally and then, on the outbreak of war, by strict regulation under statutory powers.

THE NATIONAL EFFORT

Looking to the future, we shall all agree that 1940 must be a difficult and exacting year. The strain imposed upon us will be severe, yet we shall all wish to put first and foremost the national demands. The Government has from the outset armed itself with necessary powers, which it is not hesitating to use, though with every consideration for the interests of neutral countries. The immense national resources, particularly the power to produce at home and to buy essential goods and services abroad, will enable us to carry on to a victorious end either a war of great intensity or a process of long attrition. Further, the high degree of co- ordination already achieved between ?ranee and ourselves, in economic and financial as well as military affairs, ensures a far more effective use of our combined resources than was attainable at any time in the last war- Finally, we have the inestimable asset of high morale—an asset incomparably superior to a morale which requires the stimulant of false propaganda or the goad of personal fear. With all these things in our favour, we can have no doubt as to the ultimate issue of the struggle against evil forces which un- defeated would deprive all Europe of its rightful heritage of free- dom and peace.

The report was adopted and other ordinary business was transacted.