Bankers face the challenge
GEORGE BOLTON
Sir George Bolton, chairman of the Bank of London and South America, has just retired from the Court of the Bank of England.
This year 1968 is already certain to be remem- bered as a turning point, both for the banking organisation in this country and for the system of international payments on which world trade depends. More than is realised, the changes at home and abroad are interconnected. The growth of world trade, the expansion of industry, and the accompanying increase in the scope and versatility of banking, are all making national frontiers less relevant in the financial world. The British banking community is particularly conscious of the challenge that it faces in the growing needs of the large international industrial organisations—many of them North American—and in the com- petition of the American banking system. London is meeting this challenge in its own ways. There is a well-defined trend towards mergers. The Barclays/ Lloyds ! Martins merger proposals are now being investigated by the Monopolies Commission, but I believe it is safe to forecast that the British banking system will eventually be reduced to -four groups. Steadily rising overheads can only be offset by a rationalisation of the branch system. And the steady decline in the purchasing power of sterling means that the banking system is ex- pected to handle with maximum efficiency a growing volume of trade finance both for visibte and invisible transactions.
As a- consequence of devaluation this trade finance will increase in relation to the banking system's capital and reserves and is likely to reach a total of nearly £20,000 million in 1968. To the extent that a growing proportion of this trade may have to be financed in foreign currencies, the banks must be in the strongest possible position: in the uncertain circumstances of today, size, solidity and a reputation for expertise are becoming ever more important. These uncertain circumstances are, moreover, the background against which the banking system in London has developed, and will con- tinue to operate, the Euro-currency market, which is becoming such an important factor in financing world trade.
It has been said that if the Euro-currency market did not exist it would have had to be invented. Unlike Voltaire's definition of pod, the market was in facr invented, or lather evolved, in response to real needs; it wodld be misleading to suggest that what has now become a unique source of international finance for a capital-hungry world was the outcome of some economic freak, or that the owners of u con- verted foreign currencies discovered by c ance how to place them profitably. It is precisely because the market meets the needs of both borrowers and lenders that it has developed so strongly and is now very far from being the transient phenomenon it was once held to be.
The Euro-dollar—which in supply and de- mand far exceeds any other currency—is illustrative of the market as a whole. However, the challenge, essentially political in origin, to the dollar's authority, now poses a most serious threat to this market.
We are all well versed in the various theories about the future of the us dollar and the dollar price of gold. We know that the Canadian dollar is in trouble; and recently there have been echoes of exchange disturbances from Japan. In a situation such as this, where we have a government in office and, from a nose- counting point of view, likely to remain in office for another three years, it is essential for the responsible men in banking and finance to accept the fact that the immediate future of the affairs of this country depends more on them than on prejudiced politicians. This is one of the reasons why I welcome the current mergers in the banking community. If we are to have new industries, requiring finance in depth, new markets and good management, we must be prepared to accept the era of the triumph of size over the small man.
We must be prepared also actively to enter the era of the large organisation and the interdependence of banking communities all over the world. The industrial giants demand huge resources and immensely efficient services from their banks. The trend towards mergers and associations among banks is now follow- ing the pattern set by industry and beginning to cross national frontiers; this we can see in the changes that have taken place in Holland, Belgium, France and Britain, and I believe these changes are all to the good. There are too many banks and financial organisations in the world with quite inadequate talent to serve them all; and this is true in the us too, for example, where there are some 14,000 banks. Over the last few months, the inter- dependence of the pound and the dollar has been proved. If the sterling-dollar system breaks down, the whole capitalist world will go with it. I believe the way out of some of our difficulties is a more intimate relationship between the dollar and sterling systems, and the development of links between the com- mercial banks, as well as a rationalisation of banking systems in keeping with modern needs.
Size alone will not, of course, succeed without the best possible management; good management is in short supply and the avail- able talent will have to be used to the best advantage by fewer and larger groups. How- ever, I regard the younger generation now moving into the lower ranks of management as the best I have ever known. I say this with a certain amount of experience, as I have just completed my fiftieth year in banking. While the future, therefore, may be fraught with every kind of problem, we should never forget that the success of an industry, of a bank, of a country, depends ultimately on the quality of manpower. The future of the next generation and the survival of this country, quite apart from the survival of the sterling system, will depend not on government, nor on any political party, but on the energy and enthu- siasm of the private citizen.
If, as I have feared and have commented on in the past, the sterling system fails to support the weight of the finance of not only UK but sterling area trade, then banks and industries alike will have to make major changes in their normal methods of doing business. I hope this never occurs, and that we shall succeed in pro- ducing a more stable sterling system, but we should all be prepared to change our methods practically overnight. Great and perhaps un- pleasant events are in the making—the only certainty I can safely forecast in the banking field is a rising tide of anxiety about various currencies and the effect of the consequent strains on the international monetary system.
When the leading monetary experts met at Bretton Woods in August 1944 to try to correct the faults of the pre-war years, and create a better system for the new world, there were those who, even then, foresaw many of the problems of the next twenty-five years; they recognised the need for a complete reappraisal not only of the traditional system but also of the complex thinking behind it. Unfortunately, instead of being allowed to design and construct a new system of international settlements capable of the expansion necessary to absorb increasing demands upon it, the pressures of traditional thought merely redrafted the old values and produced a structure which, with the advantage of hindsight, can be considered only as a temporary measure, however great an advance in economic practice it then represented.
Everyone is familiar with the arguments about the attraction of gold as the sole basis of international liquidity. In this context we must take geology into account and should not forget that there have been no gold discoveries of magnitude since the nineteenth century, except perhaps in Siberia; but Russian-owned gold plays no part in the international monetary system. Even if the price of gold were doubled or trebled, little increase in gold production (in terms of weight) would be seen. Gold is now in growing use in the arts and industry, and it is conceivable that in the years to come gold will find itself in the same position as silver, where industrial demand is such that it is now quite impossible to use silver as a monetary metal. Monetary authorities are, as you know, slowly and reluctantly engaged in devising new methods to ensure international liquidity. Progress will unfortunately be at a snail's pace, as the innate conservatism of the banking profession combined. with an under- standable distrust of governments, rejects change. Nevertheless, the current crisis may wake them up to their responsibility to provide a workable system. In the interregnum, the international money market will play a greater role in the normal processes of foreign trade and finance.
I personally believe that in spite of recent events, gold is fundamentally unimportant, although as a result of the conflict between the French and their allies on one side and the Anglo-Saxons on the other it is possible that the world may temporarily split into two camps: A. A gold bloc maintaining a gold exchange standard under the leadership of France and essentially Western European in character.
B. A managed exchange group arranged around the dollar and sterling systems and essentially relying on the strength of the American economy for 'liquidity.'
What should vitally concern us today is the development of—and perhaps eventually the amalgamation between—the dollar and sterling systems. There was a joke current some five years ago, when two ladies enjoyed some brief political notoriety, that the one had a past and the other a future. I believe that gold has a past; but that the dollar and sterling systems have a future.
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