Bankers and Trade Depression
WHAT has been the effect of the coal stoppage upon the banking industry ? What connexion may be traced between the banking figures and the trade depression ? Are bankers in a position to easily finance any trade revival ? These are questions which are being actively. discussed just now both in financial and commercial circles, and in this and the following article I will endeavour to deal with some of them.
At the outset, however, I may remark that it is certainly not surprising that such questions should be asked, for without a careful consideration and analysis, not only are the banking figures somewhat mystifying in the light of trade depression, but some of them may well explain why the question is raised of the ability of the Banks easily to finance any trade revival. During the past year there have been at least two great events which must have exerted a material influence upon banking business and upon the figures shown in Bankers' balance sheets. One of these has been the return -of Great Britain to the gold standard, and the other of course; has been the coal stoppage which, at the time of Writing, has continued for just over six months. ` It is the more necessary carefully to consider these two events together because in some respects the influence of the one upon the financial and banking position may said to have been set off by-the other., ,There be no question that but for our -having returned to the gold standard, the prolonged coal stoppage and consequent trade depression would have had an infinitely greater effect upon the sterling exchange, and also upon banking figures.
ADVERSE TRADE BALANCE.
We know that as a result of the trade depression the visible adverse trade balance for the first nine months of the current year shown in the Board of Trade Returns is no less than £317,000,000 or about £43,000,000 mord than for the corresponding period of the previous year. On the top of this adverse balance we have had to effect enormous purchases of foreign coal, and yet the fact remains that the American exchange; 'although it haS certainly declined, is not abnormally adverse, having regard to the period of the year. This is undoubtedly due to the fact that whereas if we had not been on the gold standard, the fact of our unfavourable economic position would have tended to such a lack of confidence m conditions here as to occasion withdrawals of foreign money, the very reverse has happened. With out return to the gold standard, Great Britain has been actively used as a depository for foreign balances, and that tendency has probably been emphasized by the fact that certain of the European Central Resccvl Banks- Ntvg deliberately.. accumulated _ _resources_ -41 sterling as Part of their reserves. Whether this eireuin- stance is to be regarded as entirely a favourable factor, or whether it must be regarded as a possible source of weakness at some later period I am not concerned for the moment to demonstrate. What I am suggesting, however, is that one reason for the effect of the coal stoppage upon the general financial situation and upon bankers figures being very faintly revealed may be the one which. I have just mentioned.
BANKERS AND INDUSTRY. . -
There is, however, another and a more important point to be borne in mind, when considering the relations 'between conditions of trade depression and the figures published by the banks. At first sight it certainly looks rather mysterious to find that not only in bad times as well as good bankers profits appear to be maintained and, what is perhaps more - surprising, that in the present instance, there should actually have been a marked expan- sion in. loans and advances. Those conversant with the actual position of affairs, however, know that not only is the explanation a fairly simple one, but that it is one which reflects favourably upon our bankers and upon our banking system. A good deal is sometimes said and ,written with regard to the duties of the banker in affording free facilities for the financing of active trade, but very little is said with regard to the extent to which in times of extreme difficulty our industries have to lean upon the banks. When the.moment of active trade arrives we sometimes hear complaints from the borrower that he has been charged too highly for his loans, and that trade activity is thereby checked. But in the days of adversity we hear nothing at all—and naturally enough—from those who receive the financial aid (without which, in some instances, -it might be impossible to tide over until the day of recovery) with regard to the assistance which has been rendered. The secrecy between bank and customer is observed very closely at such times ; the latter is certainly not anxious to proclaim the circumstances from the house-tops, whilst the secrecy of_ the banker with regard to the affairs of his customer is proverbial.
For the purpose of noting the more striking movements in some of the leading items of the banks' balance sheets, it will be sufficient to deal with in the aggregate certain figures of the clearing banks, comparison being made between the position at the end of September, and that of a year ago.
As regards deposits, there is a decline to note of about £10,000,000—but advances increased by no less than £42,000,000—a movement only partially set off by a decline of about £28,000,000 in discounts. Here we get a kind of double mystery. The first and more technical one is that deposits. should. have fallen in the face of an increase in advances, seeing that a growth in loans usually occasions a corresponding expansion in deposits. The other is that notwithstanding the coal stoppage and trade depression, we have a great expansion in the advances.
To deal first with the question of why advances in the loans have not found a corresponding reflection in deposits, the chief explanation is a fairly simple. one. During this same period the holdings of investments by the Clearing Banks declined by fully £10,000,000. When bankers as a whole sell their own investments the purchaser is obviously the depositor, and consequently deposits arc correspondingly reduced. It will be seen, therefore, that but for the great expansion in loans, deposits would have fallen very much more than they have done..
This, however, does not solve the mystery of why there has been such a great advance under the heading of " Loans " when trade depression is supposed to have been almost unprecedented, and it is important that some kind of intelligent idea should- be formed on the matter, for otherwise we may still find it difficult to determine what is the reserve power on the part of the Banks to finance any increase in trade when loans have already so greatly expanded, even at a time of trade depression and falling prices, There is, I think, little-, doubt that there are three main reasons to be found for the expansion in Bankers' loans. The first is the most agreeable one— namely, that while there has been intense depression in certain key industries such as coal, transport, iron and steel, many other tradei have been active and prosperous, and have made considerable calls upon the Banks to finance such activities.
A further explanation is, I think, to be found in the fact that whilst key industries have been depressed financial business, as expressed by Stock Exchange dealings and new capital flotations, has been pronounced, and it is quite probable that the item of Stock Exchange loans figures more prominently in the banking figures than a year ago, and certainly than two years ago. The third explanation, however, is undoubtedly to be found in, the extent to which those industries most heavily hit by the coal stoppage have had to lean upon the banks for financial assistance. In some cases this is very clearly revealed in the balance-sheets of the industrial concerns themselves, but the ramifications of an industrial depres- sion are far-reaching and there must have been almost innumerable instances where bankers' customers have been able to demonstrate that their difficulties are entirely traceable to the coal stoppage and that not only sol- vency but a renewal of. prosperity could be counted upon, given a settlement of the industrial difficulties. And I have no hesitation in: expressing the opinion that wherever a reasonably good case has been made out financial assistance has seldom if ever been refused.
Thus it may be said that the past year has been one in which the bankers-have had to care for the requirements of the robust trader in the prosperous industries and also for the invalids who have been the victims of the coal stoppage and the many. other difficulties arising out of the economic and social readjustments following upon the War. That we should have gone through these great ordeals (in which must be included the heavy taxation imposts) with so little in the way of a breakdown in com- mercial or individual credit , must be attributed in , no small measure not merely to the soundness of our banks' system but to the wide and common-sense views of the banker of to-day. In one respect, too,. Wean be admitted that the situation has been greatly aided by the firmness and the free marketability of investment securities. That fact has not only enabled the banks to realize their securities at satisfactory prices and made it possible to give the financial facilities required, but it has enabled them also to reduce the very high proportion of invOst- ments in long dated securities occasioned by the semi- compulsory investment of resources in Government securities between 1914-1918, and to bring such jito- portion much nearer to the pre-War level. ARTHUR W. KIDDY,'
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