FINANCE: AFTER THE WAR BY D. DEUMMOND ERASER,. M.Com. ■J- : Hon. Lecturer on Practical Banking at , , ' ; Manchester University Printed and Published by Herald & Walker, Pool Fold Chambers, off Chapel Walks,. H^BfljaHnUtrfliv ' Manchester .^^fUwwici8jt'i-2i' PRICE THREEPENCE At the suggestion of friends I have prepared this small pamphlet from addresses delivered at : Manchester Athenaeum, October [25th, 1916 : •Trade after the War." Manchester University, October 27th, 1916: " War Finance." Liverpool and District Bankers' Institute, Liverpool, November 13th, 1916: 44 Money before, during, and after the War." Column Club, Manchester, February 19th, 1917 : "British Credit Facilities for Agriculture and Over-sea Trade." D. DRUMMOND FRASER. February, 1917. FINANCE AFTER THE WAR. 2 BRITISH BANK BALANCE SHEETS (exclusive of Bank of England). (Taken from "The Economist") LIABILITIES. In Millions of Pounds 1913 l % | 1914 % 1915 0/ /o 1916* % £ £ f 13 £ \^d|JlLctl cLllll 1VCDC1 v c ••• 115 9 114 8 8 in 7 Undivided Profits 7 1 7 1 6 1 6 1 Deposits 1,033 83 1,136 85 1,243 85 1,368 86 Acceptances 67 5 54 4 67 4 65 4 Notes, etc 25 2 29 2 37 2 36 2 /l 247 £1,340 /l 466 £1,586 ASSETS. In Millions of Pounds 1913 % 1914 % 1915 % 1916* % £ / / Cash in hand, at Call and Short Notice 294 24 340 26 331 23 426 27 Investments 191 15 226 17 422 29 424 27 Discounts and Advances 684 55 702 52 632 43 641 40 Premises and Cover for Acceptances 78 6 72 5 81 5 95 6 £1,247 £1,340 £1,466 £1,586 - * Estimated. The " Economist " figures not yet published. BANK OF ENGLAND. (Final weekly statement for following years.) LIABILITIES. In Millions of Pounds 1913 % 1914 % 1915 % 1916 % £ £ £ £ Capital and Reserves . . . 17 14 17 8 17 8 17 8 Deposits 71 60 155 74 162 75 178 76 Note Circulation 30 25 36 17 35 16 39 16 £118 £208 £214 £234 ASSETS. In Millions of Pounds 1913 % 1914 0/ ■ 1015 % 1916 % Coin and Bullion £ 35 28 £ 69 33 £ 51 24 L 22 Investments 32 27 33 16 51 24 75 32 Other Securities 51 45 106 51 112 52 106 46 £118 — £208 £214 £234 3 In dealing with this subject in war time one is reminded of the stirring appeal which the late Lord Kitchener made for men, munitions, and money. I venture to say that in the historical record of the war, British money-power will not be the least interesting of the three Ms. The most striking feature in the above figures — deposits — constitutes, it will be noticed, over 80 per cent, of the total liabilities. These deposits are obtained by continuous day- by-day borrowing. The deposits are accumulated in small sums, comparatively speaking, throughout the country. In fact, it is almost a truism to say that one of the primary duties of every bank manager is to see that no one in his particular district has any unnecessary cash in his pocket, or keeps any unnecessary cash in the till. There are two main banking characteristics — both modern — a large extension of branches and a large number of amalgamations. These two characteristics have un- doubtedly strengthened the vitality and the soundness of the banking system of this country. The disappearance of the small local banks and the small private bankers is therefore not to be regretted. The result is large banking founded on national lines, in contradistinction to small banking founded on parochial lines ; that is to say, there are a few banks with many branches, instead of many banks with few branches. This system of concentration and diffusion has produced an effective economy in the circulating money of the country. To the uninitiated the opening of branches in country districts, in the suburbs of industrial centres, and the multiplication of branches by individual banks in the same districts and centres might seem somewhat wasteful. But the banker knows from practical experience, and from scientific foresight, that the only way to get hold of the small sums — " every lickle makes a mickle" — is by opening these branches. These small sums in the aggregate amount to the huge figures in the above table. A very striking confirmation of the success of this •spumy jo § § § § § 8 6 diffusion has been discovered by those who are responsible for working the National War Savings Committee. The Committee finds that War Savings Associations in small country districts collect per head of the population much more than the Associations in large industrial centres. It is, therefore, the aim of the National Committee to institute a wholesale scheme of devolution to collect the savings of the people, in order that they may be invested in British Govern- ment Securities for the prosecution of the war. The small investors have taken up War Savings Certificates and Ex- chequer Bonds of the Post Office pass-book issue at the rate of, on the average, two and a half million pounds a week, or one hundred and twenty-five million pounds a year. The National War Savings Committee report that the number of War Savings Certificates (issue began February 21st, 1916) sold during the week ending January 6th was 1,104,065, making an aggregate to date of 55,534,660.* Witli regard to Post Office Six per cent. Exchequer Bonds, the issue of which was suspended on December 30th last, supplementary reports received since the last announce- ment bring the total number of applications (issue began October 16th, 1916) to 316,000, and the total value of the Bonds taken to £12,320,000. In normal peace times the joint stock bank deposits increase on an average at a figure which, if we had had no war, would have shown an increase of one hundred million pounds instead of three hundred and thirty- five million pounds in the above table since the outbreak of war. Over half of the deposits is used to finance traders — bills discounted and advances. During the war the deposits have increased at a much greater rate than in peace times, because the Government is the dominant buyer of goods and services. Thus, by Government purchases, trade is greatly enriched, stocks are used up, and the consumption of goods is more * Since increased to 62,058,066 for the past twelve months. 7 rapid. Consequently the circulating money is accumulated in war time far in excess of peace time. For the same reason there is a marked decrease in the trade demand for bank advances and for the discount of bills. It naturally follows automatically that the cash resources of the joint stock banks are increased. The above figures show no less an increase than one hundred and thirty-two million pounds. In normal times half this amount is lent in London day by day for short periods against the very highest class of security, including bills of exchange. In war time the proportion probably does not exceed one-third, while the other two-thirds consist of actual gold, Treasury and Bank of England notes, Bank of England balances, and cheques in transit. A careful perusal of the speeches of bank chairmen discloses the fact that the deposits from the outbreak of war show a steady increase until June, 1915. The only disturbing element in the working of the monetary machine during that period was the abnormal Government borrowing from the Bank of England. Immediately alter June, 1915, this steady progressive increase was adversely influenced by the upheaval caused by the 4| per cent, spectacular War Loan. Out of the proceeds of the very large amount — three hundred million pounds— paid up in full in July, one hundred and sixty million pounds was repaid to the Bank of England. All this caused a violent drop in deposits, which was only gradually recovered between July and December, 1915. A further disturbing element was caused by the Government purchases on behalf of ourselves and our Allies in America, which is graphically shown in the Statist exchange chart for 1915 and 1916 reproduced on page 23. During the whole of 1916, when the Government borrowed on the continuous day-by-day principle, the monetary machine worked with the utmost smoothness, and deposits showed a steady upward tendency throughout the year. 8 In order to measure the real strength of the cash resources of the British banks it is necessary to analyse the item — cash in hand, at call and short notice — four hundred and twenty- six million pounds. From an examination of the figures of the joint stock banks which separate the cash in hand and Bank of England balance from the money at call and short notice, I proved, in a paper published in the Journal of the Institute of Bankers in 1913 under the title of " Some Modern Phases of British Banking, 1896 to 1911," that the yearly average proportion of the cash in hand and Bank of England balance was half the total. The deposits of these banks, thus analysed, represented 80 per cent, of the total. I proved that in the fifteen years — 1896 to 1911 — the joint stock banks had increased their stock of gold coin by no less than twenty-five million pounds. Since 1911 the Royal Mint gold coin census shows evidence of a further increase of thirty million pounds, to which another thirty million pounds has been added during the war. From an examination of the figures of the banks since the outbreak of war, I find that two-thirds of the per- centage of 27 is represented by cash in hand and Bank of England balance and that one-third is represented by money at call and short notice, of which the stock exchange loans are only a small proportion. It is impossible to exaggerate the importance of this large addition of gold coin, the foundation upon which the superstructure of bank credit is built. It shows how the British banker was armed to meet the awful cataclysm caused by the war. A similar analysis of the item — bills and advances — reveals the fact that the average proportion of the bills is one-fourth of the total of this item. I have not the slightest doubt that the same proportion applies to the bills held as security for money lent at call and at short notice, thus making a total investment of bills in normal times of not more than two hundred million pounds. It is therefore evident that there cannot be many German bills in this amount. As the London sterling bills of exchange were estimated 9 at three hundred and fifty to five hundred million pounds, when the war broke out, half the amount must have been held by foreign banker? — thus to this extent British over-sea trade has been supported by foreign bankers. This is a significant illustration of the advantages possessed by London as the monetary centre of the world. All this enormous increase in the circulating money of the country must raise prices all round unless there is a general civilian reduction in consumption of goods and services. The dominating daily demand of the Government for goods and services in connection with the war upsets the economic doctrinaire, who argues that a rise in prices reduces consumption. There is no tangible evidence that the ordinary general consumption among the civil population has been reduced. Unless, therefore, individual consumption of goods and services is reduced the rise in prices will continue. It is interesting to find that the increase of two hundred million pounds of deposits in 1915 over 1913 has been accom- panied by a corresponding increase in the joint stock banks' holding of long-dated British Government securities. The economic doctrinaire argues that the increase in these investments has produced the increase in deposits. He ignores the fact that the increase in the deposits preceded the banks' investment in the Government securities. If, instead of the joint stock banks investing two hundred million pounds in long-dated British Government securities, the whole of the amount had reduced the deposits in con- sequence of the people's investments, then, I submit, our national finance would have been on a sounder basis. The financial policy of the Chancellor of the Exchequer in 1914, when the 3J per cent, spectacular War Loan was floated, was to encourage the banks to subscribe, because the people took their deposits to the banks. This policy was again adopted in 1915, when the per cent, spectacular War 10 Loan was floated. Small investors were provided with scrip vouchers which were withdrawn before they could become an effective attraction for small savings. In spite of the privilege granted to those who subscribed for the first 3 J per cent, spectacular War Loan — to borrow from the Bank of England every penny subscribed at 1 per cent, below Bank Rate — the amount to-day outstanding of the loan is only £62,000,000. With regard to the 4| per cent, spectacular War Loan, the special privileges were in connection with conversions and a too generous allowance of interest. The conversions of 3 J per cent. War Loan, Consols, etc., amounted to £410,000,000, which increased the amount of the Loan from £600,000,000 to £900,000,000. It is too early to say what the final result of the 5 per cent, and 4 per cent, new spectacular War Loans will be. During the whole of 1916 the Government raised with the utmost smoothness one thousand three hundred million pounds by continuous day-by-day borrowing, as follows : — Treasury Bills (repayable within twelve months) £700,000,000 Exchequer Bonds, War Expenditure Cer- tificates, and War Savings Certificates (repayable after two years and more)... £600,000,000 £1,300,000,000 My experience of thirty years' practical banking has convinced me that, had the same attractive publicity been given to the Exchequer Bonds as to the Treasury Bills, the £600,000,000 would have reached £1,000,000,000, reducing by at .least half the amount of the Treasury Bills. The figures, at all events, prove unmistakably that the colossal daily expenditure of the Government found a safe anchorage for the current war profits of the nation in the daily investment 11 of short-dated Government securities. The funding of Exchequer Bonds after the termination of the war would, in my opinion, have been preferable to funding during the war. Yet the marvellous manner in which the banks have stood the strain of financing the trade and the war, instead of eliciting universal praise, led a former Cabinet Minister and others to urge that the banking system of this country should be modified ; that the banks in future should be prepared to run greater risks than they have done in the past. It has even been suggested that, if the banks do not modify their lines, other institutions must be established, better able to foster the economic development of the country. This reminds me of the boom in company promoting in the last years of the eighties and the early years of the nineties. Industrial Trust Companies were formed at that time to act as intermediaries between the banks who control the circulating money of the country — deposits — and the mer- chants and manufacturers who require advances and bills discounted to carry on their trade. Where are those Industrial Trust Companies to-day ? I have analysed very carefully the reasons advanced in favour of a more venturesome system of banking. The chief reason appears to be due to the popular belief that the country is drained by London of its deposits. It is alleged that money is withdrawn from domestic trade for the purposes of inter- national trade ; that the deposits of the British people are used to finance non-British industry, Stock Exchange specu- lations ; and that only a modicum is devoted to the finance of British trade. It is also said that the manufacturer who wishes to add to his buildings and machinery is driven to the company promoter. One of the most respected papers in the country, The Manchester Guardian, not-very long ago, in an exceedingly well-written leader with, an Oxford flavour, alrnost excelled 12 itself by stating that, if we had a really great Chancellor of the Exchequer, he would have seen in the recent history of banking in this country a final justification for the establish- ment of a State bank. What is the bankers' reply ? In spite of the strain of thirty months of war the banks to-day are relatively and actually stronger than they were before the war. The com- petition in banking was never keener than it is to-day. Each of the banks receiving the deposits looks upon the deposits as a reservoir, half of which is employed in advances and discounting bills to traders. Traders have no need to fear that active and healthy competition will not be forthcoming. Perhaps the greatest humiliation the banker has expe- rienced is to be told to mend his ways on German banking lines. An examination of the balance sheets of the German banks shows that advances and bills discounted exceed the deposits, with the result that the banks replenish their cash resources when required, by rediscounting bills at the Reichs- bank, instead of maintaining the same proportion of cash to deposits as the British banks. Some time ago the wires flashed throughout the world that the fifth War Loan in Germany had raised £530,000,000. But those same wires did not flash the news that, when the Reichsbank figures were published immediately after the announcement of the success of the War Loan, the bills of exchange discounted by the Reichsbank exceeded the total subscription to the War Loan. It will be found that bank deposits in Germany have largely increased daring the war, for the same reasons as the increase in the deposits in this country. It will also be found that the cash resources have increased, and that there is a reduction in the amount lent to the trader. But there has been an enormous inflation of the notes in circulation. And, practically the whole of the increase in deposits and notes in circulation, has been used in discounting and rediscounting 18 bills, thus giving a supreme example of a diabolically clever manipulation of bank credit, to gull the complaisant German people. The German banks partake more of the nature of indus- trial trusts. They lend, and they lock up their lendings in industrial concerns. When the war is over the unlocking of these locked-up lendings will be a severe problem — how severe we can realise when we remember what took place after 1910 in reference to the Agadir affair. The^bankers in Germany at that time pleaded with the Kaiser that they were not ready for war ; and war was postponed. But the Kaiser told them to get their banking house in order, and the President of the Reichsbank announced that they were going to collect a large amount of gold. How did they collect that gold ? Word went round ; and, as one man, the German nation practically cut off luxuries which previously had been imported. This turned the foreign trade balance in their favour. In about eighteen months the balance of gold in the Reichsbank rose from over £30,000,000 to £50,000,000. Can they repeat this after the war, with the door to their oversea trade barred by the British Navy ? The mortgaging of all kinds of property in Germany has been developed to an extent we, in this country, have never conceived possible. But all this pawning, no matter how skilful, is bound to end in economic disaster and financial ruin, unless the mightiest military machine scores a success on the battlefield. Two years ago the German Chancellor was bragging that the whole cost of their war would be borne by the Entente powers, thereby re-establishing the credit of Germany ! In contradistinction to banks of the German type our banks are financial institutions. Directly war broke out, arrangements were made by which the deposits of the banks of this country, perfectly legitimately and perfectly soundly, could be increased by £200,000,000 in connection with the 14 issue of currency note certificates. With the exception oi a very small amount that reserve power has not been touched. We must at all costs refuse to jeopardise the convertibility of our cash resources and the liquidity of our advances and bills discounted. BRITISH BANK PROFITS. (Taken from " The Economist ") ENGLISH BANKS. 1913 1914 1915 1916* Profits Percentage of Resources £10,377,000 11 £9, 120,000 10 £9,829,000 0-9 Dividends Percentage of Profits £6,939,000 67 £6,697,000 73 £6,288,000 64 SCOTTISH BANKS. 1913 1914 1915 1916* Profits Percentage of Resources £1,885,000 12 /1,907,000 11 £1,937,000 !•] Dividends Percentage of Profits £1,437,000 76 £1,352,000 71 £1,188,000 61 IRISH BANKS. 1913 1914 19)5 1916* Profits Percentage of Resources £1,101,000 1-2 £1,105,000 1-0 £1,226,000 !-2 Dividends Percentage of Profits /760,000 ~ 64 £750,000 68 £712,000 58 1913 1914 1915 1916* Number of Banks Number of Branches 70 7,763 65 7,832 63 7,990 * Not yet published. lb The above table shows that the whole oi this wonderful economy of the circulating money of this country is carried out by our banking system on a minimum of profit. Many people think that branch banking has a dehumanising effect upon the branch manager ; that he will only seek business which seems profitable, and not business for the good of the trade of the country. The above table proves that the banking in this country is conducted on exceedingly economical lines. The cheque, which hurled the note down from its pinnacle of power fifty years ago, i? now, for all practical purposes, the monetary machine of the nation. It runs so smoothly that the daily requirements are met by a natural expansion and contraction of the cheque currency. And the distribution of the circulating money throughout the country is effected by a stroke of the pen. This is the supreme service rendered by the banker to the economic development of the country. Germany to-day envies our cheque system, and her financiers are doing everything they possibly can to introduce the cheque into their system. They have learnt to their cost that a note currency in times of stress produces a curve which shows a rising tendency, with every now and then a jerk which disturbs the monetary machine. The last fear of a jerk inspired the German financiers to seize every Reichsbank note in the Belgian banks as a contribution to the fifth War Loan. By that means they were able to tell their people that, after all, the increasing note circulation of the Reichsbank had not overstepped the ratio of one-third gold to notes. The legal power to dispense with the one-third ratio was granted at the outbreak of war ; and the first time advantage was taken of this privilege was in the final weekly return for last year. You will find from the report of the Reichsbank for 1915 a re-assuring statement to the effect that the demand of the war upon their note currency is so incessant that these notes continue to remain out longer than in peace times. Thus they explain the constant weekly increase in the circulation of their notes. 16 BRITISH TREASURY NOTES OF £i AND io/ = . 1914 Dec. 30th. IS June 30th. 15 Dec. 29th. 1916 June 28th. j Dec. 27th. Investment Reserve Notes Total Advances : Other Banks . . . Trustee Savings Banks Redemption a/c : Government Securities Balance in Bank of England Gold Total ... 1 38,478,164 £ 302,665 46,576,801 £ 739,328 103,125,099 £ 1,704,004 122,099,278 £ 3,430,151 150,144,177 38,478,164 46,879,466 103,864,427 123,803,282 153,574,328 169,000 600,000 9,923,546 9.285,618 18,500,000 139,000 9,585,828 8,654,638 28,500,000 159,000 49,000 54,620,563 20,535,864 28,500,000 104,000 36,000 88,157.692 7,005,590 28,500,000 64,000 40,000 118,102,160 6,868,168 28,500,000 38,478,164 46,879,466 103,864,427 123,803,282 153,574,328 In order to mobilise the gold in circulation in the pockets of the people, for national purposes, and to meet the increased demand for a small currency for retail payments, an issue of currency notes of £1 and 10s. was introduced immediately after war had broken out. You will see that in June, 1915, the total amount of these notes was £46.000,000. At that time a special effort was made to induce the public to use the currency notes in place of gold. The Chancellor of the Exchequer stated in the House of Commons that it was estimated that the amount of gold in the hands of the public at June, 1915, was £75,000,000. There can be little doubt that before the war it exceeded £100,000,000. I think you will find that the increase of note issue from that date to this is about £100,000,000. Therefore these currency notes are merely taking the place of the gold in circulation previous to the war, which has been used by our banking system towards maintaining our unique position as the only free gold market of the world. 17 BRITISH GOLD RESERVE. The Chancellor of the Exchequer in the House of Commons on December 6th, 1915, in replying to a question, said : — The amount of gold coin held by the banks, including the Bank of England, was on June 30th, 1914, £82,800,000, and on June 30th, 1915, £110,200,000. The following figures (Royal Mint Census) show the striking increase in the gold coin held by the banks since 1907 :— Year. Day of Week. Amount. 1907, J une 30th Saturday £33,296,802 1908, do. Tuesday ^50,369,167 1909, do. Wednesday 49,221,074 1910, do. Thursday 44,214,173 1911, do. Friday 51,009,977 1912, do. Saturday 60,640,681 1913, do. Monday 69,524,127 1914, do. Tuesday 82,794,963 1915, do. Wednesday 110,188,109 These figures are exclusive of gold bullion and foreign gold coin. It is well known in banking circles that the gold coin held in June, 1916, shows a reduction. On the other hand it is quite probable that the reduction in gold coin was more than made up by the increase of gold bullion held by the Bank of England. Our obligations are to pay in gold, therefore gold must be forthcoming if required. We have not hesitated to export gold ; in fact, since the war began, this country has exported over £250,000,000 of gold. How has this been accomplished ? Two-thirds of the gold produced (i.e., £60,000,000 annually or £150,000,000 since the outbreak of the war) comes from the mines of the British Empire. This accounts for approxi- mately half of the amount. The other half is represented by the gold which this country received immediately after 18 war broke out, in consequence of its position as the largest creditor nation. The rest has been supplied by the Bank of England, the joint stock banks, and the banks of our powerful Allies, France and Russia. And yet there is an increase in the Bank of England, the Treasury (in connection with the currency notes), and the joint stock banks, of not less than £70,000,000 since the beginning of the war, which works out to a percentage of the additional banking liabilities — deposits and notes in circulation — double that maintained in normal times. The gold held at the present time by the Entente powers is, in round figures, £600,000,000 ; while that held by Germany is only £125,000,000, painfully gathered together in a rather suspicious manner week by week, which Germany jealously guards and refuses to export, because every ounce is required as a backing for her note-issue. We know, in fact, that some of the increase is due to the melting down of gold trinkets taken to the Reichsbank by patriotic Germans. In fact, Prussian " persuasion " has, no doubt, been the means of inducing the docile German men and women to cast their wedding rings into the melting-pot. BRITISH AGRICULTURE. Agriculture is as vital a necessity to our banking as banking is vital to our trade. The branch system permeates the country districts ; and the banking resources thus obtained are not only used freely in advances for the seasonal require- ments of the farmer but add immeasurable strength to the deposits. These advances, moreover, are remarkably free from losses. The banker cannot, however, find the farmer the mortgage money required for the purchase of farms. Recent official publications have brought home to our mind the rapid improvement made by German agriculture. 19 The success of the German farmer in feeding 70 to 75 persons per 100 acres as compared to the British farmer in feeding 45 to 50 is partly accounted for by the large proportion in which potatoes enter into the German dietary, the production of which per 100 acres of cultivated land is five times as great as in the United Kingdom. The production of cereals on the same basis is double what it is here. And yet, according to Mr. T. H. Middle ton (of the Board of Trade), the German production of meat per 100 acres of cultivated land only amounts to 4J tons as compared to our 4 tons. The milk production is 50 per cent, greater than that of the United Kingdom. Germany's remarkable development in agriculture, simultaneously with her development in manufacturing industry, is due to the modern methods of intensive cultiva- tion, to the widespread methods of scientific farming, to continual dissemination of agricultural education, and to ever-extending use of artificial manures. We, on the other hand, with a better soil and a better climate, still cling to our old-fashioned methods and will not " speed the plough." But this is not all. About 93 per cent, of the farmers of Germany own the land they cultivate ; whereas in this country only 11 per cent, of the farmers are owners. In Germany the co-operative credit facilities for obtaining the instruments of production and for marketing the produce on the most favourable lines have been brought to maturity ; whereas in this country this co-operative principle, as applied to farming, is only in its infancy. But the great factor in German agricultuie is the huge system of special institutions for mortgage credit, by which the farmer is enabled to become the owner of his farm — a system of ownership which has been greatly facilitated by the complete registration of land title and the clearness of the mortgage law. Mortgage bonds are issued upon the collective security of the land and rank as first-class securities 20 for investors. They are issued ior £5 and upwards at the ruling rate of interest plus a further small percentage paid annually for gradual redemption. The declared policy of the German government is to have a loan institution in every parish. The outstanding amount of these bonds before the war was several hundred million pounds. The bonds are not only attractive to investors but are accepted as a good security by the bankers. This gigantic home-investment has not been created in a day ; there are at least three or four interdependent groups ot institutions which decentralise and at the same time centralise this collective mortgage credit facility. When a mortgage is granted to a member of one of these institutions the loan is not made in cash but in bonds. The costs in con- nection with the valuation and supervision are kept on a low basis because of the decentralisation. And the safety of the bonds is assured because of the centralisation. The success of the movement financially is undoubtedly due to the ex- tensive propaganda continuously carried on. I believe the work of the National War Savings Com- mittee has shown the way in winch working units in small blocks of population can be used in this country for the establishment of similar credit facilities, thus securing for the farmer mortgage credit for the purchase of Ins farm and for the investor an attractive form of investment for his savings. 21 1 ! Ik 111 Q < cr II UJ > I span •030 AON ZOO Xd3S onv Ainr 3wnr At/W IdV avw 93d wvr 030 AOW XOO Xd3S aw 55 § §3Nnr Is; t WW 93d nvp 030 AON 100 ±d3S rr Ainr G) — 3N(1 1 ir IdV aviN 33d JO SUO////W K] i ^ , iq l>] , f\j t\| m ! ^ I ftj cyj (\| M fM W g g s^^^ < V| — • N 9 l 1 22 BRITISH OVER-SEA TRADE. There has been no sign from which one can deduce that any serious attempt has been made to reduce non-essential imports. Unless the Government takes means to prohibit these imports into this country, the paramount problem of the finance of the war — the payment of over-sea obligations — will remain with us. The chart on page 21 shows the monthly excess of imports over exports. The excess in war time is more than double what it was in peace time. The excess is met by our invisible exports. This country practically conducts the bulk of the international shipping, banking, and insurance of the whole world. It is estimated that in normal times this yields as much as £350,000,000 per annum. These invisible exports in peace time not only settle the trade balance against us shown in the chart, but make it possible for this country to invest in foreign investments no less than £200,000,000 a year, from which we have reaped an enormous advantage in war time. The British shipping carries in war time a volume of tonnage in excess of what it was in peace time. And there is no doubt that there have been large increases in freight and insurance charges. It is, therefore, apparent the £350,000.000 of invisible exports in peace time are doubled in war time. 23 24 *" The most convenient method of showing how exchange rates have moved during the past two years is to take the rate fluctuations as between New York and four great Euro- pean centres — London, Paris, Rome, and Berlin. To show the course of fluctuations the above diagram, remodelled from charts issued by the Board of Trade, shows comparatively the decrease per cent, between the par of exchange and the rate recorded. At the top of the diagram will be seen a shaded portion that shows what is termed the ' limit of normal fluctuations/ It is quite exceptional for normal rates to go above or below the shaded portion." " Prior to the war the American rate with London, measured in dollars per £1, was within the shaded portion, i.e., near the normal. Immediately after the outbreak of war there was a temporary rush up to a greater amount of dollars- and cents per £1 than the normal, but, as the chart only deals with the years 1915-16, such movement is not shown, and we therein only refer to the subsequent decline as between Europe and America and the value given by the Americans for European currency. Thus, at one time in 1915, there was a very severe collapse in the American rate on London. Instead of a normal of about $4'87i c - P er £1 the Americans were at one time only willing to give about $4*5.5 c. per £1, and there was unsteadiness and instability up to the beginning of 1916. It will be noted from the chart that $4*55 c. is equivalent to a depreciation of about 6J per cent, in the value of £1. After pour-parlers and arrangements at the end of 1915 for adjusting the London and New York exchange, these arrangements, supplemented by the influence of ' Mobilising of Securities ' schemes, resulted, throughout almost all 1910, in a uniform steady rate of about $4.76 c. per £1." The rally in the German rate at the end of 1916 was doubtless attributable to the " Peace " talk. " It will be noted that the chart covers two years, and each space horizontally divided off in each year represents a month." * See Chart on page 23. 25 The comparative steadiness of the American rate of exchange proves the ability of this country to find the money for our and our Allies' huge indebtedness abroad, which has arisen in consequence of the war. Unless the money is found out of our accumulated saving?, i.e., our foreign investments or foreign loans secured by our investments, our gold reserves will be drained to even a greater extent. I am afraid that the outstanding triumph of British finance during the war which will be told and retold by economic historians for many generations to come, will not be the record of home finance in connection with our Govern- ment long-dated and short-dated borrowings, but the record of our over-sea finance for the payment of our foreign in- debtedness and that of our powerful Allies. Thirty months of Government, war, etc., expenditure of £3,600,000,000, curiously enough, was raised approximately, one-fourth by revenue, and one-fourth by the first two spectacular War Loans. The other half — eighteen hundred million pounds — was raised day by day in exchange for Treasury Bills, Exchequer Bonds, War Expenditure Certificates, and War Savings Certificates. To raise approximately nine hundred million pounds in thirty months by the revenue speaks volumes for the ability of the British people to meet in the future all charges for loans, pensions, and redemption of war obligations. To raise approximately nine hundred million pounds in thirty months by the mobilisation of foreign invest- ments, foreign loans plus the export of gold, and to lend practically the same amount to Allies and Dominions, leaves the return from interest from abroad in war time more than in peace time. Thus eighteen hundred million pounds has been raised from current savings in thirty months of war by the con- tinuous day-by-day borrowing — the greatest home financial discovery of the war. This current saving capacity in war time is about double the estimated current saving capacity in peace time. 26 British over-sea trade naturally divides itself into the question of the finance of exports and imports. There has never been any hesitation on the part of the home banks to finance imports. In dealing with the credit facilities granted by the British banks for exports, there are three facts which must not be lost sight of. (1) The British banks in the United Kingdom are all actively engaged in the foreign exchange business. (2) The British Anglo-foreign banks, established in London, have thousands of branches in our Dominions, in India, the Far East, and in South America, and possess total resources of not far short of one thousand millions. (3) The London acceptance houses are of world-wide fame. All these institutions have rendered immense service to British over-sea trade. The supremacy of British goods and services in the world's markets has never been questioned. It therefore follows that the British international financial machinery remains supieme also. The London sterling bill of exchange, for all practical purposes, is the international currency for the world just as the cheque is the currency for this country. In other words, there is an immense number of bills doing duty for imports and exports for every country in the world ; and all the bills are drawn on London as the one centre recognised by every nation in the world. The concentration in one centre has naturally a wonderfully steadying influence in the foreign exchange on London. The problem of the future is how to use the British deposits to develop British over-sea trade still further. The British trader does not want to be drawn to the foreign banker for credit facilities for over-sea trade. Over-sea trade means in many cases long credit : and the British 27 trader is bound to seek the bank which can give him the best credit facilities and the most reliable information, drawn from the centre to which he wishes to ship his goods. The engineering trader, in especial, wants a system of finance for the carrying out of the contracts which are paid for as the work progresses. For example, a city in Roumania might want to have its trams electrified. It would be prepared say, to give bonds bearing interest repayable by annual drawings. We want some credit institution which will enable us to take the full advantage of the world's expanding trade. Germany, with her daughter banks abroad, has managed to do this penetration work just because she has these daughter banks on the spot. Probably one of the best compliments that has been paid to British banking is the popular desire that its activities should be extended to the opening of branches in the principal cities of the world. I think there is a better plan. The possibilities of extending our over-sea trade are immense. Everyone is familiar with the fact that enormous tracts of the British Empire are undeveloped. Everyone is familiar with the fact that it is vital to secure raw material, produced in the British Empire, for British requirements. A good deal has been said lately about information bureaus. My war work in London in connection with the Food Prices Committee, has convinced me that the information required is pigeon-holed in the various Government depart- ments ; but what is necessary is a Credit Institution to commercialise this information. Such an institution could accept bills for long credit desired by the merchant, which bills the banks would discount practically to any amount. Such an institution would have trained men on the spot, abroad, to watch the interests of the institution and the interests of the merchant on this side. Such an institution would be a bulwark in connection with the redemption of credit obligations abroad, particularly of such countries as Russia and Italy. [I have always found that when any of 28 my friends had any difficulty with any creditor in those countries, the best help was an introduction to our banking agents with a request for an introduction to their solicitors. They, being on the spot, know how to deal with these creditors.] Such an institution would be able to command the circulating money waiting for favourable investment of a more or less permanent nature ; and such an institution, with its im- primatur, could form syndicates for various groups of traders to carry out special constructive work, the profits and losses being pooled with a possible distribution of a certain bonus to employees, as an incentive to increase their productivity. Such an institution would have a clientele able to deal efficiently with the shipping rings so that fair play would be given to the transit of our goods to the ports of the world. Such an institution would be infinitely to be preferred to the addition of directors of industrial concerns on the boards of our banks. CREDIT FACILITIES FOR OVER-SEA TRADE. The British Trade Bank proposed to fill the gap between the facilities granted by the banks, and those required for the development of over-sea trade will only succeed provided it can collect the funds required in the way in which the banks have collected the deposits. It therefore seems to me conclusive that the British Trade Bank must be controlled by the banks who control the deposits of the people. Why should Manchester wait for the formation of a British Trade Bank managed from London ? Manchester has been the pioneer of the War Savings movement. It has set the example of an investment which appeals to the people. Manchester is in the heart of a vast industrial area teeming with works and manufactories of all kinds and is the centre of the greatest producing part ot the United Kingdom. It is the nearest port to 150 towns with a fourth of the population 29 of the country. The Ship Canal was brought into being by the enterprise ol thousands of small investors who came to its rescue after the London financiers had thrown up the sponge. The proportion of the imports and exports of the United Kingdom, which belong to this district, are respectively approximately one-third and one-fourth. Why not have a Manchester Credit Association as well as a British Trade Bank ? The credit-power of such an association would depend upon its financial backing, the skill and the vitality of its management. The ideal proprietary would be the banks themselves, acting in sympathy with the chosen representatives of the traders within the district. The banks have already shown unanimity of purpose in financing national interests during the war. If they collectively financed local interests after the war, they would share in the increased prosperity thereby engendered. The Manchester banks, with the Manchester branches of the London banks, have gathered together from a wide area banking resources which have reached nine figures. If these banks guaranteed a working capital not exceeding 5 per cent, of these banking resources, a fund sufficient to ensure its success would be forthcoming. This fund, at the command of the Manchester Credit Association, need only be called up pro rata from the banks over a well-spread period, for employment in approved direct advances. These advances would be constantly reduced by the issue of bonds to the investing public. Such a system would give the utmost economy of a revolving working capital on a continuous day- by-day borrowing principle. The bonds issued against specific assets or undertakings would have an effective sinking fund for gradual redemption. These bonds would provide a sound home investment for the people's savings. The banks in tying up a small percentage of their resources collectively would-be better off than by tying up the same percentage individually. 30 Twenty years ago 25 per cent, of the banking resources were employed in investments in consequence of a hide-bound tradition that a banker must hold some portion of his funds in these investments. Just before the war this percentage was reduced to 15 per cent, mainly by the provision of funds to bring the balance sheet value of these investments below the market value. The pounds, shillings, and pence of this provision amounted to a good deal more than the collective fund I suggest to start a Manchester Credit Association. During the war the percentage has again been increased to 27 per cent, in consequence of the bankers' subscription to the first and second War Loans. In the immediate future this percentage will again be substantially reduced. After the war there will be an annual sum waiting for a sound home investment. Even the eyes of the London financier have been opened by the possibilities of the small investor. The Chancellor of the Exchequer, responsible for the 1914 War Loan, told an amazed public that his expert advisers were against the experiment of issuing smaller amounts than £100. The Chancellor of the Exchequer responsible for the 1915 War Loan told an amazed public that a Committee of the Treasury had devised a very in- genious method of issuing scrip vouchers for small investors. These were as suddenly withdrawn as they were issued. For twelve months, through the War Savings Associations, the Chancellor of the Exchequer has appealed to every small investor in every parish to subscribe for the small amounts day by day. There can be no doubt that a Manchester Credit Asso- ciation would be a commercial success which would bring to the district a greater amount of prosperity than even the Manchester Ship Canal. Viewed psychologically a Manchester Credit Association as outlined has everything to commend it. One sees daily more clearly the importance oi allowing for psychological 31 factors. I have laid emphasis upon the vast resources which the possible regular savings of the small investor represent if only an adequate appeal can reach him. It is psychological factors which govern that appeal. And those factors are by no means ignoble : quite the reverse. Take the simplest factor first. The mass of men with small but regular powers of saving are prevented from doing so by the speculative nature of so many investments and the big difficulty to the uninitiated of discriminating between good and bad. Such men have a dread, some would say a wholesome dread, of privately-promoted industrial and commercial companies, and especially of companies whose operations and re-actions and properties are entirely removed from their own range of vision or their own sphere of activities. About such concerns they can form no judgment, and con- cerning their security they have no guarantee. How much such considerations influence the small investor one readily sees in their desire to purchase cottage property, or in their astonishing eagerness to become loanholders in a local mill whose bricks and mortar they can daily see and within whose walls they work. That, then, is the first psychological factor. And to replace the speculative appeal of private concerns by the guarantee of a community is to remove an enormous hindrance to the profitable employment of a great community's financial resources. But to that negative appeal one must add another, a positive one, and one which I venture to think is of the greatest possible importance, inasmuch as it lays stress upon instincts which are peculiarly British and are written large upon every page of our social history. It is this — British people are by nature collective in their sympathies and operations, but their collective sympathies incline strongly towards decentrali- sation. They dread a bureaucratic centralisation which removes the scene of operations outside their local ken and control. England's immense strength and her stability have 33 their roots deeply embedded in her love for and loyalty to local communities and corporate bodies. England was the home of the Guilds, Friendly Societies, and Communities. The very word "Commons " in House of Commons enshrines this central idea, for the Commons is but the short for the commonalty of the Communities. And if we recognise this, if we recognise the immense force of local patriotism, and if we can enable members of a great community like Manchester to feel that, through their own local Credit Association, they can corporately further their own local enterprises and push forward their own peculiar line in foreign trade, while at the same time they are corporately securing one another from the vagaries over which they have no control and whose promoters are remote and unknown ; then, indeed, are we on the road to unlimited expansion. We shall have enlisted one of the deepest instincts of our social life, and men would feel that we had ennobled our local industry. Every penny a man invested in such an enterprise would not only be secured to him, it would be perceived as a lever for the further develop- ment of his own local industries, the industries by which he and his brother citizens lived. There would be an appeal to motives higher than the mere selfish interest or security. In England at any rate real national patriotism depends finally upon local patriotism, which is its training-ground ; and a national patriotism built upon the local patriotism of such noble communities as the greater Manchester, which might easily be, would be a worthy patriotism indeed. I