FREEDOM AND PROGRESS IN BANKING.
BY HARTLEY WITHERS.
TEN years ago when the war-cloud burst there was a general opinion that " nothing would ever be the same again," and this was especially so with regard to financial affairs. It was clear that shocks were going to be administered to our financial system such as were altogether beyond the experience of the oldest inhabitant of Lombard Street, and the conclusion was natural that the result of them would be essential changes in business methods. As everyone knows, the shock part of the programme was more than frilly carried out and lasted much longer than it was theoretically possible for any system to stand; at the end of it our banking system finds itself proceeding on very mach the same lines as before it began. The only essential change that has taken place—and that is only temporary—is in the matter of the legal tender curreney 'that the banks have to handle ; instead of the sovereigns that the banks used to receive from, and pay out to, their customers, we are now blessed with currency notes, ostensibly convertible into gold, but actually not very easy to dispose of in this manner, if anybody were foolish enough to try when the law would not permit him to export the gold without a licence. When it is said that this change is only tem- porary it is not implied that we shall be circulating sovereigns again soon, if ever, but that the money that _ _ we handle will be, if not -gold, genuine gold certificates, as the Bank of England note was before the War, convertible without question into gold on demand, with full power to those who convert it to send the gold wherever they may want-to make payments. It is highly significant that legal tender currency is the only point in which our monetary system has been essentially altered by the War, because legal tender currency is the only matter in which our monetary machine is Controlled and regulated by Government. Evidently, regulation is to this extent inevitable; if a certain kind of money is declared by law to be such that every creditor has to accept it in discharge of debt, its nature and creation have necessarily to, be. subject to statutory supervision. But it is very much to the point to observe that the only thing about our monetary arrangenients which has been definitely deteriorated by the War's effects is the legal tender money which is ruled by the wisdom of Parliament. It may not have been the fault of Parliament that this happened. Probably a large majority of the people who are well informed on the subject would admit that the deterioration of the pound sterling, expressed by its loss of parity with gold, was inevitable. It is impossible to dogmatize about what might have happened if things had been different ; but I venture to think that at least a case could be made for the view that if the War had been more soundly financed this blot on the escutcheon of the pound need never have been incurred, or might have been much less deep and enduring. However that may be, there the faCt remains that the'. one dePartnient of our banking system which is under Government control is the one in which deterioration has taken place and has not yet ,been amended.
In other respects the changes that have occurred have been accelerations, at the astonishing speed with which things happen in time of world crisis, of move- ments that were already in progress before the War came. Most notable of these are the amalgamation proCess and the development of business foreign exchange by the great English banks ; both these movements were already under way, but they went ahead, before the wartime and after-wartime breezes, with every stitch of canvas spread.
In defence of the process which has created the " Big Five " banks by rolling iiito" one a number of institu- tions that used to work separately, it is usually argued that the banks could not help combining, because the ,pace at which industrial and commercial concerns were growing, by amalgamation and otherdise, made it ,essential that the banks which financed them should :expand their resources pari passu ; it was the day of " big business :5 ; customers that used to need hundreds _needed thousands to finance their engagements, and so on all up the scale ; and if the banks were to continue to justify their existence by financing trade and industry, they 'were obliged, by the force of circumstances, to add a few: noughts to both sides of their balance-sheets by manoeuvring as divisions, instead of as battalions. _When necessity cracked the whip, fashion and rivalry 'applied the spur ; the public • is always apt to judge .strength by size, and if the _public wanted bigness, the banks, as usual, were ready to oblige. Old-fashioned inhabitants of, the City, •however, are still inclined to shake.' their heads over the movement- and to Contend that while the banks have gained enormously, through the am. algamation process, -in -the magnitude of the resources that :they wield, they have lost ,"something of the .ladticitY and adaptability for which they were famous, and that a tendency to red tape, that is almost ;inevitably associated with great size, is a danger against whiahitimy NOT have-to strive-by every,pd'ssible`iinprove- meta i,R organization.. NeVerthefless - there:. an be no !doubt that, from the point of view of their ordinary customers, the banks, through and after the War, pro- us-with all the usual services and facilities far more effectively and -norinally than `any other institution -.that catered for 'our. needs; The .Postal serVice was greatly - diminished and made much dearer, and the 1;Railway service likewise, and the. shopkeepers sold us ifinch goods as they condescended to dispose of at prices 711iMitireilabled-Some of them to' There were plenty of reason-s why these, hings should be. The Post Office was a Government institution and had a great deal of Government work to do ; the railways were under Government. control and had all the troops and war material to carry ; the shopkeepers, being freed from competition by increased demand and diminished supply, took advantage" of their temporary position as monopolists. But the banks, though not a Government institution _or under Government control,' also had a great deal of *at *ork-"to dio, ; 'with- the best of their young men at the 'front, they had to I andle the vastly greater amount of book-keeping involved by enormous issues of Government securities and greatly increased expenditure on the part of the Government and public ; and yet, except - that. the hours in _which, they were open for business were slightly shortened, no change of any kind was made in the service that they provided for their customers. The banks, in fact, were the only institutions that worked for us that 'gaffe us " business as usual " . in spite of depleted staffs, and greatly increased volume of work.
As to the after-War experience, which was perhaps an even more exacting test of banking strength and adaptability, when the banks, after being first officially advised to be venturesome and then scolded because they did not " deflate " at a time when customers of Undoubted solvency and good standing were besieging their doors for credit,: found ,themselves faced by a dramatically sudden collapse in trade that divided the average price of commodities by two, it must be adthitted that any system whichcould stand such a strain 'without perceptibly shivering:is not in much need of amateur advice as to how to Conduct-its bugineis.
The other great development in English banking that has been quickened in the last ten years was the extension of the interest that it takes in *foreign exchange' which the War was so largely in the hands of the London offices of the foreign and colonial banks. If we had been told, ten years ago, that international trade could be conducted at all in spite of the fluctuations in exchange that have happened since the War, we should probably have been as incredulous as if some Cassandra had prophesied that in 1924 we should have a debt of nearly 8,000 millions, over a million of unemployed, and that London would nevertheless be stuffed inconveniently full of people who present every appearance of almost profligate prosperity, while England was at the same time leading the world in the share that it was taking of a loan to Hungary under the- auspices of the League of Nations. Impossibilities have beconie commonplaces so fast that even the gyrations of the exchanges are hardly noted by a jaded public. But in the world of business they were serious obStacles to trade recovery and would have been much more devastating in their effects if it had- not been for the 'development by the banks of the system by which'mercha.ntS and producers can protect themselves against their effects by making. " forward " purchases and sales' of foreign currencies. There can be no doubt about the -benefit, to all parties Concerned, of this expansion of the English banker's horizon by greater attention to foreign exchange business. In the past he has often been accused, perhaps with some reason, of narrowness of vision and- too little regard for anything but the state of hiS balance- sheet, the volume of his deposits, and the standing and solvency of the customers, whose needs for credit he had to meet. Concentration on essentials -is not a bad quality in a banker or anybody else, but it is possible to carry it to extremes, and the wider international Outlook of the banker of to-day is an important asset added to the strength of the London money market. A keen-eyed American observer, Dr. Chandler, an economist at the head of. thd -Intelligence Department of the National Bank of Commerce in New York, has lately stated in the June number of Commerce Monthly, his bank's magazine, that America will be well advised to make use, -in connexion ;with her present problems, of the longer European experience. " In turning," he adds, to other great industrial countries we find • no. more successful banking system than that of Great Britain." From this testimonial from an exceptionally well-informed foreign judge Our bankers can derive any comfort that they need against the slings- and arrows of 'domestic criticism. They have inherited a great tradition built upon centuries of experience, and allowed to grow along the lines of prudent development unhampered by official control and interference. When Parliament, in the 'forties of last century, laid down stringent regulations concerning the note-issuing power of the banks, it fortunately omitted to exercise any control over that side of their business which was even then important enough to enable banks to prosper without any note issue at all, and has since become their predominant activity. This is the business of taking care of the public's money placed with them on current and deposit account, and the creation of credit by lending to their customers_ not notes but the right -to draw cheques. All this side- of banking is left entirely to the discretion of the bankers, guided-Dilly -by the rules that their own experience has laid down for their observance, and their wholesome respect for public opinion which obliges them to show in their periodically published statements a position of unexceptionable strength. Another highly important function that they exercise in complete freedom is the discrimination that they exercise in the matter of the bills of exchange that they are prepared' to discount and to accept as collateral for loans. In this keen and bracing atmosphere of freedom and publicity our .banking system has grown and flourished, and in this respect its environment has significantly differed from that in which the American banks have been developed, with strict regulation of the proportion of cash to deposits that has to be maintained, and periodical -visits' by - official inspectors to see that the statutory proportion of cash is in hand, or deposited with the Federal Reserve Bank. Some people tell us nowadays that freedom is an out-of-date Victorian obsession, but it has produced for us a banking system which is accepted as a model for foreign imitation ; and the adaptability and discrimination that are essential to success in monetary affairs are just those- qualities that are developed by freedom and deadened by the best intentioned efforts at official control and regulation.
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