COMPANY MEETING

MIDLAND BANK LIMITED

THE RT. HON. R. McKENNA'S ADDRESS

THE Ordinary General Meeting of Shareholders of the Midland Bank Limited was held at the Head Office of the Bank, London, E.C.2, on Thursday, January z6th, 1939.

The Chairman, the Right Hon. R. McKenna, said : I cannot do otherwise than open my address with an expression of deep sorrow at the death of Mr. Hyde. For more than fifty years his exceptional qualities had been devoted to the service of the Bank, and it was only last June that he was compelled by continued ill- health to retire from the position of managing director. His career provides an example of the contribution made by native gifts and sterling character to the building up of a great institution, while winning for their possessor the affection of colleagues and the loyal collaboration of assistants. We deeply deplore his death, and I am sure you will all wish to join me in a message of profound sympathy to his family. We are meeting in surroundings which are new to the majority of those present. For many years before the head office was finally moved to London, our shareholders' meeting was held regularly on bank premises. This year the completion of our new head office building has enabled us to revert to the former practice. I believe the change will be of convenience and comfort to the shareholders, and if so we shall in future assemble annually in this room.

I propose to say something to-day upon a matter which has attracted much comment, the movement of foreign balances and the effect of the movement upon the banks. In common with all other business undertakings, banks felt the decline of trade activity during the first half of last year, but it was not until the autumn that they became affected in a special way by the withdrawal on a large scale of foreign funds, a withdrawal induced by the grave international anxieties at that time.

For the purpose of financing world trade considerable foreign balances are always held with London banks. These, however, are sometimes heavily supplemented for reasons having nothing to do with trade : a change of opinion as to the economic or political stability of this or that country will lead to large transfers from one centre to another. At one time London may be the favoured depository, at another New York. In 1936 and 1937 foreign balances in London were steadily increased, reaching their maximum in the spring of last year. The movement was then reversed as the European political outlook became threatening, and in nine months nearly the whole addition to foreign balances, accumulated over more than two years, has been re-transferred from London to other centres.

EFFECTS OF THE MOVEMENT OF FUNDS The interesting feature for us in this huge transfer of funds lies in the operations of the Exchange Equalisation Account. During the years when foreigners were increasing their balances in London the Exchange Account prevented a too rapid rise in the exchange value of sterling by continual purchases of gold. Part of the gold was re-sold to the Bank of England, but even so the accumulation by the Exchange Account was very large. When the movement of foreign balances was reversed and heavy sales of sterling over the exchanges took place, the Exchange Account again exercised its function of maintaining a fairly steady day-to-day rate for sterling, and sold gold as readily as it had previously bought it.

To see how the banks were specially affected by the withdrawal of foreign deposits we may follow the course of a typical transaction. When a foreign deposit is withdrawn, the cheque drawn upon the bank is met in the clearing by a claim upon the bank's balance at the Bank of England. A number of intermediate transactions may then take place in which the money passes through the hands of exchange brokers, bullion dealers and their banks. For the sake of simplicity we may omit these from consideration and, looking only at the conclusion of the various dealings, we find that the money paid out by the bank from its Bank of England balance goes to pay for gold sold by the Exchange Equalisation Account, and is then utilised by the Exchange Account in taking up Treasury bills. Thus at this stage public deposits in the Bank of England are increased by the amount paid for Treasury bills, corresponding to the reduction in bankers' balances arising from the withdrawal of the foreign deposit.

It is here that the banks feel the pinch in the reduction of their

cash reserves. The money has passed out of the banking stream into the pool of public deposits. Ordinarily, however, the consequent stringency is only temporary and is continually being eased. The Government does not keep an unusually large balance for long ; the added amount of its balance is shortly distributed among con- tractors and others, who have their accounts with the joint stock banks, and in this way the money comes back to the joint stock banks as a deposit and passes once again into bankers' balances in the accounts of the Bank of England. Thus the original cash position of the banks as a whole is in the end made good, and, on the supposi- tion—to which I shall refer later—that they are able to work back to their customary ratios, deposits also will in due course be restored. The only important change will. be that a larger proportion of the deposits will be domestic and a smaller proportion foreign.

We may note that the withdrawal of the exceptional foreign

deposits accumulated in recent years has not materially diminished the importance of London as a centre for financing world trade. But far more noteworthy is the fact that, contrary to all previous experience, the transfer was effected without any rise in the Bank rate. There was no monetary restriction to aggravate the shrinkage

of internal business which was already taking place as the universal falling away of 1938 developed. Although in the autumn interest rates in the money market stiffened, the movement was without effect on the cost of accommodation for business. The abundance of available bank credit was unimpaired, a small decline in advances being due, not to any restrictive policy, but simply to a natural reduction in demand for borrowed money in the uncertain trade outlook.

Thus we see how with this new and efficient instrument, the Exchange Equalisation Account, in skilful operation there need be no conflict between the measures required to cope with large and irregular exchange movements and the measures required to main- tain an internal monetary policy appropriate to the conditions of domestic business and finance. The conduct of the Exchange Account is entrusted to the Bank of England, acting as agent for the Treasury, and the events of last year afforded a valuable test of the working of a managed currency under exceptional and very difficult conditions. I could quote many examples to show how, under the gold standard, external influences caused grave disturbance to internal credit. The vulnerability of the money market to external influences was extreme, and was due mainly to the statutory obligation to maintain the pound sterling at a fixed gold value. To-day the central bank is no longer under this obligation ; there is freedom to allow the rate of exchange to swing more widely and, by judicious purchases or sales of gold as foreign balances increase or diminish, to take the weight of great international movements of funds without affecting internal trade credit.

THE NEw SYSTEM AND THE OLD The Exchange Equalisation Account is an essential part of the machinery for regulating monetary conditions. Let me observe, however, that no monetary mechanism can of itself perform the numerous and complicated tasks connected with the control of currency and credit. In internal policy, for instance, it must always be difficult to draw a precise line between the legitimate demands of trade and the illegitimate demands of excessive speculation. Expan- sion and contraction cannot be regulated by a sort of financial thermostat, acting automatically according to the temperature of the economic body. No automatic system could be devised which would prove sufficiently elastic or adaptable for the purpose. The new technique of monetary management called into being since 1931 requires for its proper exercise far more knowledge, judgment and skill than were needed in working on the Gold Standard. There was no room for doubt then as to the action to be taken. If too much gold was leaving the country the Bank rate was put up and credit restricted until gold flowed back. If gold was coming in beyond what was necessary for reserve requirements, the Bank rate was lowered until foreign borrowing checked the inward flow.

The simplicity, the almost automatism, of currency and credit control under the Gold Standard has been highly praised. But at what cost to trade and industry did the system operate ? The Bank rate might have to be raised when internal conditions required not restriction but expansion of credit—as for example last year, when the outflow of gold would have led to severe credit restriction at the very time when confidence was already shaken and enterprise languishing. Seen in retrospect, the pre-war automatism in mone- tary affairs meant doing nothing until an acute stage of financial weakness had been reached—a stage at which drastic action was inevitable, however damaging its effects might be on industry and trade. But why should the British industrialist and trader pay more for credit, or find credit more difficult to obtain, because foreign capitalists choose to transfer their bank balances from London to New York ? To-day human skill and judgment must take the place of automatism. Open market dealings by the Bank of England and the operations of the Exchange Equalisation Account are the modern instruments of control, and after several years' experience we can appreciate how well they have been used. Monetary management on this scale is a new system and therefore in some degree experi- mental, but we all recognise the readiness of the authorities to profit by experience and the adaptation of methods to changing needs.

POSITION AND PROGRESS OF THE BANK Dealing now with the position of our Bank, you must all have been sorry to learn of the resignation from our board of Sir John Anderson, who has been called to serve his country in the Government. We heartily wish him well in his new position, which is of vital importance to national defence. Unhappily, death has removed another of our directors Mr. Darling, who in years gone by had achieved great distinction in a banking career, at home and abroad, but whom ill-health obliged some years ago to refrain from active work. I have also to record, with deep regret, the death of a former managing director, Mr. Woolley, who, after serving as a director for several years, retired from the board in 1935. On the other hand, I am happy to say that the board has been strengthened during the past year by the appointment of Mr. Arthur Chamberlain, who has a high and, may I say, well deserved reputation as a man of great constructive business ability.

Mr. Hyde's withdrawal from active management necessitated a rearrangement of responsibility among the general managers. We may congratulate ourselves that Mr. Astbury, whose large experience and qualities as a banker are well known to us all, was available for the principal post. He has been appointed chief general manager, with a seat on the board. Mr. Lederer and Mr. Sadd—both excep- tionally able bankers—have been appointed assistant chief general manager and deputy assistant chief general manager. The directors are united in their confidence that under these arrangements the progress of the Bank will be fully maintained and its traditions worthily carried on.

To this end, however, something more than wise and experienced (Continued on page 154.)

COMPANY MEETING

MIDLAND BANK LIMITED (Continued from page 153.)

head office management is required ; it is essential that this should be supported by faithful, able and well-trained service on the part of managers of departments and branches and every member of the staff. Fortunately, this indispensable condition of strength and progress is present in our Bank, and on your behalf I warmly thank all those who contribute, by their loyalty and the high quality of their work, to the fulfilment of our responsibilities to the public. The volume of business is constantly increasing, so that, notwith- standing the extent to which we have introduced machines for a great deal of the work formerly done by hand, our staff is still growing, and today numbers 13,600 as compared with 12,900 five years ago.

I come now to the profit and loss account. The net profit, at £2,446,000, is slightly less than for 1)37, but the decline is more than accounted for by the larger provisions required for income-tax and national defence contribution. There has in fact been little change, as between the two years, in the actual earning power of the Bank. Adding to the sum I have mentioned the balance brought forward, we have £3,037,000 for disposal. In view of large provisions in the past and the completion of the head office building, we are appro- priating this year the smaller amount of £150,000 to reduction of bank premises account. On the other hand, having regard to the unsettled conditions, which often have serious if temporary effect on values of investments, we think it desirable to make a larger allocation to reserve for future contingencies. To this fund we have set aside £500,000. The interim dividend of 8 per cent. less tax absorbed L879,000, and if you approve our recommendation of a final dividend at the same rate an equal amount will be required for that purpose. The sum of £628,000 is carried forward. I may point out that the dividends for last year, notwithstanding the unchanged rate, absorb a trifle less than those for 1937 ; the greater income tax provision this year has slightly more than offset the enlarged effect of the capital increase fifteen months ago.

Turning to the balance sheet, deposits are £34 millions below the record figure of December, 1937. The decline was concentrated in the last four months of the year, and represented the first stage of the process I described earlier in my address. It is natural that heavy withdrawals of foreign-owned funds from London should be reflected most clearly in the figures of the Bank which transacts probably the largest share of the overseas business passing through London. For reasons I have explained, we should ordinarily be justified in regarding the shrinkage in total bank deposits as likely to prove no more than temporary; indeed, the first sign of re-expansion is already apparent in the restoration of cash.reserves. You will notice that our cash on December 31st provided a ratio exceeding 1 ri per cent. of deposits, whereas on some weekly make-up days within the last four months of the year the ratio was only a little above ten. With cash reserves replenished, therefore, we might reasonably expect a rapid recovery of deposits to the former level; but at present what would ordinarily be regarded as probable is subject to an important qualification. The banks, as I have mentioned on previous occasions, must look not only to the maintenance of a requisite cash ratio, but also to the provision of an adequate supply of supporting liquid assets, particularly bills. If they cannot find sufficient bills to keep up their second line of defence, they must maintain a stronger first line, by working to a higher ratio of cash to deposits.

This is exactly the position at the present time. The banks can- not proceed to a re-expansion of deposits on the restored cash basis, because they cannot acquire the bills they need to ensure fulfilment of their standards of liquidity. Our discounts of trade bills have declined by £9 millions over the year, and, so far from being able to make up a compensating total of Treasury bills, our holding of these has diminished by no less than £25} millions. The supply of bills —and I speak here of Treasury bills, which provide the great bulk of the total—is determined in the long run by policy in respect of public finance. To illustrate the difficulties we have to contend with, I may mention that our holding of Treasury bills has been subject to wide fluctuations during the past year, ranging from a maximum of £73 millions to a minimum of £27 millions.

In view of the seasonal inflow of taxation, there seems little pros- pect of a fuller supply of bills becoming available in the early future; hence the re-expansion of deposits may be delayed, even though it appears that the outflow of foreign money may now be coming to an end. On a longer view, however, provided bank cash is maintained at the restored level, and more bills are issued to the market, there is no reason to suppose that the decline in bank deposits as a whole will prove to be more than a passing phase.

Money at call and short notice stands at about the same figure as a year ago ; activity on the stock exchange has remained at a low level, and a smaller volume of bills is being carried in the money market, the decline in loans to bill brokers being offset, however by other short money items. Advances are on balance £1 million higher, but, whereas in the first half of the year they continued to increase, since then trade conditions have led to a diminution of borrowing. I find from the quarterly analysis of our advances that accommodation for industrial and trading purposes reached its peak about May, the subsequent falling off having been more than enough to account for the reduction in advances as a whole. We must regard this movement, therefore, as being associated with the business recession, coupled with the fact that much of the industrial activity arising from the rearmament programme is financed without recourse to bank advances. One thing we can say very definitely ; it has certainly been no part of our policy to press for the re-

(Continued at foot of next column.)

COMPANY MEETING

(Continued from preceding column.)

payment of advances, nor has there been any change in the stand- ards by which we judge applications.

Investments are slightly higher, this being the net effect of pur- chases of short-dated securities earlier in the year, almost wholly offset by sales in the later months with a view to increasing our liquid resources. In conformity with our practice of entering invest- ments in the balance sheet " at or under market value," we have made full provision to cover depreciation.

Our liabilities on behalf of customers show roughly compensatory movements. Acceptances are down by £3 millions, partly due to the shrinkage in the turnover of international trade, and partly to the smaller proportion conducted by the time-honoured method of London acceptance credits. Engagements are unchanged in amount, but the note on the balance sheet gives a figure for forward exchange commitments £4 millions higher on the year. The expansion is mainly in dollar liabilities, resulting from the disturbed conditions in the exchange market.

To conclude my observations on the balance sheet, I. would make just this reference to our affiliations. Our three related banks in Scotland and Northern Ireland have maintained throughout the year the high standards of strength and liquidity, combined with a full range of service to customers, which are common to them all. The amount of business undertaken by the Midland Bank Executor, and Trustee Company increases consistently, necessitating additions to the staff and extended branch representation. Altogether, this company now operates through twenty branches, seventeen of which are in provincial centres.

THE OUTLOOK

The business outlook is still overshadowed by international anxieties, but, just as we have experienced sudden turns for the worse in foreign affairs so we may yet experience an equally sudden change for the better. If this should happily take place there would be little doubt as to the probability of a marked recovery in business during the coming year. Even as things are, I think we may reasonably look for some modest

improvement. In external trade, the Anglo-American agree- ment and the arrangements associated with it mark a big step forward in the direction of a larger volume of free interchange of goods over the greater part of the world. In domestic trade, we are probably far from having felt the full effect of the rearmament programme in stimulating output and employment. On all grounds, there is assuredly no room for despondency.

The report was adopted, other ordinary business was transacted, and the proceedings ended with a vote of thanks to the Chairman.