COMPANY MEETING

MIDLAND BANK LIMITED

GREAT BRITAIN'S STRONG POSITION NO GROUND FOR PESSIMISM MR. REGINALD McKENNA'S ADDRESS

THE ordinary general Meeting of shareholders of the Midland Bank, Limited, was held on January 26th, at Southern House, Cannon Street, London, E.C.

The Rt. Hon. Reginald McKenna, Chairman of the bank, in the course of his speech, said : The year 1937 opened with a good proSpect of sustained business improvement. The industrial outlook was so promising, indeed, that fears were expressed of a coming boom: There were signs of growing speculation on the Stock Exchange and in raw materials ; some commodities, parti- cularly metals, had made a disturbing jump. Speculation, however, was speedily checked by a reduction in the quantity of money, and a decline in prices followed. The decline went so far as to cause f. ome anxiety, and, although the quantity of money was later restored, the closing months of the year that had opened buoyantly were marked by a more subdued outlook.

AMERICAN CONDITIONS.

Meanwhile depressing influences had been at work in the United States, but what might have been no more than a temporary break developed in the United States into a real business recession. The confidence of industrialists, already disturbed , by the policy of the Government, became seriously shaken, and capital construction was arrested. Happily, no similar obstacle to business enterprise is present in Great Britain, and there is no indication here that the drop in Stock Exchange quotations and commodity prices will lead to a comparable decline in general trade.

It is natural that a setback first' in prices and then in trade should oe taken to confirm the fears of people who are dubious about both the theory and practice of a managed currency. Management has meant cheap and abundant money, and in their view long- continued cheap money must lead to over-expansion of industry and trade, which has its inevitable reaction in a slump. The alleged benefits of cheap money, they tell us, have been exaggerated, while the danger of inflation is always present. Now they see that a fall in prices and a drop in employment have taken place while money- is still cheap, and they regard this as definite condemnation of a managed currency.

We have now had a sufficiently long experience of a managed :urrency to enable us to form an opinion of the general effect of its operation. It must not be overlooked that deliberate currency management, particularly of a ouicrency subject to such world- wide influences as sterling, is.not an easy undertaking. - A few years ago the very conception of a purely managed currency was something new ; in no country were the conditions such as to make it practicable ; it is only conceivable as being efficiently practised .

in a country with banking and credit highly centralised and with a government maintaining national credit unimpaired. Much had to -be learnt and is being learnt, but, however difficult it may be to put on one side the ideas to which long usage of the gold standard has accustomed us, we find in practice that the system is working smoothly. In die light of our present knowledge a Managed currency can no longer be regarded as a mere temporary makeshift while the gold standard is in abeyance.

COMPARISON OF EXPERIENCE 1925-31 AND 1931-7.

To judge between the two systems the question we must ask is : How have we fared while our currency has been free to fluctuate without reference to any backing other than the country's credit ? In answering the question, then, how have we fared, we can compare our economic condition during two equal periods, one on gold and the other under management.

I take the Bank of England's stock of gold as the first subject for comparison, not only because it is usually regarded as the test of the strength of our international position, but because under any system of currency control it is an essential part of our equipment as bankers to the world. In April, 1925, it stood at £154 millions ; by September, 1931, it had fallen to £135 millions ; but by January, 1938, it had risen to £326 millions at the statutory price. At the Current price the value of the existing stock. would be about£53o Millions, quite apart from the gold held in the Exchinge Equalisation Account. When we remember that gold is the universally accepted medium of international payments and that we, as a world centre of banking and finance, are liable to be called upon at any time to meet large external liabilities, it is clear that our position has been immensely strengthened by the great increase in our stock during the period of a managed currency.

FLUCTUATIONS OF NATIONAL DEBT.

Next we may note fluctuations in the burden of the national debt. There has been little change in the amount of the debt, by:- a great

change in the interest paid. Excluding the American debt and interest on savings certificates, the national returns show that in the year ending March, 1926, the first year of the return to the gold standard, the charge was over £271 millions. In 1931-2 it had fallen by £13 millions. But in 1936-7 it was no more than £200 millions, a saving of nearly £6o millions a year since the intro- duction of a managed currency. Cheap and abundant money made possible the conversion of the old 5 per cent. War Loan into a 3i per cent. stock, while on Treasury Bills alone the saving is approximately £17 millions a year. When the demands upon the Exchequer are as heavy as they are today, both for national defence and social services, I cannot imagine any Chancellor of the Exchequer closing his eyes to the immense economy in the service of the debt that has been made as a result of monetary policy.

The relative degree of cheapness and abundance of money in the two periods is indicated by a comparison of the Bank rate and the quantity of bank deposits. From 1925 to 1931 the average Bank rate was approximately 4 per cent. On the abandonment of the gold standard the rate was raised to 6 per cent. as a precautionary measure which was soon found to be unnecessary. It was lowered by stages until at the end of June, 1932, it stood at 2 per cent., where it has remained ever since. There were no less than sixteen changes of Bank rate in the first period of six years, all of them consequent upon the obligation imposed on the Bank of England to protect its meagre gold stock. The subsequent stability at 2 per cent. has lasted over five and a half years. No previous period of stability of so long duration can be found in the last hundred years, a fact which suggests that the frequent description of present money rates as abnormal is hardly justified. It is difficult to draw a line between the normal and the abnormal, but a rate which is now in its sixth year and shows no likelihood of variation in the early future might perhaps put in a claim to being no more abnormal than any other. The effect of freedom from the restrictions imposed by the gold standard is no less apparent in the quantity of money than in the rate paid for its use. Bank deposits, which were about £1,800 millions on the average for 1931, rose to nearly £2,300 millions in 1937.

TRADE AND EMPLOYMENT. .

The increase in purchasing power shown by this growth of deposits has been as beneficial to industry and trade as to the Treasury. If we resume our comparison and consider our condition at the beginnidg and end of each of the six-year periods, the conclusion is inescapable that, whatew r other forces may have been in operation, a managed currency is at least consistent with flourishing trade. Let us look first at weekly wage rates, taking rates in 1924 as the basic figure of zoo. In 1925 the corresponding figure was 102 ; by 1931 it had fallen below 97 ; but by last year it had risen again above 103. Taking the same year as the basis, profits, according to Sir Josiah Stamp's calculation, stood at 404 in 1925, dropped to 77 in 1931, but rose again to 120 in 1936, the last year for which this index is available. The figures of industrial production repeat the same story in another form-a decline over the first six years and a rise in the second by perhaps 5o per cent. Thus it is evident that, while business was on balance dropping away in the earlier period, it was steadily improving in the later.

Wages and profits are a measure of the incomes of the mass of the population. Production measures the degree in which our industrial capacity is being used ; it governs the total of employ- ment and unemployment, the returns for which make perhaps a more striking comparison than any others. Between 1925 and 5931 the total of our insured workers rose by 1,2oo,000, but the employed fell by 200,000, and the unemployed rose in consequence by i,400,000. This was how we stood at the end of the first six-year period. In the second the insured workers increased by a further 800,00o, but the number of those employed grew by as much as 2,100,000, thus reducing the unemployed by well over a million.

No figures could be more convincing ; no figures could exemplify more clearly the change in our economic condition in the two periods. We have still some way to go before we shall be utilising our full productive capacity, but the experience of the past six years indicates that in currency and credit policy we have not been led astray in using the opportunities for intelligent management which the departure from gold presented. I have not suggested, and I would not for a moment do so, that the pronounced improvement in our position as between the two periods is due solely to the change in the monetary system. But I do suggest that there is nothing in our present condition to indicate that the change has been other than for the better or that it is fraught with unknown perils in the future.

(Continued on page 156.)

MIDLAND BANK LIMITED (Continued from page I55.) BALANCE OF PAYMENTS.

The data I have just quoted relate to our internal condition, but the picture would be incomplete without a reference to external trade. Last year, you may remember, I referred to the balance of current international payments and receipts as a test of safety in deciding whether an expansive monetary policy might be pursued further. Unfortunately, we have no certain knowledge of the true balance of payments. There can be no doubt that the require- ments of rearmament and the growing volume of consumption due to greater employment necessitate additional purchases of goods from abroad in excess of our sales. The import surplus of mer- chandise is increasing. The other elements in the account are not so readily estimated, but when we consider the position as a whole it is difficult to believe, notwithstanding the official estimates, that the final balance is against us.

Here again it is helpful to take a longer view than is given by the figures for a single year. The official estimates of the balance of payments for 1932-6 show a net deficit for the five years approaching Lso millions. To this we must add at least an equal amount for last year, making an aggregate of over £100 millions. The figures prepared by Sir Robert Kindersley indicate that we have drawn to some extent upon our long-term capital abroad, a fact which would fit the supposition of a deficiency on current account. But in these six years we have spent on the purchase of gold now held in the Bank of England and the Exchange Equalisation Account an amount approximating £600 millions. If the official estimates be accepted, this expenditure could have been offset only by sales of British securities to foreigners and by an increase in our short-term liabilities. No evidence has been adduced of sales of securities on such a scale or of any vast increase in short-term liabili- ties, and it appears in consequence very doubtful whether our capital position has moved against us in any degree comparable with the addition to our gold reserves. On the evidence of gold and capital movements, the contention that over the past six years we have been living upon capital does not appear to be well founded. The matter is of real importance, as we must not lose sight of the fact that any Continued worsening of our current international account would call for a restrictive monetary policy.

I have now covered the ground which has to be surveyed in order to compare our experience in the two periods, characterised by radically different monetary arrangements." Everyone must recog- nise the dangers and difficulties of free monetary management— difficulties which have been greatly increased_by the vast movements of funds from country to country for a variety of motives, economic, financial and political. But the fact that mankind is subject to innumerable physical disorders is no reason why medical research should cease or why the individual should not try to keep fit. The argument applies no less to financial than to bodily health. We have had far greater freedom under present conditions in adapting our policy to rapidly changing circumstances. The instruments with which trade can be stimulated or speculation checked are readily available for use. Already a great deal has been learnt about the principles and practice of a free monetary system, and I do not doubt that as fine a technique will be developed under the new system as we ever had when working on the gokl standard.

PROFIT AND DIVIDEND.

The profit for the year, added to the balance brought forward, makes the total sum available £3,055,000, and out of this we have already paid £855,000 by way of interim dividend at the rate of sixteen per cent. per annum less income tax. We have allocated L300,00o, the same amount as a year ago, to reserve for future con- tingencies, and £400,000, that is £50,000 more than last year, to reduction of bank premises account. The increased appropriation under this head is called for by the expenditure upon premises result- ing from the continued growth of our business. In particular, our head office is nearing completion ; one of the new wings is already occupied, and work on the other is proceeding rapidly. After these allocations there' remains a sum of £7,500,060, out of which we propose to pay a final dividend again at the rate of sixteen per cent. per annum less income tax. In consequence of the recent increase in our capital this requires the larger sum of £909,000, and we are left with an addition of £44,000 to the carry 'forward, raising it to £59 7,000.

In the balance-sheet the capithl paid up and reserve fund show the effect of the recent new issue. As you know, in October last shareholders were given the right to subscribe for one fully-paid share of LI, at a price of £2, for every £20 of paid-up capital held. This offer entailed the issue of roughly 760,000 shares. Following our practice, we also offered new shares at the same price to members of the staff of the bank and its affiliations, in proportion to status and years of service. On this account about 200,000 shares have been issued. The aggregate addition to our paid-up capital is rather more than £900,000, and, the premium of Li per share having been carried to the reserve fund, an equal addition is made to that item.

In deciding upon this increase of capital we were influenced by the growth of the volume of our business since the last issue in 1930. Our deposit liabilities have expanded considerably over the period ; last year, for example, they rose by nearly £xo,000,000, bringing the total to a new balance-sheet record of £496,000,000. It was felt in consequence that the proportion of shareholders' funds to liabilities had become unduly low. The favourable terms of the issue have given both shareholders and staff a participation in the bank's restored profits.

The assets side of the balance-sheet shows the maintenance of a high standard of liquidity, the " quick " assets covering over 36 per cent. of deposit liabilities. Cash alone is a million higher. Balances with and cheques on other banks happen to be substantially lower, and money at call and short notice shows a decline of £3,000,000, part of a much larger reduction in stock exchange loans, which are, included under this heading. I mentioned a year ago that these loans are under constant review to ensure that the banking facilities we give are not being used to finance undue speculation. The change in conditions since last spring has removed any anxiety we might then have felt on this ground ; stock exchange loans have in fact fallen to an unusually low level. On the other hand, borrowing by the money market has shown an increase, presumably to carry a larger volume of bills. Our own bill portfolio has risen by nearly £9,000,000 on the year, wholly under the heading of discounts as opposed to Treasury bills. Although rates in the money market are still very low, they give us at least a modest return on funds which for reasons of liqiiidity we should otherwise have to retain in the =remunerative form of cash.

The largest movement on the balance-sheet is to be found in advances, which have risen over the year by nearly £79,000,000, a more rapid rate of growth than in 1936. Roughly one-half of the demand has been met out of the addition to deposits, and for the rest we have sold investments, which for want of better employment of our funds had risen to an exceptionally large total.

THE BUSINESS OUTLOOK.

But what of the factors beyond our control ? When we look to the future I see no ground for pessimism. We must not, it is true, under-rate the importance of American developments in their. -effect on other parts of the world. If the recent shrinkage in American business should for any reason persist, then it seems likely that the slow but substantial growth of world trade, which had been gathering strength until the middle of last year, may be definitely arrested. With a decline in total trade it becomes all the more important that we should neglect no opportunity of expanding our exports, whatever other pressure may be put upon our productive capacity. The special rearmament demand is temporary only ; the maintenance of our export trade is a permanent necessity.

Against the ill-effects of a possible recession in international trade must be set the fact that we are favoured by far healthier basic condi- tions than existed prior to the last slump. Our industry is financially and technically stronger. In addition, world markets are not gener- ally overburdened by vast stocks of materials, and producers are .better organised to adjust their output to demand. While, therefore, I do not minimise the importance of American influence on us, I think it would be wrong to deduce from recent commodity and stock exchange movements that we are necessarily on a lasting downward curve. The clearing out of a speculative position, although accom- panied by a severe fall in prices, is not in the long run bad for trade. Indeed, there are signs already that the depressing effect here of the American closing down of purchases of capital goods has spent its force, and that the underlying factors making for wider industrial activity are again coming into play. The great business of this country will still go on.

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