FACTORS IN BANK DEPOSITS

Dominion, Volume 22, Issue 84, 3 January 1929, Page 6

FACTORS IN BANK DEPOSITS

BILLS AND CALL MONEY ADDRESS BY MR. F. HYDE Following his re-eleetion as president, Mr. Frederick Hyde recently delivered his second inaugural address before the Institute of Bankers, in London. Prefacing his address, which was given in the School of Oriental Studies, E.C., Mr. Hyde referred to the fact that this year the institute celebrates the 50th anniversary of its foundation. Its membership numbered over 28,000 at tlie beginning of the year, including 5300 holders of the ■i' .ificate, and as a ioration of the occasion, it had been decided to offer annually a special prize of £5O, to be competed for by members holding the certificate. Mr. Hyde said that the year 1028 would be a memorable one in the history of English banking, as the year of the Currency and Bank Notes Act. Following tlie war, they had experienced a boom in trade which was entirely unforeseen, followed by a trade depression which he believed to be without parallel. Unemployment bad been severe and continuous, and had afforded much food for thought to the best brains the country possessed. It had been held by some experts that there was a close connection between unemployment and the currency and credit systems of the country, and a re-examina-tion of the proposals of the Cunliffe Committee, ns recommended by themselves, would at all events have afforded an opportunity of sifting the arguments on which that opinion was based, with the possibility of arriving at a definite conclusion. The Government, however, had decided that an inquiry would serve no useful purpose, and the new Act would come into operation in a few days. » Tlie Bank of England’s Gold. Bankers would watch with keen interest the working of the Act under the changed conditions, and would be able to form an opinion as to whether the system which threw the whole weight of gold movements, probably of much greater magnitude than formerly, on to a relatively small proportion of the stock of gold held by the Bank of England was the one best suited to the country’s needs. Under the present system, which was continued by the new Act, the gold which could be withdrawn for export was that represented by v the notes in reserve amounting to about £50.000,000, the balance of about £115.000.000, or much the larger part, being held ns cover for notes in circulation. The latter part of the gold could be drawn upon only in the event of .an abnormal contraction in the circulation, and the conditions which would make such a contraction possible would at the same time tend to turn the foreign exchanges in our favour and so render an export of gold unprofitable. It was. therefore. worth, while considering whether it were wise to lock up the major portion of the gold to meet an emergency which in practice would not occur, and. in doing so. suffer the inconvenience of the unduly high rates that might, have to he enforced to keep the remainder, which was unprotected.’ at n sufficiently high figure to maintain the confidence both at home and abroad. Great progress had been made in the stabilisation of currency, not only in Great Britain but also throughout the world. This year they had seen the currency of France definitely placed on a gold ‘basis. It could not be doubted that a common standard of value was one of the first requisites for'international trade, and he was convinced that, in the conditions prevailing in the leading commercial countries the gold standard was the only practicable one. But . however important in domestic and international trade a common standard ot value might be. the smooth working, of the credit machine was hardly less important. Effect of Lower Cash Ratio. Mr. Hyde proceeded to explain the. importance of bills of exchange and call money as regulating factors in the creation and diminution of bankers’ deposits. By the ties of charts he showed that, while the gold in the issue department of the Bank of England had shown a steady increase in the first half of 1928 over 'the total in the first half of 1927, the ‘other” deposits had been continuously below the 1927. figures, this being due to a contraction in the bank s holding of securities. He then demonstrated that, while the movement in the cash holdings of the clearing banks in the first half of 1928 had followed roughly the course of the “other” deposits at the Bank of England., th" total of clearing bank cash was decidedly less than in the first half of 1927. Assamins no change in the~ banks’ cash ratios. Mr. Hvde continued, the , lower cash holdings this year must have, led them to expect a serious reduction in clearing bank deposits, whereas these deposits had in fact remained continuously at a level above that of 1927. The explanation was to be found in a lower cash ratio, and he showed that the ratio in the first six months of ihe year bad averaged 0.3 per eent. less than in the previous year.

This lower ratio had liberated cash ns the basis of new deposits to nn extent averaging 0.3 nor cent, of total denosits of £1,700.000.000. or about £5.000,000. Hence, though the actual total cash had declined by an average of about £2.000.OOO.the cash liberated had made good that deficiency and given nn excess on the average of about £3.000,000. upon which th" new denosits averaging about £25.000,000 had been built up. On the subject of window-dressing—an operation (connected with the published cnsh ratios of the hanks) which, he said, caused considerable disturbance in the money market at the end of each half-year and to a small extent each week —bo said that it was satisfactory to note that in .Tune this year the nractice seemed to have been considerably curtailed. Althought it was of old standing and had been generally indulged in. he. did not think that anyone would seriously defend it. Annrt from all other eonsideraitnons it failed in its purpose, for it misled nobody, and had lost all value as an advertisement. Creation of New Deposits. Mr. Hyde showed that, as compared with the‘first half of 192". investments of the clearing banks had taken a declining tendency while the rise in advances appeared to have been checked. The movement in deposits over a period of two years to June. 1928. showed a close correspondence with that of call money and bills combined, and he thought it was clearly indicated that the growth of deposits was the result of the increase in call money and bills which the banks had been able to hold by reason of the reduced ratio maintained of cash to deposits, new deposits being thus created which had continued to increase until the surplus cash ratio had been absorbed. A lesson to be learu from these tendencies was that enunciated by Gilbart nearly three-quarters of a century ago, which, from “History, Principles and Practice of Banking,” he quoted as follows: “By means of bills of exchange bankers can easily extend or diminish their advances. If the amount of their deposits ... is diminishing they will diminish their discounts. If these increase they may increase their discounts.. . . These temporary surplus funds be (the banker) will on no account invest in Government securities, as his deposits will be certainly, and perhaps suddenly, reduced, and he might have to realise his Government securities at a loss. He will in this case increase his loans to brokers and 'his brokers’ bills. They might, therefore, regard bills and call money as a regulator of the banking machine. He thought call money and bills could properly be considered as forming one group, though no doubt some part of the call money was not based on bills, but on Government or other securities which, except when quite shortdated, could not be described as selfliquidating. It had sometimes been urged that a distinction should be made in published statements between commercial bills and Treasury bills, but in practice

a reduction of a bank’s holding of Treasury bills produced no different effect on the cash ratio from that produced by a similar reduction of its holding of commercial bills. In both cases the utimate result was that’ bills were reduced on one side of the balance-sheet and deposits on the other. Protection of the Trade Bill. Dealing with various types of bills, Mr. Hyde said that it was regrettable that within the last 20 or 30 years there had been a tendency for bills drawn by the manufacturer on the merchant, or by the merchant on the retailer, to be replaced by book credits, granted by the sellers of goods to their buyers, which in turn often involved unsecured advances by bankers in place of discount facilities. He thought it would be wise for bankers to encourage so far as they could the use of the inland bill. The fact that it had a definite maturity was a strong point in its favour, and its greater use would also prove advantageous to the banks’ customers themselves, not only by reason of the rate charged for discounting being usually below that charged for an .overdraft, but also because payment by bdl was a strong safeguard againts the tendency.of book debts to become stale.’ He instanced three types of bill, representing America exporting to England. England exporting to India, and India exporting to America, in each case the transactions being financed by a bill pavable in London. London thus became the clearing house through which settlement was effected of all the bills, and the banker for the whole triangle of thought it desirable that hills drawn for the purpose of triking advantage of the lower rate of discount ruling in the London market in order to provide funds to be employed in foreign markets should be discouraged. Since the war the lower discount rates which until recentlv ruled ip New Y OI J’.’L C x 1 "; junction with other factors had had the tendency to divert some of e . ac C? pta n n S business from London to that city, and he thought it would be unfortunate bv the creation of quasi-finanee bills the discount rate in London were ra-sn| and the use of the bill on London therebv restricted. As they had seen, the bill performed a useful and even inchsnensable function in our financial operations.