CITY OF LONDON

Manawatu Standard, Volume LIX, Issue 98, 25 March 1939, Page 14

CITY OF LONDON

COMMERCE AND FINANCE. At tho weekly meeting of tlie Palmerston North Citizens’ Lunch Club, yesterday, Dr W. M. Smith gave an interesting address on tlie commercial and banking activities of the City of London. Tho speaker described first tlie geographical location and tho nature of tho principal markets and financial institutions, and followed this up with an examination of the financial mechanisms of the “City” under the gold standard and under the “managed” monetary system that had been developed since 1031. The “City,” as it was called, comprised an area of about one square mile. The hub of the “City” contained the Bank of England, the five great clearing banks, tho headquarters of most of the big insurance concerns, and tho Stock Exchange. Outside this central region were to be found a great variety of “markets” and “exchanges,” in some of which no commodities were ever seen and some of which were not located in any building, but were conducted by telephone or messenger as a means of contact between those interested. Tho speaker described the qporations in some of the leading commodity markets, including those in which New Zealand was interested. He said that it was more important, however, to understand the working of the “City” in the proper sense of a financial centre. The functions of the “City” were to provide a mechanism for tho paying of money with tho least resort to the use of notes or coin, to furnish credit for the carrying on of production and trade, to regulate the flow of investment and the movement of the foreign exchanges. The types of banking instution in London, said Dr. Smith, were mainly three. The Bank of England, now a semi-Stato concern, was a central bank, like the Reserve Bank of New Zealand and kept balances from the clearing banks as well as the Government account. It now managed ihe foreign exchanges on behalf of the Treasury through the Exchange Equalisation Account. Tho clearing banks were not free to devise a.nd carry out their own policies, but could bo largely controlled by the Bank of England by open market operations and in other ways. Thus the Bank of England could increase or diminish tho deposits ol the clearing banks, and thus affect their capacity to make advances, by buying or selling Government securities. The other banks, variously called private or merchant banks, or acceptance houses or issuing houses, were concerned wdth foreign short-term lending, the finance of international trade, and tho issuing and servicing of Dominion and foreign loans. It was had banking on the part of flic acceptance houses which was largely responsible for tho financial crisis in London in 1931, They borrowed from other European countries on short term in order to cover their “acceptances” on bills which did not represent genuine trade transactions, hut which were described by the Statist as ‘the mostbrazen finance paper”. These “short” borrowings they lent “long” to Centra] European countries on very profitable terms, but with disastrous results to themselves and everybody else. Their operations had since much declined in volume, being in part replaced by the Government Export Credits Department, which now played a growing part in tlie financing of external trade.

THE GOLD STANDARD. As a method of control the gold standard, said Dr Smith, was simple to work and understand and more or less automatic. The Bank of England raised or lowered its discount rate as gold left or entered tho country, and thus tho exchanges were steadied and gold payments could bo maintained. But the raising of the bank rate in order to check the loss of gold had harmful reactions on economic activity. Yet business and employment had to adjust themselves to the standard. Under the present “managed” monetary system the standard was that of the level of economic activity (other than the employment of labour) and the monetary arrangements were adjusted to maintain the volume of production and trade. While tin's arrangement had much to commend it, the speaker believed that its great weakness was that it took little or no account of the level of employment. The emphasis was upon profit and not on the fullest employment of labour. That was why we had tlie phenomenon of a profit-level in Great Britain far above that of ten years ago associated with a much greater amount of unemployment. Since 1931 the financial institutions of London had come increasingly under the control of the State. The aims oi the control wore to check speculation in foreign exchange, to maintain low interest rates, and to regulate the flow of investment. Tho control had been achieved largely by the voluntary co-operation of “City” concerns. Some institutions had advocated the placing of tho various controls on n legal basis by statutory enactment, while others had preferred to retain the voluntary basis. The foreign exchanges were now regulated hv the funds of the Exchange Equalisation Account, which were managed hv tho foreign exchange department of the Bank of England. The department was assisted by the Foreign Exchange Bankers’ Committee whose members were in close touch with all exchange transactions. The Exchange Account relieved tho Bank of England of the task of managing the foreign cxt changes, so that it no longer had to move its discount rate as before, and domestic business activity was largely unaffected by fluctuations in tho external value of sterling. Other committees, continued Dr. Smith, assisted with the control of investment. In recent years there had been for mast of the time a ban on foreign lending. Even internal borrowing had been regulated in order to keep money cheap and enable the Government to carry out conversion and borrowing operations. This was more than ever necessary in view of the colossal armaments programme. Tho danger was that the flow of investment might not bo really wisely directed and the expansion of the armament industries might be secured at greater cost than was necessary. This appeared to be happening, said the speaker. In conclusion, Dr. Smith warned his hearers against any reverent and uncritical admiration for the financial institutions of London. They tended, very naturally, to look after their own narrow interests, rather than the broad social interests of the nation as a whole. However, the experiments in control over tho past seven years bad provided, without much stress or dislocation, a basis for the liberalising of financial policy in the future. If |tho “City” desired to avoid straightout statutory control by the Government, it would bo well advised to “go along” and accept any changes that were directed to tho general welfare. 1 Mr J. A. Colquhoun was in the chair, and, in introducing Dr. Smith, 1 ho said ono would liavo to go a long

way to find a moro impartial speaker. At tlio end of the talk the chairman moved a voto of thanks to the speaker, which, was carried with acclamation^